Mt. Gox collapse spurs calls to regulate Bitcoin

Bitcoin is virtual money that cuts out banks and credit card companies, and has gotten more popular recently. Here's what you need to know about the original cryptocurrency. (Davin Coburn/The Washington Post)

A leading Bitcoin exchange completed its weeks-long collapse Friday with a public apology and a bankruptcy filing, fueling calls for regulators to rein in the innovative virtual currency worth billions of dollars.

The spectacular rise and fall of the marketplace, called Mt. Gox, has played out as something of a morality tale for those skeptical that a currency created on computers and untethered from regulatory structures or the full faith and credit of an issuing nation can be made secure enough for routine transactions.

Yet as the debate raged over Bitcoin’s fate, there was growing consensus that virtual currencies — if not this particular one — would soon become irreplaceable features of the world’s financial system by satisfying a widespread demand for high-tech, low-cost ways to transfer money beyond the reach of most forms of government tracking.

Losses at Mt. Gox have been put at more than $400 million, and experts say it’s not clear whether that money was stolen by criminals or somehow mishandled by the operators of the exchange. Company officials have blamed a glitch in the transaction software that, they say, allowed hackers to siphon away money undetected.

“What’s fascinating and disturbing about the bankruptcy is the size of the loss,” said Mark Williams, a former Federal Reserve official who teaches finance at Boston University. “There’s no legal recourse. There’s no financial system. . . . In essence, if a criminal gets the coin, the criminal owns the coin.”

The bankruptcy of Mt. Gox, one of the first major Bitcoin exchanges, surprised few by the time it arrived on Friday at a court in Tokyo, where the company was based. It had a history of trouble and had stopped functioning normally several weeks ago. Many Bitcoin enthusiasts said its demise will lead to a more-durable system for trading the virtual currency as other major exchanges around the world grow stronger.

Demands for government regulation are the biggest threat to Bitcoin, say supporters. Sen. Joe Manchin III (D-W.Va.) went even further, calling for a ban on Bitcoin this week as news spread of Mt. Gox’s troubles.

“The sooner that Mt. Gox goes away, the better for Bitcoin,” said Barry Silbert, chief executive of SecondMarket, which operates an investment fund for owners of bitcoins. “If you look at the short history of Bitcoin, there’s been a series of bubbles and busts, there’s been a series of disruptions, there have been hacks, there have been thefts. And really, after every single event, Bitcoin has emerged stronger.”

Bitcoin was not the first virtual currency, but it has gained uncommonly widespread acceptance since its invention by an anonymous developer in 2009. The creation of individual bitcoins — called “mining” in homage to the days when all currency was made of metal dug from the earth — involves computers using complex algorithms.

The currency won support initially among technology enthusiasts and speculators but gradually was adopted by those wanting to gamble or buy illicit goods on online marketplaces. When federal authorities shut down Silk Road, one such marketplace, in October and arrested its alleged founder, they seized 26,000 bitcoins worth about $3.6 million, sending the value of the currency plunging.

It has recovered since then, as it has several times after setbacks, including previous ones involving Mt. Gox. Some retailers, such as Overstock. com, began accepting bitcoins as payment in what supporters saw as a move toward the inevitable acceptance of the virtual currency. Bitcoin ATMs appeared in some cities, making purchase of the currency easier.

Yet bitcoins remained awkward to buy and trade, especially compared with credit cards. People wanting to buy bitcoins typically had to order them from far-flung exchanges. Transfers were irreversible, meaning people who bought a product or service with a bitcoin had little recourse if they regretted the purchase or felt defrauded.

Regulators worldwide were reluctant to police transactions involving a currency they didn’t issue. China banned bitcoins outright amid concerns about rampant speculation. Japanese regulators, located closest to Mt. Gox’s headquarters, were more typical in tolerating the exchange but doing nothing to protect against abuses.

“No one recognizes them as a real currency,” Japanese Finance Minister Taro Aso told reporters on Friday. “I expected such a thing to collapse.”

Trading at Mt. Gox was interrupted several times in recent years, and last year users complained of being unable to trade bitcoins for dollars — a core function of exchanges. The situation turned far worse Feb. 7, when Mt. Gox suspended all withdrawals because of what it called a software bug. The exchange never fully resumed operations.

The company has blamed its problems on a glitch called “transaction malleability” in which users can trick the software into making a withdrawal twice. Many outside experts have said that Mt. Gox lacked the accounting systems to spot fraud and keep its books balanced.

Chief executive Mark Karpeles told reporters Friday that among the 850,000 bitcoins missing from Mt. Gox are 100,000 that belonged to the company and were valued at more than $50 million. “I am sorry for the troubles I have caused all the people,” he said in court in Tokyo.

The company’s descriptions of its problems has drawn skepticism from many Bitcoin supporters, who say it will take independent auditors months to determine what happened to the money missing from Mt. Gox.

“At best, it was very, very poorly managed,” said Nicolas Christin, a security researcher at Carnegie Mellon University. “That doesn’t mean that the entire monetary system needs to be thrown out.”

Although governments have long worried about the difficulty in tracking bitcoins, privacy advocates have made the opposite complaint — that it’s too easy to determine who owns them. Every transaction is recorded in an online register that’s publicly available. Also, many exchanges operate under laws requiring that those who buy bitcoins verify their identities. Some other virtual currencies are entirely anonymous.

“The thing that will kill Bitcoin is a better virtual currency, or hundreds of other better virtual currencies,” said Ryan Lackey, a computer security expert in San Francisco.

Brian Fung contributed to this report.

Craig Timberg is a national technology reporter for The Post.
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