Mt Gox fiasco erodes trust in Bitcoin

The suspicious behaviour from Japan’s Mt Gox, once known as the world’s biggest Bitcoin exchange, smacks of outright fraud. On February 25, the company’s website first went blank, then later stated that news reports were affecting it so adversely that it had to shut down to protect customers.

On February 24, the news was that its CEO Mark Karpeles had resigned from the Bitcoin Foundation. Earlier in February, it had halted Bitcoin transactions because, it said, of a well-known technical  flaw in Bitcoin. Its office is reportedly empty, with angry customers picketing outside. The rumours are growing that it was hacked and has lost more than 700,000 Bitcoins, currently worth US$400 million of its customers’ money.

Forbes notes that Bitcoin exchanges are favourite hacking targets, and shared that Mt Gox itself had lost US$9 million in 2011, but had regained its reputation through using its own funds; funds which are unlikely to cover the current loss. In hindsight, the original halt in transactions could well have been when the theft was discovered, and all the activity since then, a desperate attempt to look for answers and a way out.

The Bitcoin Foundation has been shoring up confidence in the currency with multiple statements, first when Mt Gox claimed technical problems with Bitcoin, then when Karpeles resigned.

With millions at stake, other Bitcoin exchanges have been quick to say the problem has been with Mt Gox. “This tragic violation of the trust of users of Mt.Gox was the result of one company’s actions and does not reflect the resilience or value of bitcoin and the digital currency industry,” they said in a joint statement that Coinbase announced in a blog post.

At this point, it is looks unlikely that Mt Gox investors will get their money back.

The Singapore government has warned the public about virtual currencies (VCs), stating at its Moneysense portal that VCs are not legal tender, and that investors face many risks.

“Under the Currency Act, the Monetary Authority of Singapore (MAS) has sole right to issue currency notes and coins in Singapore. Only notes and coins issued by MAS are legal tender in Singapore.”

“Further, VCs are not considered as securities under the Securities and Futures Act (SFA). As such, platforms that enable the trading of VCs are not regulated by MAS under the SFA.”

Moneysense continues: “Consumers may not be able to obtain a refund of their monies should a VC scheme cease to operate. Consumers should also take note that the value of decentralised VC schemes could fluctuate unpredictably within a short period of time.”