Or, worded differently, the existing system protects consumers victimized by fraud, whereas Bitcoin doesn't (and won't ever be able to reverse a fraudulent transaction).

Fraud protection is a good thing. We should be trying to figure out how to get it into Bitcoin. YC should fund a company that aims to protect consumers from the risks of Bitcoin. Something like "trust us with your coins, and if we lose them, then this insurance company is guaranteed to pay you market rate for your losses."

I've been mulling over whether it'd be possible for Coinbase to get the equivalent of FDIC insurance. That would turn them from being "it's insane for anyone to trust you" into "you just became an awesome bank."

I can't think of any choice for exchanges or webwallets: either get insurance or erode consumer faith in bitcoin. And since it's so hard to get insurance, it's likely that the first one who does will have a huge advantage over everyone else.

I have no idea whether it's possible in practice to insure bitcoins on a large scale. I'm only saying that it's absolutely needed, because it's absolutely necessary for consumers to be able to trust some third-party service with their coins the way they trust a bank with their dollars. Either that, or make it trivial for people to manage their own coins as trivially as Coinbase does, which seems implausible.

When I point out that credit cards are superior to bitcoin from a consumer perspective, people sometimes counter with "you pay for that with 2% higher merchant fees, etc." But that's a small price to pay to guarantee you won't suddenly be unable to pay your phone bill next month due to theft. I've mentioned before, but someone once stole my credit card and got gas with it. I called up the credit card company and within 10 minutes the transaction was refunded and I was issued a new card. It would be amazing if that could be the case with bitcoin via some kind of insurance plan. I wonder if it's possible...