The libertarian streak among bitcoin fanciers will be hard to kill, but at the moment it's certainly crippled. That's because bitcoin's onetime market leader, the Mt. Gox exchange, today filed for bankruptcy protection in Japan.
Of course it's not just Mt. Gox that gets protected under bankruptcy laws--the Japanese provision under which Mt. Gox filed is similar to Chapter 11 in the U.S.--but the firm's creditors, including customers. Since the exchange firm says 750,000 of customers' bitcoins may be be missing, that's not trivial. At the current bitcoin price quote on coindesk.com, they're worth more than $420 million. The customers will now be in the hands of bankruptcy officials charged with reorganizing the firm, if possible, as well as figuring where the money went and getting it back.
That last chore will be complicated. The bitcoin system is designed so that all transactions, even fraudulent ones, are irreversible. But as we've observed before, that's one example of a supposed virtue of bitcoins that has turned into a serious drawback.
It has been understood by many in the bitcoin community that the key to making the virtual "currency" broadly useful as an instrument of exchange is bringing it within shelter of government regulation. Done right, that would preserve the system's flexibility and independence from vested interests in the financial services world, like banks, while adding consumer protections.
Many bitcoiners are still holding out. In fact, they're intensifying their insistence on bitcoin's independence from government oversight, like gay marriage opponents resorting to "religious conviction" exemptions as a last-ditch attack on civil rights. Here's Erik Voorhees, a Panama-based bitcoin entrepreneur, in an open letter posted a few days ago on Reddit:
"The lesson is not that we ought to seek out 'regulation' to save us from the evils and incompetence of man. For the regulators are men too, and wield the very same evil and incompetence, only enshrined in an authority from which it can wreck amplified and far more insidious destruction. Let us not retreat from our rising platform only to cower back underneath the deranged machinations of Leviathan." Etc., etc.
This insistence on systemic self-regulation was minted into bitcoins from the very start, in the founding design specification written by the pseudonymous Satoshi Nakamoto. "Any needed rules and incentives can be enforced with [the] consensus mechanism" through which bitcoins are traded and valued, Nakamoto wrote.
He (or she, or they) claimed to have invented a financial exchange system that could be rigorously enforced by mathematical algorithm and therefore operate "without relying on trust." That's where the system has broken down, and now it's appealing to the "deranged machinations" of human regulators to put the trust back in.
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