A Bitcoin giant has fallen. Mt. Gox was once the world's largest Bitcoin exchange. It has overcome repeated troubles as if it retained a surplus of "life" renewal points from the Magic: The Gathering cards that it traded before Bitcoin, giving it its name. But after a crisis that started early this year, it appears to have no cards left to play.
It halted Bitcoin withdrawals last month, blaming it on a "transaction malleability" problem with Bitcoin that it had not coded around as other companies had. On Monday, a day after CEO Mark Karpeles "resigned" from the Bitcoin Foundation board, the Mt. Gox site shut down citing "the potential repercussions on MtGox's operations and the market."
Meanwhile a leaked document circulated by Bitcoin entreprenuer and blogger Ryan Selkis suggested a massive hack that robbed the site of 744,000 coins, or $380 million at Bitcoin's current value; that's 6% of all Bitcoin in circulation. The document is a "crisis strategy" PowerPoint presentation that appears to have been prepared by a third party trying to come up with ways to cover up Mt. Gox's troubles.
Selkis, who has been blogging about Bitcoin as "The Two-Bit Idiot" for several months, says by phone that the document comes from a reliable source and that he was able to confirm its authenticity with sources close to Mt. Gox. In a second post on Tuesday, he suggests the document is evidence of a concerted cover-up by third-party companies. At the very least, SecondMarket which announced plans to launch a U.S. Bitcoin exchange Monday, was aware of Mt. Gox's coming shuttering, reports Fortune. Meanwhile, technology analyst Alex Daley spotted in Mt. Gox's code a comment saying "Put announce for mt gox acq here," which might have been the part of the crisis strategy plan that said the site would be relaunched as a rebranded "Gox."
While Mt. Gox's reported 500,000 customers watch their Bitcoin holdings go up in smoke, other Bitcoin companies, including Coinbase, Bitstamp, Blockchain and BTC China, issued a joint statement seeking to reassure consumers, saying that Mt. Gox was a "bad actor that need[ed] to be weeded out."
The Bitcoin company CEOs from around the world met via Skype Monday afternoon to prepare their statement. "I think it will be a short term setback, but ultimately emerge stronger," says Coinbase's Fred Ehrsam. "We might see a month or so of bad press but I think it's hard to ignore all the innovation going on in the space and increased adoption in real businesses."
"It’s insane to me that we haven’t seen any public communication from this company [Mt. Gox]," says Jeremy Allaire, founder of Circle, a Bitcoin company that hasn't launched services yet. "That’s remarkable when we’re talking about this much value. In the U.S., it would be illegal."
U.S. lawmakers say the Mt. Gox implosion is proof that the Bitcoin industry requires strong regulatory oversight.
“The disturbing news today from Japan is a reminder of the damage potentially ill equipped and unregulated financial actors can wreak on unsuspecting consumers," said Sen. Tom Carper (D-Del) in a statement. Carper helped organizing hearings in November that sent Bitcoin's value soaring. "My staff is working closely with relevant federal agencies to determine what lessons can be learned from this failure to help ensure this does not happen here in the United States."
“As any industry matures it will face growing pains and there will be individuals who believe they can use the fog of uncertainty to cover up their follies," said Carper. He called the Mt. Gox news, if true, "a sad violation of consumer trust, whether through malicious action or simple incompetence" and "unacceptable." "For months, our Committee has been calling on law enforcement, industry, and relevant regulators to come to the table and engage in meaningful dialogue to provide clear rules of the roads for entrepreneurs, investors, and consumers," he said. "Without these rules, businesses can’t be successful and consumers can’t be protected."
New York's chief financial regulator Benjamin M. Lawsky, who has said New York may issue "bitlicenses" for virtual currency businesses, also said the Mt. Gox implosion highlights the need for oversight in the U.S. "While all the facts surrounding the situation at Mt. Gox in Japan are not yet clear, these developments underscore that smart, tailored regulation could play an important role in protecting consumers and the security of the money that they entrust to virtual currency firms," he said in a statement.
The value of Bitcoin plunged on Monday to $450 -- its lowest since the price surged over $1000 in November -- but started to recover on Tuesday.
"I'm not worried about any long-term effects of this on Bitcoin," says BTC China CEO Bobby Lee, who signed the joint statement from Bitcoin businesses. "In the short term, for self-fulfilling prophecy reasons, Bitcoin prices will come down a bit, due to this 'bad news.' However, in the long run, since Bitcoin is decentralized, this Mt Gox episode will fade away in memory and Bitcoin will remain strong."
