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Will Mt. Gox’s missing money prompt regulation on Bitcoin?

February 28, 2014 at 6:33 PM EDT
Mt. Gox, an early player in the virtual currency Bitcoins, became a major online exchange until the disappearance of a significant sum and the subsequent bankruptcy of the company. Kashmir Hill of Forbes joins Hari Sreenivasan to discuss the potential for tracking the missing money and the repercussions of collapse for its users and other rising cryptocurrencies.
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HARI SREENIVASAN: For more on all this, we turn to Kashmir Hill, senior online editor and writer at Forbes who has been following these events closely. She’s also author of the e-book “Secret Money,” recounting a week she spent living exclusively on Bitcoins.

So, first of all, explain to us what Mt. Gox was and how it got so big.

KASHMIR HILL, Forbes: So, Mt. Gox was one of the earliest Bitcoin exchanges. Its name, Mt. Gox, actually stands for Magic the Gathering Online Exchange, because it started out basically dealing in Magic cards.

So it was interested in value created by virtual worlds. And so it made sense that it would move into virtual money created for the real world. So it was very early. It became one of the biggest exchanges out there, in part because it just arrived — arrived to the game very early on.

HARI SREENIVASAN: All right, so this potential theft or robbery or dissolution of money that happened — well, it didn’t really happen Tuesday. We don’t exactly know what happened, do we?

KASHMIR HILL: We don’t really know. There is still a black hole of information around exactly how Mt. Gox may have lost these 850,000 Bitcoins.

There was one document that was leaked that said that there was a leak in their cold storage wallet. And they blamed hackers who took advantage of a flaw in their code to take Bitcoin out of their system. But we still don’t exactly know what happened.

HARI SREENIVASAN: So if these coins were to come back into circulation, isn’t there the equivalent of a serial number on a dollar bill? Wouldn’t they show up because all of the transactions on all of the Bitcoins are in a kind of open log?

KASHMIR HILL: Right. So, unless their servers fell in the ocean or something, the Bitcoins weren’t completely destroyed. They were taken from Mt. Gox.

And, theoretically, Bitcoin is one huge public ledger, and so if we could figure out which transactions were the fraudulent ones, fraudulent ones, the theft, we could trace the Bitcoin, and potentially follow it to whoever has stolen it.

But there are ways within the Bitcoin system to kind of confuse where Bitcoin moved. But, theoretically, we could potentially see when the Bitcoin taken and kind of see the flow of transactions as to where it went.

HARI SREENIVASAN: So what about the people who lost money? Is there any way that they can be made whole again? There isn’t an FDIC or even a bank that they can go complain to.

KASHMIR HILL: And for a lot of critics of Bitcoin, they are pointing to this as saying, see, we told you so. You put all of this money into a virtual currency, and now it’s gone away.

You know, Mt. Gox filed for bankruptcy. They did say they have some assets, but they also have a lot of debt. So, right now, it’s looking like customers of Mt. Gox who were using Mt. Gox as their Bitcoin bank have lost their savings, which is — which is really sad for a lot of people who had a lot of money there.

HARI SREENIVASAN: So the Japanese finance minister was one of those critics. He wasn’t shy about his pessimism or skepticism for it.

How are other countries around the world and possibly their central banks positioning themselves to not just Bitcoin, but other cryptocurrencies?

KASHMIR HILL: Here, the U.S. regulators and lawmakers are being pretty progressive around Bitcoin.

And they are pointing to things like Mt. Gox, saying, we need regulation. We need some kind of oversight of businesses that are involved in Bitcoin. So I think this will give them more fodder for calling for that kind of regulation.

New York’s — New York’s financial regulator said that they want to issue bit licenses for Bitcoin businesses, where they will be audited and checked and make sure that there is nothing like what happened with Mt. Gox, where people’s Bitcoin just disappear overnight.

HARI SREENIVASAN: So it seems like the regulation could be a double-edged sword here. On the one hand, it could slow things down, which is exactly the opposite of what Bitcoin proponents want. On the other hand, it could add some legitimacy to these currencies.

KASHMIR HILL: Early Bitcoin adopters who liked Bitcoin because it was free of the state and free of regulators have looked askance at the calls for regulation.

But people who have gotten in later, who are more interested in the kind of legitimate uses of Bitcoin to, you know, avoid transaction fees when sending money, are pretty excited about the idea of these businesses actually having some kind of oversight.

HARI SREENIVASAN: And how significant is it that this particular exchange, the collapse of the largest exchange of Bitcoin, what is the consequence of that on these cryptocurrencies? It seems that there are arguments on both sides, one saying that is actually going to make the system stronger, then the other saying this is the beginning of the end.

KASHMIR HILL: So, Mt. Gox was for a long time the largest exchange. It was kind of the only place where you could go to buy Bitcoin.

But, as the value of Bitcoin has risen, it has attracted other exchanges. So there are very big exchanges in China, for example. There’s one in Slovenia. And here in the U.S., a company called SecondMarket is planning to launch one this summer. So there are other players in the Bitcoin market now. So a lot of people are saying that Bitcoin is just going to route around Mt. Gox’s failure.

It just clears the field for other, more legitimate companies to operate. Other critics say, you know, this is — in terms of mainstream — mainstream adoption and new people entering the Bitcoin market, this is going to be very scary for them, the idea that you might buy a bunch of Bitcoin, and then overnight see them disappear.

HARI SREENIVASAN: And while we have repeatedly talked about Bitcoin, it’s just one of multiple currencies. It’s sort of the gold to — there is a silver, there’s a copper out there, right?

KASHMIR HILL: There are other cryptocurrencies out there.

There is Litecoin. There is Dogecoin. These are basically currencies where they have copied the Bitcoin code and then modified it in some way. So it is very similar to Bitcoin with slight differences. And Litecoin is actually — it saw more of an increase in value over the last year than Bitcoin did, relatively. If you bought $100 worth of Litecoin in January of last year, it would have been worth something like $30,000 in January of this year.

So we’re definitely seeing a kind of wider interest in cryptocurrencies, or altcoins, as some people call them.

HARI SREENIVASAN: All right, Kashmir Hill from Forbes, thanks so much.

KASHMIR HILL: You’re welcome.