Bitcoin needs better consumer protection, says industry exec

Getty Images

Bitcoin start-ups need to do a better job policing themselves or risk getting bogged down in regulation and legal fees, said an executive of a cryptocurrency "wallet" company.

"As an industry we need to be much more committed to consumer protection than we already are," said COO Peter Smith said in an interview Monday at TechCrunch Disrupt in New York.

Blockchain, which builds software that allows users to securely manage their funds, is the Internet's most popular bitcoin service, with about 1.6 million wallets on its platform.

Read More Why bitcoin needs a marketing campaign

Educating consumers about the different types of bitcoin services, specifically exchanges and digital wallets, is one of the key things the community needs to do as soon as possible, Smith said.

Case in point: More than $450 million worth of bitcoin vanished when Mt.Gox, a popular bitcoin exchange, collapsed in February. Mt.Gox was a centralized trust, where all users' coins are stored together in a master account. So when the exchange was the target of an attack, all bitcoins in the exchanged were vulnerable.

The centralization makes such exchanges riskier, and consumers need to be aware that they should only keep small amounts of money in such platforms, Smith said. Platforms like Mt.Gox a really made for people like day traders, and the average bitcoin enthusiast shouldn't keep large sums there, he said.

Smith said digital wallet services—like his company—have security features that allow users to store the private keys (which are needed to access their bitcoins) and send payments, and are probably more appropriate for the average consumer.

Blockchain's wallet service does not store its users' bitcoins in a master account and cannot view a users' balance or transactions, he said.

Read More Watch CNBC's 'Bitcoin Uprising'

Besides improving its consumer outreach, the bitcoin community also needs to address growing regulation concerns.

The failure of Mt.Gox has spurred calls to regulate the digital currency. But Smith said the industry should try to take the lead and regulate itself.

"I'd like to see the Bitcoin Foundation [a nonprofit trade organization] take a more active role on this front," Smith said. "I'd like to see them take a much more active role on consumer protection and self-regulation."

Read More Bitcoin bickering: How much regulation?

That regulatory uncertainty makes it hard for the young companies to make long-term decisions, Smith said. It's also costly.

"It means that we spend a burdensome amount of our money on legal fees," he said. "And so this uncertainty has a very real cost."

Instead of spending money filling lawyers' coffers, bitcoin start-ups should be using that cash to find new ways to fix the problems that exist in the space, he added.

By CNBC's Cadie Thompson