Bitstamp is a UK headquartered, web-based, Bitcoin exchange. It enables its customers to use fiat currency to buy Bitcoins; before transferring them to others, or holding them as a potential investment.

Late on 4 January 2015, some of Bitstamp’s operational wallets were compromised and up to 19,000 Bitcoins, worth approximately US $5m, were lost. At 9am on 5 January 2015, Bitstamp suspended Bitcoin withdrawals, and advised its customers not to make Bitcoin deposits to previously issued Bitcoin addresses. Bitstamp’s normal services resumed at 9am on 9 January 2015.

Between 5 and 8 January 2015 (inclusive), Bitstamp “fully investigate[d] the incident and actively engage[d] with law enforcement officials”. It also “rebuil[t] [its] systems from the ground up from a secure backup … onto entirely new hardware … to preserve … evidence for a full forensic investigation of [an alleged] crime”. Bitstamp’s CEO, Nejic Kodric, has apologised to Bitstamp’s customers. He has also promised that “any Bitcoins held with [Bitstamp] prior to … suspension … are completely safe and will be fully honoured” and that all transactions conducted between 9 and 17 January 2015 (inclusive) will be commission free.

Some commentators spent the period from 5 to 9 January 2015 wondering what impact this would have on the price of Bitcoins. Others wondered whether Bitstamp’s customers could complain to the UK’s Financial Ombudsman Service (FOS) or claim compensation from the UK’s Financial Services Compensation Scheme (FSCS), if they were dissatisfied with Bitstamp’s service or suffered loss as a result of its difficulties. The answer to the first of these questions is now apparent: according to Coindesk, Bitcoin’s value rose from US $ 272.95 to US $ 294.88 between 5 and 7 January 2015 (inclusive), before falling back to US $ 283.25 on 8 January 2015, and rising to US $ 288.54 on 9 January 2015, spiking some commentators’ guns. They seemed to have expected MtGox like falls when the Bitstamp story broke, rather than modest rises.

The answer to the other questions have been clear for some time: the FOS and the FSCS cannot help.

There are a number of reasons for this. For example, Bitstamp does not appear to be carrying on any regulated activities. It doesn’t therefore have to be authorised and regulated by the UK’s Financial Conduct Authority (and it isn’t). In view of Bitstamp’s promises, there is no current reason to suppose that anyone will suffer a direct financial loss as a result of any crime that might have been committed. And, if losses do occur, they’re more likely to suffered by (largely FOS and FSCS-unprotected) corporates than consumers, in any event.

The UK Government and the FCA may eventually change the law, so that complaints and claims can be made to the FOS and FSCS if a Bitcoin exchange is forced to withdraw its services or its customers suffer loss as a result of a cyber-attack, the routine failure of its IT systems, or for other relevant reasons. They may even begin to impose fines on Bitcoin exchanges akin to those imposed on the IT-failure affected banks. But these changes are unlikely to occur this year. Bitcoin users and investors should probably therefore heed the widely reported advice of Gavin Andresen, chief scientist at the Bitcoin Foundation: Bitcoin is “dangerous” – ordinary people should avoid using it for now, unless (at the very least) they’re technically proficient enough to keep their own computers secure.

Posted by Cooley