Tag Archives: Virtual currency

Mt. Gox

The Doom of Mt. Gox [2023 Update]

February was the month that the all-seeing eye of the media turned its lidless gaze upon Bitcoin and the craggy peaks of Mt. Gox, the Japanese Bitcoin exchange site. Almost half a billion dollars went missing from Mt. Gox, the exchange was rocked, Bitcoin was scorched, and the site went bankrupt.

The Official Merchant Services Blog has been tapped into the ongoing saga of Bitcoin since this article in November — delving into the fascinating gimmick of Bitcoin mining.

Wait, What is Bitcoin?

Bitcoin is a virtual currency introduced in 2008 by a programmer or group of programmers under the name Satoshi Nakamoto. It has no central issuing authority and uses a public ledger to verify encrypted transactions. The flashy shiny aspect of it is it’s a currency that can be bought, sold and mined electronically. The famous internet comic strip Penny Arcade defines Bitcoin for its readers here.

Wrapped Bitcoin

In 2013 the currency captured the imagination of the virtual and business worlds by soaring in value, rising from $10 to $1,200 per coin. It surpassed the value of gold at its peak. And then i crashed down to $500.

The currency was also embroiled in the huge Silk Road scandal as federal authorities seized millions of dollars worth of Bitcoins when it shut down the notorious black market web site the Silk Road.

The real trick of Bitcoin and why it’s so fascinating to payment processors is that it’s a cryptographic protocol, or crypto-currency. The protocol creates unique pieces of digital property that can be transferred from one person to another. It’s essentially the legitimization of microtransactions linked to actual monetary value. Each Bitcoin is defined by a public address and private key, both long strings of numbers and letters giving it a unique identity in virtual reality. In addition to its digital fingerprint, Bitcoins also have a place in a public ledger. This blockchain gives the Bitcoin a physical identity. So Bitcoins bridge the virtual and the physical.

Mt. Gox: Hackers Gonna Hack

Hacker

But no matter how elegant and ingenious the actualization of Bitcoin is, the currency apparently can be hacked.

  • On February 25, Mt. Gox, the leading Bitcoin exchange located in Tokyo Japan shut down. It had discovered that hundreds of thousands of Bitcoins had gone missing, and more than $400 million had been stolen.
  • On February 28, Mt. Gox filed for bankruptcy and said it was under orders not to pay its debts. The exchange publicly apologized to users for “causing so much inconvenience.”

February was actually filled with problems for Mt. Gox and Bitcoin, as we reported previously.

Everything from Russia banning Bitcoins to China half embracing it just piled onto the Bitcoin craze. And then the hack and the bankruptcy happened. Since then, pieces of code showing parts of Mt. Gox’s Bitcoin source have cropped up around the web according to VentureBeat. Mt. Gox set up a phone support line but that got blitzed. Two other sites vied to fill the void of Mt. Gox, with BitStamp edging out BTC China for the title of largest Bitcoin exchange — for now. And then things got funny weird.

Virtual Theft

Mt. Gox

The authorities are now tasked with investigating the crime. And well, there’s this book, Halting State by Charles Stross, written in 2007. The premise of the book seemed so novel back then: A police officer is called to the offices of a big corporation because a robbery was reported. The robbery as it turns out took place in a virtual world, as the company runs a video game system with virtual currency. And then the novel goes on to explore technology, and how it is quickly evolving to affect the physical world from the virtual world. It was set just a few short years in the future.

And here we are, a few short years into the future, and authorities are investigating the theft of real value currency stolen from a virtual environment.

The amount of coins hacked and stolen from Mt. Gox amounts to about 6 percent of the entire Bitcoin market in circulation. And law enforcement is now tasked with trying to find the identity of the perpetrators — which may seem like an obvious and standard step in the investigative process. But it’s Bitcoin, which is famous for its anonymity and unregulated status. So authorities are filing subpoenas to Mt. Gox to gather information about how the virtual currency is transferred and converted into dollars. While stuck investigating even the basics of how the model works, authorities haven’t even gotten to the stickier situation of how Bitcoins are designed to be untraceable and finding the phantom thieves who stole the strings of encrypted numbers may not happen.

Leaving a half billion dollar hole in an industry that’s already proving to be volatile and susceptible to hacking.

The Bitcoin Roller Coaster

Back in November, The Official Merchant Services Blog dove into the Bitcoin currency craze with an in-depth look at Bitcoin mining.
Bitcoin, introduced in 2008 by a programmer or group of programmers under the name Satoshi Nakamoto, has no central issuing authority and uses a public ledger to verify encrypted transactions. It is a virtual currency that can be bought, sold and mined electronically.

The Hammer is Dropped

We focused on the technological gimmick that is Bitcoin mining – essentially powering multiple computers to create the virtual currency from virtually nothing. The rest of the media since then has been concentrating on the other aspects of Bitcoin, including its use as a money laundering tool. In that same month of November, Federal prosecutors in New York filed charges against Ross William Ulbricht for running the Silk Road website, where customers allegedly used Bitcoins to buy and sell drugs.

And on February 9, Florida stepped into the spotlight concerning virtual currency and money laundering. Bitcoin traders. Florida prosecutors have charged three men, saying that their use of a site called localbitcoins.com violates laws against unlicensed money transmitters, according to a report in the Krebs on Security blog.

Bitcoin Banned in Russia

More bad news for Bitcoin came from Sochi Olympics host country Russia. The country banned Bitcoin altogether. Russia’s Prosecutor General’s Office recently made its stance on Bitcoin abundantly clear. “Systems for anonymous payments and cyber currencies that have gained considerable circulation — including the most well-known, Bitcoin — are money substitutes and cannot be used by individuals or legal entities,” the office said in a recent press release reported by Reuters. Any use of Bitcoin will be considered “potentially suspicious,” as the Russian government has linked Bitcoin usage to illicit activities.

Russia is only the latest country to release a statement detailing its position on Bitcoin. In early December, China barred financial institutions from using Bitcoin, though it didn’t ban the currency outright. In late January, Canada released a statement that said Bitcoin is not legal tender in the country. Countries like these have expressed skepticism in Bitcoin not only because of its links to money laundering, but also for its overall volatility.

Market Troubles

Bitcoin has plunged more than 8 per cent after a Tokyo-based exchange halted withdrawals of the digital currency, citing technical malfunction. Mt. Gox, a popular exchange for dollar-based trades, said in a blog post it needed to “temporarily pause on all withdrawal requests to obtain a clear technical view of the currency processes.”

It promised an “update” – not a reopening – on Monday, February 10, Japan time. Bitcoin exchange Mt. Gox said customers can take out cash “as normal” and it’s working to resolve technical issues that prompted it to halt withdrawals of the digital currency.

“It’s not about cash at all, only about Bitcoin,” Michael Keferl, a communications officer for Tokyo-based Mt. Gox, said. “There is a problem in the way transactions are verified.”

Things then rebounded. The price of Bitcoin rose 0.3 percent to $683.66 at 9:07 a.m. London time, according to the CoinDesk Bitcoin Price Index, which averages prices from exchanges including Mt. Gox.

Bitcoin App Dropped by Apple

On February 5, Apple struck a blow against Bitcon. The Blockchain app, downloaded 120,000 times during its two years in Apple’s iTunes App Store, was the most popular way for people and companies to transfer bitcoins from one another. Apple removed it from the store on February 5. Blockchain immediately shot back with a statement, accusing Apple of getting overly aggressive with future competitors. Apple is rumored to be developing its own mobile payment system.

And Speaking of …

With the crazy ups and downs of Bitcoin, one thing is undeniable: Virtual currency is a profitable new marketplace. Which means Apple isn’t the only group trying to develop their own alternative. An untraceable currency called Zerocoin is being designed by Johns Hopkins University researchers to compete with other virtual moneys such as Bitcoin. The researchers say that if virtual currencies are going to exist, there should be one that provides the same kind of privacy that people have when exchanging traditional forms of money.

What Does This all Mean?

The virtual currency movement has the potential to be the next stage in the evolution of payments and transaction processing.
Advocates say such digital currencies, made possible by complex computer formulas, will eventually be widely embraced by users who want to exchange money instantly and directly, without a bank as middleman.

While it may seem like the wild west in terms of security and long term viability, the concept of virtual currency is actually well in line with what we’re already surrounded with as consumers. By and large we continually swipe plastic through card readers when we buy everything from a coffee at Wawa to a down payment on a new automobile. So a paperless and coinless world is already one in which we exist. It’s not hard to envision a next step where the currency itself is virtual.

But that does leave security issues which are relevant and real. Relying on even the best encryption still leaves risk and susceptibility to fraud.

However, it seems governments are still playing catch up to the technology itself. Focusing on money laundering and the instability the anonymous exchange of currency brings to the banks themselves, as well as the sale of illegal goods and services. All of which are certainly part of their purview. It’s just a weird transition period as the infrastructure of the old school banking system doesn’t seem all that prepared to deal with the fluidity of a virtual currency snaking through the world’s consumers.

In short, it’s an interesting time to bear witness to the evolution of money and the marketplace. Governments will catch up with virtual currency. And consumers will embrace convenience more and more until we face a world that may actually give up on paper and coins completely, in favor of your PIN numbers and some encryption codes that store the value of you.