It turns out that if you’re hoping to run a worldwide revolution in finance, it’s best not to put too much faith in a company initially intended as a way to buy and sell Magic: The Gathering playing cards. Sure enough, Mt. Gox, the Japanese company that was once the world’s largest Bitcoin exchange, seems to have met its demise on Monday night after losing hundreds of millions of dollars of its customers’ Bitcoins. After being valued at more than $1,000 late last year, Bitcoins are trading around $500.
It has been clear for a while that something is seriously wrong with Mt. Gox, which spent most of last year having its accounts seized by government regulators and experiencing increasing trouble allowing its customers to get at their money. Earlier this month the site restricted withdrawals, citing technical problems. On Sunday the company’s chief executive resigned from the board of the Bitcoin Foundation, the primary advocacy group for Bitcoin. Then on Monday, Ryan Galt, a Bitcoin blogger, posted a document purporting to outline a crisis strategy from Mt. Gox. In the document, the company copped to having lost track of 744,000 Bitcoins, which seemed to have been stolen over the course of several weeks as the exchange struggled with security issues. Mt. Gox soon took down its site and erased its Twitter feed.
The bio on Galt’s blog says he’s “doubling down on Bitcoin like a damn fool,” but apparently the hijinks shook him sober. ”This is catastrophic, and I am sorry to share this,” he wrote. “I do believe that this is one of the existential threats to bitcoin that many have feared and have personally sold all of my Bitcoin holdings through Coinbase.”
In a statement posted at its website on Tuesday, Mt. Gox wrote: “In light of recent news reports and the potential repercussions on MtGox’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.”
Some Bitcoin believers are cheering the development, hailing it as the end of amateur hour for the crypto-currency. “It purges the final vestige of the first generation of infrastructure companies,” says Jerry Brito, director of the technology research program at Mercatus Center at George Mason University and a longtime proponent of Bitcoin. “Who’s left? It’s the serious people, who are doing this right.”
Those people are working hard to assure the market that they are, in fact, serious. Several prominent Bitcoin companies signed on to a statement vowing to shore up the credibility of the currency. The companies describe the need for Bitcoin companies to submit to independent audits, balance sheet requirements, customer disclosures, and policies that don’t allow companies to leverage customer assets for their own trading. The companies signing the statement were Coinbase, Kraken, Bitstamp.net, BTC China, Blockchain.info, and Circle.
In a fortuitously timed but otherwise unrelated development, Barry Silbert, founder of SecondMarket, said Monday night that he was launching an exchange that would function much like the New York Stock Exchange; regulated institutions would trade Bitcoin for customers, rather than having millions of people move cybercurrency into dollars and back on their own. The exchange will also set the value for Bitcoin twice daily in an attempt to reduce its infamous volatility.
“This is the best way to get the existing financial establishment to participate in the Bitcoin space,” says Silbert. He says he’s been talking to a half-dozen large financial institutions, as well as such Bitcoin companies as Coinbase, about joining the exchange. As of Tuesday morning, Silbert says he hasn’t discussed the Mt. Gox situation with any of his prospective partners.
Nothing that has happened indicates any problem with the technology on which Bitcoin is based. But Mt. Gox’s failure is likely to shake the social and psychological foundations of the Bitcoin craze. The libertarian streak that has accompanied the currency since its inception is steadily losing ground as non-ideological investors and speculators join in.
The failure of a major exchange would seem to bolster the case for greater regulation in the Bitcoin world, although it’s unclear when or if regulators will step in to prevent future disasters. “It’s going to be difficult to argue with anything they propose,” says Brito.