Mon, Mar 03, 2014 - Page 9 News List

Restoring the luster to bitcoin in the wake of Mt. Gox

The digital currency has a problem with robberies that needs to be sorted if it is to survive. Some proponents are urging steps that are anathema to many in the community: regulation of the currency and a move away from anonymity

By Alex Hern  /  The Guardian

However, the document is also brutally honest about the likely future of Mt. Gox — and bitcoin itself.

“The reality is that Mt. Gox can go bankrupt at any moment, and certainly deserves to as a company,” it reads. “However, with bitcoin/crypto just recently gaining acceptance in the public eye, the likely damage in public perception to this class of technology could put it back 5-10 years, and cause governments to react swiftly and harshly. At the risk of appearing hyperbolic, this could be the end of bitcoin, at least for most of the public.”

Most of the bitcoin community seems prepared to try and separate perception of Mt. Gox from that of the currency and concept itself.

Marc Andreesen of Andreessen Horowitz, a venture capital firm that has invested heavily in bitcoin, described the firm as “obviously broken and possibly outright crooked” when speaking to CNBC on Tuesday last week.

“This is like [bankrupt financial services firm] MF Global, not some huge breakdown of the underlying technology or other exchanges,” he said.

Henry Blodget, formerly an equities analyst and now in charge of Business Insider, puts it like this: “There’s a chance consumer trust in bitcoin may survive. What happened to Mt. Gox is essentially a bank robbery — albeit one bigger than any in recorded history [the next-biggest recorded theft is for US$108 million]. It’s actually far easier to comprehend than something like the collapse of Northern Rock or Lehman Brothers; and if those failures didn’t bring down fractional reserve banking or highly leveraged derivative trading, then there’s hope for bitcoin.”

However, if the Mt. Gox losses are equivalent to a bank robbery, they underscore the perception of bitcoin as a currency highly susceptible to bank robberies. Users of services including Bitcoinica, and now Mt. Gox have all seen their deposits disappear overnight.

So how secure are other exchanges? Many bitcoin services were hacked together with little attention paid to long term security. For instance, Mt. Gox incorporated encryption code which was described by its creator two years ago as “quick-n-dirty” because they were “too lazy” to do it the proper way.

In a world where a single bitcoin was worth pennies, that was acceptable, but once real money was at stake, the duct-tape approach led to problems.

Bitcoin exchanges are now constantly under pressure, with a massive distributed denial-of-service attack hitting some of the biggest early last month. By their nature, such exchanges are tempting targets for hackers; they are, in essence, a bitcoin wallet connected to a Web interface. All too frequently, the security system in place has been easy to overwhelm.

However, the new generation of bitcoin companies — professional, venture-capital-backed, serious and, hopefully, secure — are fighting to change that. Their move toward reliability even extends to pushing for regulation of the currency, something which seems anathema to longer-standing users.

“There’s probably some minimal requirements and procedures that should be put in place if you’re facilitating that kind of exchange,” as Fred Ehrsam, the cofounder of bitcoin payment processor Coinbase, said to regulators in January.

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