It's a product that can't really be sold, because the only people buying would be fraudsters. Suppose a new bitcoin "bank" came to an insurer and said "we want to buy insurance against losing any of our customers' money". The insurer would, quite rightly, assume that the business plan here was to steal all the money and put the loss on the insurer. The insurer would assume that to even consider writing such a policy, they'd need to verify and stand behind every single aspect of the "bank"'s business operations, website, and so forth. The insurer would quickly realize that the premiums for such a policy would have to be extravagant, like 100% of the amount insured. And the insurer would decline the business.
The FDIC insurance "works" because of the large body of regulation and the mandatory enrollment requirement, neither of which exist in bitcoin-land. There isn't insurance for bitcoin banking, and can't be.
(Well, I suppose someone could offer fraudulent insurance - take premiums but have no intention of paying out. But that's just fraud, not insurance.)
So what I'm proposing is industry self regulation. That said, I doubt that any deposit insurance scheme could ever be large enough to cover losses of such enormous proportions as we have seen in recent weeks. The hope would be that utterly incompetent adventurers like Mt. Gox would never pass the audit.
A bank can verify, on a daily basis, that they still have "most" of their assets. And a lot of the assets can't be stolen in any real way. Banks owns a house - house can't be stolen. The legal process will get it back. Bank owns treasury bonds - can't be stolen, we know who is "supposed" to own them. Etc.
Occasionally there may be an unexpected asset leak (rogue trader or something). But the damage is still limited, it's still small compared to the assets of the bank. Barings lost something like 20% of all their assets - obviously disastrous, but they still had 80% left. And a failure that large is intended to be impossible to occur.
A bitcoin "bank", well, you audit it at 11AM and at 11:02AM it can have nothing, 0, zero. No insurer is going to sign on for that sort of risk at any price.
One already has: http://www.bbc.com/news/technology-25680016
But I'm not suggesting getting insurance from insurance companies. I'm suggesting that every bitcoin bank should set aside some small share of its revenues to fund the industry's own deposit insurance scheme. That's how deposit insurance works in many countries. If the losses exceed the fund's resources then it's too bad for the depositors.
Insuring bitcoin banks (or rather storage companies) is not actually that problematic because losses at different banks are uncorrelated. That's a much simpler situation than insuring regular banks, which have loan loss risks that are strongly correlated. Recession -> unemployment and bankruptcies -> non performing loans at many banks at the same time.
You are right that regular banks cannot lose everything in a single event. But that's not true for many other types of insured assets. Fire insurance being one example. As long as there are many insured and the losses are not strongly correlated it's not a problem for insurers.
For example, Venmo[0] is simply an app layer over the ACH system. Sending someone money is as easy as sending a text on iOS, or an email on your computer. Payouts to your bank account can be same-day but usually take 1 business day.
Other than the pseudonymity (which is admittedly one of Bitcoin's stated value propositions), doesn't Venmo capture most of Bitcoin's advantages? What's preventing someone from using the Venmo API to, for example, write a reddit micro-tipping bot? Is it that an app having ACH access to people's bank accounts is scary?
Those aren't rhetorical questions -- I'm genuinely interested in knowing what advantages cryptocurrencies have for the layperson compared to an enhanced ACH system where security is already taken care of.
(I do use Venmo, but am not affiliated with the company otherwise.)
[0] http://venmo.com
Just brainstorming here. I really do suspect that most of the benefits of cryptocurrency are due to the way it interacts with technology, which can be imitated through just a bit of innovation in the banking industry. (Imagine banks allowing customers to script transactions, like Bitcoin, or providing direct APIs to bill-pay and ACH transactions.)
Bitcoin needs a solution to address this for it to be a valid way of spending money. And irreversibility, pseudonymity, and no regulation make it impossible.
Disclaimer: I'm with GreenAddress.it
Banks as we knew them did not work this way. Yes, having to wait three days for settlement is absurd, but folks are working to speed that up (to just one day, haha). Yes, the fees add up. But the systems have been developed over a really long time, and they have multiple levels of protection against you losing all your money. In the US that's the FDIC and SIPC, for regular-sized accounts. There will never been a direct equivalent for BTC, precisely because no one's national security is tied to BTC. And most people won't buy deposit insurance at any price higher than the "free" one they get from their government.
Early adopters of Bitcoin spoke fondly of the fact that there are no chargebacks. That's a great way to reduce transaction costs. It's also a great way to make sure that when you get hacked (and you will) you cannot recover.
Compare this to the situation with ACH transfers (the US-only, low-cost "wire transfer" system). Anyone who knows anything about computers would be aghast at the technology comprising that system. The security appears to be pretty lame. Yet people do not lose their savings via ACH. Why? It isn't because ACH transfers are so secure--it's because the banks can undo them, which in turn lowers the incentive for thieves. This is a virtuous cycle, by contrast to Bitcoin's vicious one, and the way it works has nothing to do with technology.