Major bitcoin exchange said to be insolvent after alleged theft of currency


Kolin Burges, a Mt. Gox customer, holds a placard while protesting outside a building housing the headquarters of Mt. Gox and its parent company Tibanne Co. in Tokyo on Tuesday. (Kiyoshi Ota/Bloomberg)
February 25

One of the world’s largest Bitcoin exchanges has seemingly disappeared, delivering a severe blow to the virtual currency as it struggles to gain legitimacy.

A coalition of virtual-currency companies said Tuesday that Tokyo-based Mt. Gox went under after secretly racking up catastrophic losses.

Mt. Gox’s Web site was returning a blank page Tuesday. On Wednesday, it displayed a notice to customers that said all transactions were closed “for the time being” to protect the site and customers. The disappearance of the site follows the resignation Sunday of Mt. Gox chief executive Mark Karpeles from the board of the Bitcoin Foundation, a group seeking legitimacy for the exotic new form of money. The exchange had imposed a ban on withdrawals earlier this month.

Prominent supporters of Bitcoin — including San Francisco-based wallet service Coinbase and Chinese exchange BTC China — sought to shore up confidence in the currency by saying Mt. Gox’s collapse was an isolated case of mismanagement. They said in a statement that it had abused users’ trust but did not offer details.

“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 statement said.

What is a bitcoin?

Japanese officials appeared reluctant to react, with the Finance Ministry and Financial Services Agency both saying Wednesday that a virtual currency like Bitcoin was not under their jurisdiction. Tokyo police declined to comment. Chief Cabinet Secretary Yoshihide Suga said the financial regulators are gathering information and “if necessary, I believe they will act on this.”

Speaking shortly after the Wall Street Journal reported that Mt. Gox had received a subpoena from federal prosecutors in New York, Suga declined to comment further, Reuters reported.

Since its creation in 2009, Bitcoin has become popular among tech enthusiasts, libertarians and adventurous investors because it allows people to make one-to-one transactions, buy goods and services and exchange money across borders without involving banks, credit card issuers or other third parties. Criminals like Bitcoin for the same reasons.

For various technical reasons, it is hard to know just how many people around the world own bitcoins, but the currency has attracted outsize news media attention and the fascination of millions as an increasing number of large retailers such as Overstock.com begin to accept it.

Speculative investors have jumped into the Bitcoin fray, too, sending the currency’s value fluctuating wildly in recent months. In December, the value of a single bitcoin hit an all-time high of $1,200. In the aftermath of the Mt. Gox collapse Tuesday, one bitcoin stood at about $470.

Central banks across the globe have been hesitant to recognize bitcoins as a legitimate form of money, and Mt. Gox’s virtual vanishing is not helping.

Mt. Gox “reminds us of the downside of decentralized, unregulated currencies. There is no Federal Reserve or IMF to come to the rescue. There is no deposit insurance,” said Campbell Harvey, a professor at the Duke University Fuqua School of Business who specializes in financial markets and global risk management.

Documents purportedly leaked from Mt. Gox lay out the scale of the problem. An 11-page “Crisis Strategy Draft” published on the blog of entrepreneur and Bitcoin enthusiast Ryan Selkis said 740,000 bitcoins are missing from Mt. Gox, which roughly translates to hundreds of millions of dollars’ worth of losses, although figures are fuzzy, given Bitcoin’s extreme volatility.

Mt. Gox chief executive Kar­peles did not respond to several messages seeking comment.

The scandal may cost customers dearly. 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 Burges, 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.”

Bitcoin has struggled to shake off its associations with criminality, particularly its role in powering the now-defunct online drug marketplace Silk Road. Only last month, another member of the Bitcoin Foundation, Vice Chairman Charlie Shrem, was arrested at New York’s Kennedy Airport on charges of money laundering.

— Associated Press

For more Bitcoin coverage, see The Switch at washingtonpost.com/
blogs/the-switch.

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