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Bitcoin exchange's collapse is probed by U.S. and Japanese regulators

U.S. and Japanese regulators are investigating the collapse of the world's largest exchange for trading bitcoins, the virtual currency that has grown in popularity among technophiles for buying products and services online.

The separate investigations were launched Wednesday as supporters of the virtual currency insisted that the shutdown of Mt. Gox was only a temporary setback for the novel monetary system.

The failure of the Tokyo exchange, which may have included the theft of almost 750,000 bitcoins worth more than $300 million, was seen by critics as derailing prospects for the virtual currency.

But several high-profile bitcoin investors came forward in its defense Wednesday.

"Mt. Gox had to die for bitcoin to thrive. Its former role from early bitcoin days has been supplanted by better, stronger entities," said Marc Andreessen, a Web browser pioneer whose venture firm Andreessen Horowitz has invested about $50 million in bitcoin start-ups. "Every important new technology has birthing pains. PC did, Web did, bitcoin does."

Still, the shutdown of Mt. Gox came as a shock to many. According to an unverified document that purports to be from Mt. Gox, thieves have hijacked hundreds of thousands of bitcoins, about 6% of all bitcoins in circulation, which probably can't be recovered.

On Wednesday, Mt. Gox Chief Executive Mark Karpeles posted a new statement on the company's website.

"As there is a lot of speculation regarding Mt. Gox and its future, I would like to use this opportunity to reassure everyone that I am still in Japan, and working very hard with the support of different parties to find a solution to our recent issues," he wrote.

He did not say what those issues were.

Meanwhile, a Japanese government spokesman confirmed at a news conference that an investigation of Mt. Gox was underway.

There were also reports that the office of Preet Bharara, the U.S. attorney in Manhattan, and the FBI had launched investigations into Mt. Gox and other related bitcoin businesses. Bloomberg cited sources that said the agencies have requested documents from companies that offer bitcoin services.

Banking regulators stepped up calls for greater scrutiny of virtual currencies.

"While all the facts surrounding the situation at Mt. Gox in Japan are not yet clear, these developments underscore that smart, tailored regulation could play an important role in protecting consumers and the security of the money that they entrust to virtual currency firms," Ben Lawsky, New York state's first superintendent of financial services, said in a statement this week.

Sen. Joe Manchin III (D-W.Va.) went one step further and called for a ban. Manchin made his case in a letter to several agencies, including the Treasury Department, the Federal Reserve and the Securities and Exchange Commission.

"This virtual currency is currently unregulated and has allowed users to participate in illicit activity, while also being highly unstable and disruptive to our economy," he wrote. "I urge regulators to take appropriate action to limit the abilities of this highly unstable currency."

Bitcoin was created in 2009 by a programmer using the pseudonym Satoshi Nakamoto. Bitcoin is a set of Internet protocols that run across a wide number of servers around the world for regulating the creation and trading of bitcoins. It is not controlled by any nation, governing body or business.

Mt. Gox was, until recently, one of the first and largest bitcoin exchanges, a place where people could buy and sell bitcoins. As the company experienced glitches and legal issues over the last year, bitcoin traders began migrating to other exchanges that seemed more stable.

Despite the hit to bitcoin's credibility this week, many of its boosters are rallying to show that their support for it hasn't wavered. Indeed, many argue that the Mt. Gox collapse is a welcome development.

"There have been red flags around Mt. Gox for some time, which in part led to it losing its role as the dominant bitcoin exchange," said Jeremy Liew of Lightspeed Venture Partners. "Hopefully now there will be an opportunity for a U.S.-based regulatory compliant exchange to build meaningful liquidity."

Others argued the $300-million loss and the ensuing bad publicity would be a short-term issue. Indeed, they noted that after declining for a couple of weeks, the price of bitcoins has begun to rise again.

"Bitcoin is already very volatile, and the negative PR from the experience is definitely a setback for the ecosystem," said Adam Draper, who founded the start-up accelerator Boost. "But the community is rallying behind bitcoin very heavily in response, and I think it will have limited impact."

Fred Wilson, a partner at Union Square Ventures, which has invested in Coinbase, a digital wallet for using bitcoins, said on his blog that he went out and bought some bitcoins because he feels "good buying when there is blood in the streets in any market. It is my favorite time to buy."

chris.obrien@latimes

Twitter: @obrien

Copyright © 2014, Los Angeles Times
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