The End of Bitcoin?

Bitcoin exchange Mt. Gox’s possible bankruptcy due to security flaw
February 25, 2014 Updated: February 25, 2014

All currencies in the world depend on one thing: Confidence. Confidence in Bitcoin was shaken Tuesday by reports its biggest exchange will go bankrupt because of a security flaw.

“At the risk of being hyperbolic, this could be the end of Bitcoin, at least for most of the public,” a leaked report by Tokyo-based Mt. Gox, the world’s largest Bitcoin exchange, states. Mt. Gox itself neither denied nor confirmed the report.

The “crisis strategy draft,” first published on the blog of bitcoin entrepreneur Ryan Selkis, states Mt. Gox lost 744,408 bitcoins ($385,603,344 at Tuesday’s prices) because cybercriminals hacked into the exchange’s bitcoin wallets. Wallets are digital instruments that store bitcoins and connect to exchanges for transactions.

Selkis claims he obtained the report from a reliable source and confirmed its existence with other sources.

The paper states the theft has been going on for years and could explain the problems Mt. Gox customers had in making transactions and withdrawing funds over recent months. Withdrawals of fiat currencies have not been processed since the beginning of February.

The exchange released the following statement Tuesday: “In the event of recent news reports and the potential repercussions on Mt. Gox’s operations and the market, a decision was taken to close all transactions for the time being in order to protect the site and our users. We will be closely monitoring the situation and will react accordingly.”

Mt. Gox CEO Mark Karpeles resigned from the board of the Bitcoin Foundation, a group seeking legitimacy for the currency, earlier this month.

Prices quotes on Mt. Gox Tuesday did not exceed $150, whereas other exchanges transacted bitcoins for more than $500.

Customers Harmed

The report suggests that bitcoins held in customers’ wallets were also stolen. It lists liabilities in bitcoins and dollars far higher than its assets. This also suggests the exchange might have used customers’ dollar assets to buy bitcoins to make up for the shortfall, as no dollars were reported stolen.

At the Tokyo office tower housing Mt. Gox, bitcoin trader Kolin Burges said he had picketed the building since Feb. 14 after flying in from London, hoping to get back $320,000 he has tied up in bitcoins with Mt. Gox.

“I may have lost all of my money,” said Burgess, next to placards asking if Mt. Gox is bankrupt. “It hasn’t shaken my trust in Bitcoin, but it has shaken my trust in bitcoin exchanges.”

Just a Bad Apple

Leaders of other bitcoin organizations blamed Mt. Gox for its lack of security standards but assured customers that the Bitcoin project would continue.

“This tragic violation of the trust of users of Mt. Gox was the result of one company’s actions and does not reflect the resilience or value of Bitcoin and the digital currency industry,” six CEOs of important bitcoin organizations stated on the blog of Coinbase, a large maker of bitcoin wallets.

“As with any new industry, there are certain bad actors that need to be weeded out, and that is what we are seeing today,” the CEOs stated.

Despite the assurances, the decline in price has accelerated since the troubles at Mt. Gox started. Bitcoin reached its high of $1,153 on Dec. 4, 2013, and now trades for around $500.

Looking at History

Security experts admit that stealing bitcoins is much simpler than cleaning out bank accounts, but this doesn’t mean the crypto currency cannot evolve.

When money was still mostly made up of gold coins, there were individual bank robberies, but confidence in the system persisted and it evolved.

When notes were issued by different banks in a decentralized way in the 1900s, individual banks would go bankrupt and depositors lost all their money.

Even nowadays, the recent Target scandals confirm that traditional payment systems such as credit cards aren’t 100 percent safe either.

The difference lies in the way different actors absorb the losses. Bank deposits are now insured by the FDIC and many credit card companies offer customers insurance against fraud.

Bitcoin companies, exchanges, and federations could likewise offer insurance against mistakes individual companies make—a move that would protect consumers and boost confidence.

The Associated Press contributed to this report.