The shuttering of the leading Bitcoin exchange earlier this week was a wakeup call for the virtual currency industry. But the game's not over.
Bitcoin is finished. The Bitcoin economy is ruined. Bitcoin has been wrecked forever.
That chorus, following the shuttering of MtGox, the largest Bitcoin exchange with close to 1 million users, on Monday is predictable, but not likely to be true. The cryptocurrency is still in its infancy, and its bugs, though pretty significant, are still being worked out.
Small businesses planning to transact in or develop around the currency shouldn't bolt from it, though the MtGox closure does signal caution.
On Monday, MtGox, which was based in Japan, said it would cease operating, and it was planning to file for bankruptcy, owing its users somewhere between $300 and $400 million. The closure follows a hack attack that exploited a hole in the exchange's settlement process.
As Bitcoins are meant to mimic cash, and keep the identities of parties within the transaction anonymous, it's possible the outstanding amount will never be tracked down, or perhaps only after lengthy investigation, experts say.
But regulators, who have been trying to figure out how to oversee the currency and exchanges that let people change national currency into a digital equivalent, sort of expected problems. In early February, the New York State Department of Financial Services conducted several days of hearings about how best to apply regulations to virtual currency without throttling innovation.
"The recent issues at MtGox, for example, have prompted some financial commentators to write Bitcoin’s obituary. Or to at least question the viability and reliability of virtual currency technology," Benjamin Lawsky, superintendent of Financial Services for the State of New York said at the conclusion of the hearings.
Lawsky was referring to transaction "malleability" problems which had also temporarily shuttered MtGox earlier this month, and earlier in the year. Malleability refers to the gap between the transaction time and the settling, where hackers can re-identify the currency and cause acceptance glitches. Hackers appear to have exploited this gap en masse in the latest episode.
Businesses that accept Bitcoin certainly have had their fair share of serious problems, from the criminal transactions it was used to pay for on online bazaar Silk Road, to the related recent arrest on money laundering charges of Charlie Shrem, chief executive of Bitcoin startup Bitinstant, in January.
And with just two exchanges left, Mark T. Williams, professor of finance in the Boston University School of Management and a former Federal Reserve examiner, says there's no guarantee they'll perform any better than MtGox.
"The implications are industry-wide and not simply a case of one bad apple," Williams wrote in Business Insider on Tuesday. "MtGox is the poster child of why self-regulation does not work."
Gavin Andresen, one of Bitcoin's lead developers, says the issues are not the fault of Bitcoin's code, but rather of the participants in transactions. In a February 10 blog post for the Bitcoin Foundation, Andresen wrote:
"This is a good reminder that Bitcoin is still young and experimental. There are best practices to think about and account for by those who want to build companies."
And like Andresen, regulators in New York are hopeful. They see their role as one that would foster innovation, protect consumers in Bitcoin transactions, and make the exchanges more transparent and stronger.
"There might be, at the very least, a kernel of something here that has a profound impact on the future of payments technology and the financial system," Lawsky said earlier this month, referring to the innovations that Bitcoin, virtual currencies, and the startups that use them could ultimately engineer.