Commentary on the economic , geopolitical and simply fascinating things going on. Served occasionally with a side of snark.
Wednesday, February 26, 2014
Bitcoin Updates February 26-27 , 2014 -Japan authorities “gathering information” on Mt Gox closure ..... Interestingly , When bitcoin’s biggest exchange ( Mt Gox ) failed, it asked for a bailout from its competitors - and even tried to declare that Mt Gox was " Too Big To Fail " ! Apparently the argument was not bought and no one is planning to bail out Mt Gox ! SecondMarket CEO to Launch Regulated US Bitcoin Exchange this Summer - and the door to bitcoin will be opened to Wall Street Banks !
Jesse Powell is founder and CEO of cryptocurrency trading platform Kraken. Here, he shares his reaction to the recent Mt. Gox revelations, and offers advice to fellow ‘goxed’ customers who have lost both funds and faith in bitcoin.This article was originally posted on Jesse’s blog.
I am deeply saddened to hear of the tremendous loss suffered by the bitcoin community today.
Undoubtedly, thousands of lives have been destroyed and innocent people have been left in financial ruin. I’m not often short on imagination but how the damage got to be so severe without anyone noticing is unfathomable.
I can’t help but be angry, and frustrated and depressed. All the hard work we’ve done to bring bitcoin in to the mainstream and now this, and the people. Fuck.
I actually had lunch with Mark and Gonzague in Tokyo just a month ago and despite their banking woes, they were upbeat and excited about their Bitcoin Café. We talked about how we were in it for bitcoin, and the greater good, and how we should work together.
“Clearly, we need to be more demanding as a community of our wallets and exchanges.”
They certainly gave no indication that they were worried about insolvency. Perhaps it was something they’d come to live with, or perhaps they really were oblivious.
In time we’ll have the true story. After all, second to Bernie Madoff this is the biggest heist/giveaway/debacle of the century. The replacement value of those 744,408 lost coins must be north of $1bn – surely international law enforcement bodies will be tripping over themselves to take such a high profile case.
I was just thinking how grateful I am for not having any funds in Gox, and then I realized that I actually do have funds in Gox. You see, the last time I tried to make a withdrawal from Gox, back in 2012, they’d taken 3+ weeks and still hadn’t processed my wire.
I determined that they were insolvent, canceled my wire and immediately withdrew my funds via coupon to Bitcoinica.
As luck would have it, Bitcoinica got hacked shortly thereafter, never to recover, and what funds remained have been tied up in liquidation proceedings since. And guess who was holding those funds for the liquidator. Can you guess? Mt. Gox, that’s who!
I just ate a whole box of Thin Mints.
You know, when Gox got hacked in June of 2011, Roger Ver, one of my oldest friends from the high school Magic: the Gathering days called me up:
“I’m at the Mt. Gox office. How soon can you be in Tokyo?”
I was on the next plane, on my own dime. I spent the next two weeks volunteering at Gox, leveraging my own personal and company resources to help them get the situation under control.
I even wrote the press release about the event. I did that for the greater good of bitcoin, and when I left, I thought—for the greater good—somebody oughta make another exchange pronto because this ship is going down in flames. We founded Payward in July of 2011.
The internal Mt. Gox ‘Crisis Strategy Draft’ that was released yesterday, if authentic, seems to indicate both a disconnect with reality and a determination that operating on a fractional reserve was a necessity, for the greater good of bitcoin.
A similar approach was discovered to have been taken by Bitcoinica, unbeknownst to its users. In both cases, if the exchange had simply exposed the truth, the damage would have been lessened.
Clearly, we need to be more demanding as a community of our wallets and exchanges. Regulators have been kind enough to not enforce against unlicensed bitcoin businesses, allowing the industry to flourish, but that means the onus is on us to keep our custodians honest.
I’ve been wracking my brain trying to make sense of everything. What gets me is that Mark isn’t an idiot. If I assume that the Crisis Strategy Draft is truthy, a scenario like this is more plausible than what we’ve been fed:
Gox was robbed of a massive amount of coins (800k+) at some prior point in time, possibly June 2011, and has been operating a fractional reserve since.
Gox determined that it was better to continue operating the exchange, probably both for the sake of Bitcoin, and for their customers who would eventually be made whole from fees earned.
Gox knew of transaction malleability and had been keeping that scapegoat in their back pocket to use in the event of a bank run. Or, they didn’t know but the losses from TM were actually recent and minor. Or, they didn’t know but the losses from TM occurred over a long period of time and they never noticed because they never reconciled the books, because they knew they wouldn’t match anyway because they were already fractional.
Fiat withdrawal problems led to an increased uptick of BTC withdrawals, outpacing BTC deposits and draining reserves to 0. This may have been compounded by an actual problem with transaction malleability that accelerated the process.
Gox spent its fiat reserves and customers’ fiat reserves to buy up BTC in order to keep the ship afloat until they could launch their rebranded Gox.com and Bitpocket wallet, which they’d hoped would provide more runway in the form of additional BTC deposits.
Gox doesn’t make it happen in time and is forced to shut down, negative on fiat by millions and having lost all BTC.
Look, I was supposed to write some lawyer-approved PR statement about how Kraken kicks ass and is super secure and compliant, and Payward is leading the charge at DATA, and all the great things we’re doing right.
Obviously, all of that is irrelevant to the guy who just lost his life savings, wondering where he can find a good bridge.
If you got goxed too, I want to appeal to you to hang in there, and stick with it and not do anything stupid. I’ve been broke, and I’ve been robbed for every dime, and did I mention I sold ALL my bitcoin very early to get Kraken to launch?
You’ve got your life, and you’ve got your freedom, and you’ve got tremendous value to this community and cause. Bitcoin just lost a major battle and needs all the reinforcements it can get. The core dev team is underfunded and understaffed, girlscouts can’t get a wallet on iOS, banks are frozen solid, services are lacking in competent technical and business acumen.
I was standing outside of 20Mission tonight talking with Jered Kenna when we were informed by a random woman passing by that “Bitcoin is hacked and dead”.
It’s a goddamn war and it’s not going to be won without you. How many opportunities in history have we had as a people to change the world in such a positive way? If you want to join the effort, call me. If you want to jump off a bridge, call me.
After months of silence on the matter, Federal Reserve chairwoman Janet Yellen has stated that the US central bank does not have the authority to regulate bitcoin.
Yellen was appointed as chair of the Federal Reserve last October after she was nominated to replace Ben Bernanke.
During an address to the Senate Banking Committee on 27th February, the top US banking official, said:
“The Fed doesn’t have authority to supervise or regulate bitcoin in any way.”
In her response, Yellen commented broadly on a score of issues including the impact of recent weather on US economic output, ongoing turmoil in the Ukraine and the new technologies that are more broadly impacting payments.
It was on the latter subject that the topic of bitcoin was introduced, with Yellen noting that such developments are “taking place outside the banking industry”.
Notably, the remarks came in response to a question about bitcoin regulation by US Senator Joe Manchin, a noted critic of bitcoin.
The news follows Manchin’s 26th February letter to the Federal Reserve chairwoman, which called for her to take aggressive action against bitcoin due to its involvement in criminal activity. The Bitcoin Foundation has also since responded to the letter.
Additional remarks
Yellen continued, saying that FinCEN has indicated that current money laundering statutes are “adequate to meet enforcement needs”.
Manchin later asked whether Yellen believed the US to be “behind the curve” in regards to regulation, a nod to his previously stated belief that the US should follow the lead of countries like China and Thailand in banning bitcoin.
Yellen said:
“Certainly it would be appropriate for Congress to ask questions about what the right legal structure would be for digital currencies […] My understanding is Bitcoin doesn’t touch [US] banks.”
She ended her response by stating that the Federal Reserve is looking into the matter.
The statement notably comes at a time when many US state regulators are looking for guidance on how to put controls or safeguards on the bitcoin industry.
Though the most notable example would be New York, which held detailed hearings on the matter in January, Alabama and Texas have joined the conversation following the ongoing troubles at major Japan-based bitcoin exchange Mt. Gox.
Despite recent suggestions that its top financial bodies would not take any action against troubled bitcoin exchange Mt. Gox, Japan’s senior regulators are now saying they would seek to regulate bitcoin, but only as part of an international effort.
Speaking at a press conference on 27th February, Senior Vice Finance Minister Jiro Aichi addressed the topic, stating: “If we regulate [bitcoin], international collaboration would be necessary.”
Aichi suggested that this type of large-scale coordination is needed to prevent criminals from exploiting loopholes or weak points in international law.
“If we regulate [bitcoin], international collaboration would be necessary.”
Further, Japan stepped up its rhetoric on Thursday regarding Mt. Gox, suggesting that it would intervene “if necessary” to determine what wrongdoing occurred. Japanese law enforcement officials were earlier reported to be looking into the developing Mt. Gox case, along with US regulators.
The news follows the release of more documents detailing the exchange’s long-term business plans, and mounting evidence that internal financial mismanagement was a core issue that plagued the once-prominent company.
‘Not a currency’
Aichi released a few additional details about the actions that could take space, and indicated that more government agencies could become involved in the investigation.
He also stated that bitcoin does not meet the definition of currency under Japanese law, but did not say how this could affect any future developments. Aichi added:
“As for its legal position, a currency (under Japan’s jurisdiction) would be coins or notes issued by the Bank of Japan. At the very least, we can say bitcoin is not a currency.”
The Bank of Japan had earlier indicated that it was researching digital currencies, but stopped short of making any statements about their use.
Media take notice
Despite its penchant for high-tech toys, Japan has been oddly silent on bitcoin, though that could soon change.
Sources in Tokyo suggest news from Mt. Gox has filtered through to the mainstream, and that bitcoin is starting to receive attention from the general public, with newspaper articles appearing nearly every week.
Invading TV crews have begun to so annoy the manager of the Tokyo Bitcoin Meetup group’s favourite restaurant that, on Thursday, at least two networks were forced to wait outside and conduct one-by-one interviews.
Whether or not the increased coverage will be positive or not remains to be seen. Japanese media tend to play up the ‘dangerous hacker’ angle on any story involving bitcoin or even peer-to-peer (P2P) technology, sources say, and a recent special report on bitcoin by NHK, the national broadcaster, dedicated 15 minutes of the programme’s half-hour timeslot to discussion of Silk Road.
Coming off the greatest financial collapse in modern history because of unregulated derivatives backed by dodgy collateral, it is more than a little disconcerting that we are now forced to use our digital ink to explain the pitfalls of investing in a digital currency backed by air.
There seems to be a mass hypnosis at work. For example, last evening, at 6:47 p.m., the wire service Reuters explained Bitcoin to its readers as follows:
“Unlike traditional currencies, where a central bank decides how much money to print based on goals like controlling inflation, no central authority governs the supply of bitcoins. Like other commodities and currencies, its value depends on people’s confidence in it.”
The last sentence of the Reuters statement was likely penned by someone who has never traded commodities or registered with the Commodity Futures Trading Commission. Bitcoin is decidedly not like other traded commodities. Corn, sugar, gasoline are tangible things. You can readily check that their trading value is hinged to reality by checking their price in the grocery store each day or, in the case of gasoline, at the pump. A Bitcoin, on the other hand, has no tangible commodity backing it. Its value is whatever some self-created website says it is.
According to news agency AFP, just before the MtGox Bitcoin website shuttered its operations yesterday, a Bitcoin was trading for $130. On other Bitcoin websites it was trading for around $500.
As for the sustainability of confidence in a product based on nothing tangible, one need only look at the trading range of Bitcoin at MtGox since January. It has declined from $900 to $130 according to AFP. If that were a real commodity, a crash of 86 percent in a few months would strongly suggest a catastrophic event.
The business writers at Reuters are also dead wrong on Bitcoin being like other currencies whose “value depends on people’s confidence in it.” Let’s take the U.S. dollar. Backing the use of the U.S. dollar as a world currency is the following: a Congress made up of 435 Representatives in the House and 100 Senators in the Senate; 535 people elected from all over the United States who have the power to tax the income of every American receiving wage, dividend, interest or even Social Security income at whatever rate they see fit in order to pay the Nation’s bills and debt obligations to other countries.
There are two big mechanisms underlying the confidence in the U.S. dollar. Unlike many other countries which have a not-so-foolproof system of collecting taxes, in the United States Federal income tax is deducted from workers’ paychecks and sent off to the Federal government by the employer before the worker gets his hands on his paycheck. Every worker, therefore, becomes part of the store of value in the U.S. dollar.
Next comes the billions in taxes owed on interest and dividends. Those are reported to the Internal Revenue Service under the individual’s social security number by the financial institution or company declaring the interest or dividends, leaving no escape hatch for not reporting and paying the taxes owed.
When an individual or a financial institution tries to game the system to dodge paying their share of taxes to support the roads, schools, tunnels, bridges, national parks, and Federal law enforcement protections provided with those taxes, the government has both the ability and eager willingness to lock you up and/or make a public spectacle of you. Just yesterday, Credit Suisse was outed by Senators Carl Levin and John McCain and the U.S. Senate’s Permanent Subcommittee on Investigations for aiding and abetting tax cheats. In 2009, Swiss bank UBS was outed on similar charges and paid $780 million to settle the matter.
A digital currency that is backed with nothing tangible, that has no legislated power of taxation to support the currency, that has no Federal regulation over the people offering the currency, that has no independent, taxpayer-financed police to prevent counterfeiting of the currency, is not even a Tulip Bubble. A tulip is a tangible thing. This is just a bubble.
Bitcoin was launched in 2009 by an anonymous person or group calling itself Satoshi Nakamoto. The currency exists online with the promise that computers are keeping track of how many Bitcoins each individual owns. Investors can buy Bitcoins with dollars, euros and the currency of some other countries. In a standard transaction, an amount is transferred from the buyer’s online digital wallet to the seller’s online digital wallet. Because these websites are accepting deposits of hard cash from people around the world, they are effectively unregulated global banks.
When regulators can’t even control the global banks they already have on their radar screens with the legislative power to regulate, just what they need are unregulated banks where they have no oversight power.
Mainstream media has to some extent aided and abetted Bitcoin trading by referring to these unregulated Bitcoin websites as “exchanges,” giving them the imprimatur of a stock exchange or futures exchange – all of which are regulated in the United States. InLondon, not so much.
One entity which has been a big promoter of Bitcoin is the Mercatus Center at George Mason University which is heavily tied to billionaire Charles Koch and his money. Koch is a die-hard libertarian whose utopian ideal is the free-wheeling entrepreneur unfettered by the evil regulations of government.
In a paper published last year by Mercatus, researchers Jerry Brito and Andrea Castillo wrote:
“The current market capitalization of the bitcoin economy is estimated to be more than $1 billion. Businesses big and small have shown interest in integrating the Bitcoin platform into their operations and providing new services within the bitcoin economy. Venture capitalists, too, are eager to put their money behind this growing industry. The development of Bitcoin and its early successes are an exciting testament to the ingenuity of the modern entrepreneur.” (If Ayn Rand were alive today, she would no doubt be welling up with tears of pride.)
Signaling big plans for the future of Bitcoin websites, Brito of Mercatus wrote further in the December issue of Reason Magazine that Bitcoin “can serve as the backbone for any online transaction that relies on a ledger, such as property registration, futures swapping, and bonded contracts. Because Bitcoin is decentralized, these applications can exist largely outside regulators’ reach.”
A former director of the Mercatus Center’s regulatory program was Wendy Lee Gramm, the former chairperson of the Commodity Futures Trading Commission (CFTC) from 1988 to January 1993. Gramm’s deregulatory stance toward credit derivatives is widely regarded as a key element in the 2008 financial collapse of Wall Street.
According to Public Citizen, “In 1992, as the first step in its business plan to profit on the speculation of energy, Enron petitioned the CFTC to make regulatory changes that would limit the scope of the commission’s authority over certain kinds of futures contracts. Immediately before leaving the CFTC, Gramm muscled through approval of an unusual draft regulation that would do just that – it narrowed the definition of futures contracts and excluded Enron’s energy future contracts and swaps from regulatory oversight. Although her actions were criticized by government officials who feared the change would have severe negative consequences (as, in fact, it did), Gramm was rewarded five weeks after she left the CFTC with a lucrative appointment to Enron’s Board of Directors. Between 1993 and 2001, when the company declared bankruptcy, Enron paid Gramm between $915,000 and $1.85 million in salary, attendance fees, stock option sales, and dividends.”
It may come down to proving solvency ......
How To Prove That Exchanges Really Have Your Money
From all the news surrounding Gox’s demise, it seems pretty certain at this point that it was operating with a fractional reserve, trading with only a small proportion of the money that it was supposed to have. The question now is, how can we be sure that others aren’t doing it, too?
Whether you’re a straightforward bitcoin wallet or an exchange, the hope is that you’ll have enough bitcoins to cover everyone’s accounts, should they all decide to empty their funds at once. This week, large bitcoin companies seemed eager to persuade people that they did.
In their joint statement condemning Gox, five major exchanges explained that they would be “coordinating efforts over the coming days to publicly reassure customers and the general public that all funds continue to be held in a safe and secure manner”. How do they do that, exactly?
“I imagine that would be handled by the MTL regulators as they require permissible funds and when they come onsite to do the audit it would be apparent,” said Megan Burton, the CEO of exchange CoinX, which is taking a state-by-state approach to getting its money transmission license in the US.
“Most companies will perform self-audits in the near term and potentially hire an outside auditing firm when appropriate,” said Jaron Lukasiewicz, the founder of New York-based exchange Coinsetter. “We are also discussing creative ways we can give customers greater transparency, and we will announce them once those plans are finalized.”
Neither Coinsetter or CoinX were cosignatories of the joint statement released this week. Coinbase came closer to an audit than anyone. It blogged, already discussed here, in which Andreas Antonopoulos, the CSO at Blockchain.info, visited the office to check things over.
He published a short, six-paragraph report describing how he checked the firm’s cold storage addresses in the block chain. He also made Coinbase conduct a transaction on a random address in its block chain to ensure ownership.
Is this enough?
Financial audits can be extensive affairs, in which beancounters nose their way through reams of paperwork relating to accounting practices and financial controls. There is generally an audit committee which oversees the whole process. By the time that the audit is done, the likes of EY and PwC have gone over things with a fine toothcomb.
Barry Silbert, the head of the Bitcoin Investment Trust, who is now said to be preparing an exchange. Silbert has said that many auditors aren’t well-equipped to deal with bitcoin, not least because bitcoin addresses are anonymous.
“Access does not equal ownership, so you cannot prove title,” he told CoinDesklate last year. Nevertheless, he has enlisted one, so it can be done, apparently.
Blockchain transparency
Coinkite is doing its best to provide customer accountability. The Canadian company, which operates wallets for its users, released a link to what it calls an audit, although this isn’t verified by a third party. Instead, it’s a listing of the individual inputs and outputs contained within the user’s own wallet, and it’s drawn from the block chain.
Rodolfo Novak, co-founder of the firm, says that it’s able to do that because it relies on the block chain for its data. All transactions are conducted on the block chain, he explains, which makes it easy for users to see what’s going on. “We don’t have any off-chain transactions. Even the fees you pay to us are block chain transactions.”
Novak wonders why anyone would want to resort to a centralized audit at all. After all, his argument goes, wasn’t bitcoin supposed to be about decentralized trust?
“We decided to do this in a way that there is no need for an old system,” Novak says. “You are the owner of your money, and you can check it. I could call PwC or whatever, and they could sign off that they saw it. But we don’t need that.”
CoinDesk asked Coinbase about the access and ownership question, but it directed us to its blog post and refused further comment. Neither Payward (the owner of Kraken, which just suspended USD withdrawals) nor BitStamp commented.
Coinkite’s block chain-based transparency is one of the things that sets it apart from the co-signatories to the joint statement. These companies don’t seem to run their operations in the same way.
In particular, it can be difficult for exchanges to achieve block chain transparency. “The main thing is that the order book can’t be block chained. It needs to be fast. The actual settlement of that order book could be block chained, but it takes a phenomenal amount of technology to be written and to achieve that,” Novak muses.
Decentralized audits
Is there a way, then, to create decentralized means of proving a non-fractional reserve? The brouhaha around Gox has rekindled interest in a proposal by Gregory Maxwell, one of the core developers.
In a traditional exchange, it may be difficult to publicly state how much the exchange should have, and then publicly prove that they have it, without listing all of the account balances for proof. That’s a privacy nightmare, of course.
Maxwell’s proposal uses a node – think of it as a leaf on a tree – with two things in it: a hash indicating the specific account, and a value of bitcoins in that account. All the nodes connect back to a central node (call it the trunk of the tree, which knows about all of the leaves).
The exchange or wallet publishes the central node, which gives the entire value of all the nodes in the exchange, and then it gives the owner of a ‘leaf’ its value, while also confirming that it has also checked all of the leaves between it and the trunk.
The user wouldn’t know anything about the other accounts, but it could compare its own value with the exchange’s total reserves, to make sure that it had enough to cover at least that account’s value.
As Maxwell says: “It doesn’t prevent fractional reserve — but if used well, it prevents dishonest fractional reserve.”
Bitcoinity, which monitors various exchanges, likes the idea so much that it wants to promote the first exchange to use it, on its site.
Earlier this week, I published a document I received from a reliable source entitled “Crisis Strategy Draft”, which was allegedly a roadmap to show how Mt. Gox could recover from insolvency despite the mind-blowing loss of nearly 750,000 customer bitcoins.
Since that initial leak, I have had a number of conversations with industry insiders who have spoken about the situation both on and off the record.
They have confirmed the best news possible for Bitcoin given the damning evidence documented in the leaked presentation: Mt. Gox acted alone in its deceit, and ultimately failed in its desperation, to find an investor willing to bail them out.
Although Mt. Gox CEO Mark Karpeles would only admit that the leaked document was “more or less authentic” during a chatlog obtained by Fox Business, I have confirmed that it was, in fact, prepared by Mt. Gox representatives.
Mandalah’s role
The presentation was created (at least in part) by employees at global consulting firm Mandalah.
The actual author(s) of Mt. Gox’s 27-page business plan (another leaked Mt. Gox document – seen below) may be ambiguous, but the final publisher of this latest file was revealed to be one of Mandalah’s junior employees in Tokyo.
Representatives from Mandalah declined to elaborate on any specifics regarding its relationship with Mt. Gox, citing confidentiality agreements, but they did claim to have never been contracted by Mt. Gox to do “strategic planning” and say they lacked access to sensitive financial information or customer data. A representative clarified:
“Our mission with MtGox has always been to help them create better products and services…our main interest is in bitcoin and creating amazing experiences with it, and MtGox’s customers are the #1 thing on our minds these days.”
A source claims that the same junior staffer who published the business plan document also attended an alleged emergency investor meeting just one day after the “Crisis Strategy Draft” was created.
According to that source, it was at this meeting in which Karpeles and colleague Gonzague Gay-Bouchery first outlined the extent of Mt. Gox’s losses.
The fallout
The chain reaction that followed was rapid. The solicited investors rebuffed Karpeles and his colleagues’ pleas for a bailout, demanded the company come clean to customers and stakeholders immediately, and then notified other industry executives, including those at the Bitcoin Foundation, of the catastrophic losses at Mt. Gox.
Sources also tell me that multiple investors who were approached restricted their own employees from buying or selling bitcoin themselves as soon as they realized the extent of the damage at Mt. Gox.
Further allegations
Mt. Gox has allegedly never conducted a single audit of its customer deposits, and it is believed that Karpeles may have been the only one within the company to have knowledge of how to actually tap the exchange’s cold storage.
It remains unclear exactly how this type of storage leak could have happened over a multi-year period without any knowledge on the part of the executives at Mt. Gox.
As a result of Karpeles’ apparent “Wizard of Oz” status within the organization, it also appears unlikely that the true technical cause of the leak will be fully understood until the embattled CEO speaks. Whether that will happen during an interview or a possible criminal case is unclear.
The latter seems likely, however, as one source believes that Karpeles knew about the pervasive damage of the transaction malleability attacks for several weeks and was engaging in an arbitrage scheme that leveraged the depressed Mt. Gox price to reap gains on other exchanges.
This was allegedly happening well before the exchange’s breaking point this past weekend.
Going forward
Mark Karpeles and Mt. Gox representatives were unreachable for comment, despite repeated attempts.
However, three major industry players that were initially tied to Mt. Gox “acquisition” rumours have either released statements or confirmed (via backchannels) unequivocal denials of any improper ties to Mt. Gox.
The Bitcoin Foundation, Blockchain.info and SecondMarket have by all accounts acted ethically and professionally in the face of a serious scandal. Their speedy clarifications and apparent cooperation with authorities is commendable and suggests that Mt. Gox was a mere bad apple in an otherwise good bunch.
Mt. Gox lived among the Bitcoin community for several years as an early pioneer. Luckily for the industry, it appears to have died alone.
U.S. Senator Joe Manchin, a democrat from West Virginia, has formally sent a letter to federal regulators calling for an outright ban on bitcoin and suggesting that the failure of immediate action could negatively impact US consumers.
The letter, which was sent to Federal Reserve Chairwoman Janet Yellen, among other top regulators, called the digital currency “unregulated and unstable”, and cited increasing warnings from central banks around the globe.
Said Manchin:
“I am most concerned that as bitcoin is inevitably banned in other countries, Americans will be left holding the bag on a valueless currency.”
Notably, this is not the first time the senator has spoken out about bitcoin, having written a lengthy letter on the now-defunct online black marketplace Silk Roadlast June.
Black market connections
Manchin began the letter by providing a background on bitcoin, before addressing his laundry list of concerns about its use.
The senator suggested that bitcoin’s features make it inherently attractive to criminals, who have used the currency to “steal millions from bitcoins users”, and to buy drugs and weapons illegally. Further, he critiqued the irreversible nature of bitcoin transactions as the primary contributor to such issues.
“Bitcoin’s ability to finalize transactions quickly, makes it very difficult, if not impossible, to reverse fraudulent transactions,” the Senator said.
Consumer protection issues
The senator also suggested that bitcoin’s price volatility adds to its dangers, and he cited recent developments at troubled Japan-based exchange Mt. Gox as an example. Manchin painted a picture of bitcoin as an elaborate scheme in which only early buyers, investors and miners benefit. Said Manchin:
“There is no doubt average American consumers stand to lose by transacting in bitcoin.”
In summation, Manchin again returned to the issue of bitcoin’s deflationary nature, comparing its 98% deflation to the 1.3% inflation shown in the Consumer Pricing Index. Manchin used this data to suggest spending bitcoin now would cost users wealth in the future.
“This flaw makes Bitcoin’s value to the U.S. economy suspect, if not outright detrimental,” said Manchin.
However, this letter, addressed directly to new Federal Reserve Chairwoman Yellen, is unique as it will likely add fuel to speculation that the US central bank head will issue a comment or statement on digital currencies soon.
FBI getting into Mt Gox mess too ?
FBI Launches Probe Into "Criminal Violations" By Mt.Gox
Submitted by Tyler Durden on 02/26/2014 12:16 -0500
It does not appear that things are getting any better for the virtual currency exchange named after "Magic: The Gathering."
*FBI SAID TO BE PROBING POSSIBLE CRIMINAL VIOLATIONS BY MT. GOX
*U.S. SAID TO REQUEST DOCUMENTS FROM BITCOIN SERVICE PROVIDERS
*MANHATTAN U.S. ATTORNEY SAID TO BE REVIEWING MT. GOX SHUTDOWN
No real reaction yet in price across Bitcoin exchanges.
As Bloomberg reports,
The office of Manhattan U.S. Attorney Preet Bharara and the Federal Bureau of Investigation are probing possible criminal violations tied to the shutdown of Tokyo-based Mt. Gox, once the world’s largest exchange for digital currency transactions, two people familiar with the matter said.
...
Bharara’s office has requested documents from businesses that provide Bitcoin services and the FBI is reviewing the matter, said the people, who requested anonymity because the matter isn’t public. One of the people said that the matter is in its preliminary stages and isn’t yet a formal investigation.
How did the once-largest Bitcoin exchange lose hundreds of millions of dollars’ worth of the digital currency?
Two words: transaction malleability. A hacker can tinker with the code that makes a Bitcoin transaction happen, so that it looks like it didn’t go through. The person who was supposed to receive a payment then asks again and, in Mt. Gox’s case, is paid again automatically. Mt. Gox has acknowledged this was happening. It seems that someone has been slowly bleeding it for months, leaving it without the funds to pay out legitimate withdrawals. But with the company being pretty tight-lipped about it for now, that’s only the best theory.
Was this a shot from the blue?
Not quite. Mt. Gox has been having problems for months, and people have been complaining about not being able to get their money out of the system since late last year. The company halted withdrawals altogether in early February. So while the number of lost Bitcoins is striking, many people have seen the failure of Mt. Gox as imminent for a while.
...
Where did the lost Bitcoins go?
In theory, Mt. Gox could begin to track their path by identifying the fraudulent transactions and searching for the wallets the coins ended up in. But no one is putting much faith in the accounting expertise over there at the moment. In any case, many of the tainted coins have likely moved beyond their initial destinations. If there really has been a slow leak from Mt. Gox for a long time, then the coins could have spread to the ends of the earth by now. One thing is certain: They are probably all over the place, just based on the sheer number of coins alleged to have been stolen. They’d amount to about 6 percent of the Bitcoins in existence.
Is this a security problem with Bitcoin itself?
When Mt. Gox described the issue as a bug in the Bitcoin protocol, people didn’t appreciate it. The technical issue at the root of Mt. Gox’s problem didn’t just crop up recently; it seems that Mt. Gox was left vulnerable because it didn’t protect itself against the issue.
Bitcoin exchange Kraken put a brief halt on US dollar withdrawals and suspended USD deposits today, offering customers a 2% bonus to convert their balances to euros (EUR).
“Many USD withdrawals have been delayed beyond a limit we can accept, and it reflects poorly on our service,” a customer support representative said.
“All pending USD withdrawals not already in transit are being cancelled and the funds will be automatically credited back to your account.”
Customers can now select the ‘Convert USD to EUR’ option on its support page, either for one withdrawal or the entire account. Converting EUR amounts back to USD for USD-only bank accounts would incur a fee of less than 1%, Kraken said.
The company claims the problem was caused by a recent increase in US dollar transaction volume, much of which came from outside the United States, and temporarily overwhelmed Kraken’s current US banking partner.
Don’t use USD
The exchange has indicated that it actually prefers customers to use non-US currencies.
Kraken CEO Jesse Powell said US dollars represented only a small piece of the company’s business, and that dealing with USD and its associated headaches cost it more in customer service and agent time than it earned in revenue.
“We’re still doing dollar withdrawals and dollar trading; we just don’t want to take any more new dollars,” he said.
“They can still withdraw, they can still trade with dollars. We just didn’t want to create any new liabilities.”
Most Kraken customers trading in USD are not even US residents. Powell recommended those customers should switch to euros, where liquidity was greater and transaction fees were lower.
“We haven’t even been going after the US market at all. We just offer the dollar because we’re able to. In hindsight we probably should not have [...] at least until we have a more robust banking partner.”
“In the meantime we’re emailing all the users with dollar balances, offering to convert their balances to euros; they can trade on the euro if they want to.”
New banking partner
The company was currently in negotiation with a couple of other banks, Powell said, and would reactivate USD deposits then.
Despite the recent debacle surrounding Mt. Gox, he said while Kraken had “not heard any panicked phone calls” the topic had a chilling effect and was bound to come up in meetings over the next couple of days.
“I don’t see the point of offering a service that’s just going to be an exercise in frustration,” he concluded.
“If it’s not a good service, if we can’t do it well, then why do it?”
Mt. Gox CEO Issues New Statement, Claims He’s Still in Japan
Mt. Gox has issued yet another brief statement and this time it is coming straight from CEO Mark Karpeles. The troubled exchange issued a very short statement late yesterday, saying that it decided to “close all transactions” for the time being in order to “protect the site” and its users.
No change
The latest statement won’t do much to reassure customers, either. Here is what Karpeles had to say:
February 26th 2014
Dear MtGox Customers,
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.
Furthermore I would like to kindly ask that people refrain from asking questions to our staff: they have been instructed not to give any response or information. Please visit this page for further announcements and updates.
Sincerely,
Mark Karpeles
It should be noted that Karpeles is still nowhere to be found. Mt. Gox moved to new offices and Karpeles isn’t talking to the media (apart from a short statement made to Reuters). This appears to be his only formal statement since the exchange was closed a few days ago.
Serious questions persist
The fact that Karpeles and the rest of the Mt. Gox team have been so secretive ever since the exchange suspended bitcoin withdrawals is just adding insult to injury. A leaked document indicates that the exchange is insolvent, quite spectacularly so.
An online chat conversation published by Fox Business last night reportedly shows Karpeles telling a consultant that he is not giving up on Mt. Gox. In the chat, Karpeles says the leaked document was not produced by Mt. Gox, but he admits that there is some truth to it.
Even before Mt. Gox closed its doors and abandoned its offices, it was in a world of trouble. It suspended bitcoin withdrawals citing technical issues, namelytransaction malleability.
Shortly thereafter, members of the bitcoin community started organising protests in front of the Mt. Gox headquarters in Tokyo. For days the offices were picketed by customers demanding their cash or bitcoins back, but eventually the company simply vanished.
Two days ago Karpeles resigned from the Bitcoin Foundation’s Board of Directors. The foundation announced that Karpeles submitted his resignation and that it was effective immediately.
Now we know that Karpeles is still in Japan and that something is happening behind the scenes. The question is – what?
Mt. Gox Faces US Subpoena and Investigation in Japan
The Mt. Gox maelstrom is starting to attract attention from law enforcement in Japan and the US.
According to the Wall Street Journal, Mt. Gox has been subpoenaed by the US Attorney’s office in New York. Additionally, a few thousand miles west, Japanese officials have confirmed that local authorities are looking into the matter, too.
The Wall Street Journal cites an unnamed source, which revealed the federal subpoena was sent this month. Details are rather thin on the ground and at this point in time it remains unclear when the subpoena was sent, or what it is all about.
In any case, federal prosecutors don’t tend to waste their time in vain and the fact that the attorney’s office is declining to comment the matter is consistent with an ongoing investigation.
Japan authorities “gathering information”
As for Japan, it might be even more serious, as Japanese authorities are already looking into the closure of Mt. Gox.
“At this stage the relevant financial authorities, the police, the Finance Ministry and others are gathering information on the case,” Chief Cabinet Secretary Yoshihide Suga told a news conference, Reuters reports.
Suga stopped short of saying what sort of investigation has been launched. It should be pointed out that Japan’s Financial Services Agency and the Ministry of Finance insist that they simply do not have jurisdiction over Mt. Gox. The Bank of Japan has not commented publicly, either.
However, Suga also mentioned the police, so it is plausible that he is talking about a criminal investigation – although this is not something we can confirm at this time.
Mt. Gox still isn’t saying much
For its part, Mt. Gox is still practically silent. Mt. Gox CEO Mark Karpeles isn’t talking to the media, but he did tell Reuters that the exchange should have an official announcement ready “soon-ish”. He added that Mt. Gox is “at a turning point” and that he cannot say more as other parties are involved.
The only things coming out of Mt. Gox are new revelations that are anything but positive.
Fox Business published an online chat between Karpleles and consultant Jon Fisher that all but confirmed that leaked documents purporting the exchange’s insolvency are more or less true, although he insists they were not produced by Mt. Gox.
Karpeles mentioned “other parties” in his response to Reuters, but it remains unclear who produced the documents and how (or why) they were leaked.
BITTARP
When bitcoin’s biggest exchange failed, it asked for a bailout from its competitors
Now bitcoin firms connected with blue chip venture capitalists and Wall Street are moving to control bitcoin’s infrastructure and integrate it into the regulated financial system.
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Mt. Gox was once the biggest online exchange for converting bitcoin into dollars and back, but shut down operations after a flaw in its software made it possible for hackers to steal the digital currency. When some 744,408 bitcoin it held on behalf of customers turned up missing—worth perhaps hundreds of millions of dollars—the Tokyo-based company became insolvent.
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In an echo of the 2008 financial crisis, Mt. Gox essentially tried to declare itself “too big to fail,” according to a document purporting to come from the exchange. The document was leaked by one bitcoin entrepreneur and is as yet unverified, though it jibes with most press reports.
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It depicts a scenario that plays out in the financial markets too often for comfort. A troubled financial institution scrambling for help argues it is so important to the financial system—the bitcoin ecosystem, in this case—that its bankruptcy would bring down the whole system. From the document:
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What Mt. Gox allegedly wanted was a bailout, like the one JP Morgan arranged for the largest banks during the panic of 1907 or the ones put together by the US government after the 2008 financial crisis. Possible strategies above include a debt-for-equity swap, capital injections, and even the equivalent of preferred shares—anything to restore solvency with the promise that future profits will make up the difference. But there are no clearinghouses between bitcoin customers and their exchanges, there is no central bank for bitcoin, and its major players apparently will not bail out Mt. Gox.
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The absence of a rescue for Mt. Gox is good if you like to see incompetence (and Mt. Gox’s management has been troubled for years) punished by the markets. It’s unfortunate if you lost your cash in the process, whether it was stolen or simply as bitcoin value dribbled away during the resulting sell-off.
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Bitcoin adherents are channelling Henry V to bolster faith in the currency, which has fallen in value perhaps 20% after Mt. Gox was shuttered. Strip away the drama, however, and they are right that the exchange’s failure doesn’t spell doom for the whole system even if confidence in the currency slips temporarily. And bitcoin, like all means of exchange, depends on public confidence.
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But what will restore that public confidence? Five bitcoin firms backed by venture capitalists and plugged into Wall Street have responded to the crisis with acoordinated promise to support “transparent, thoughtful, and comprehensive consumer protection measures.” Second Market, the company that came into existence as a private trading floor for Facebook stock, has announced plans to create a bitcoin exchange, not for anyone on the internet, but for major financial institutions on Wall Street. And if large financial institutions get involved with bitcoin, you know what that means: regulators are not far behind.
Mt. Gox CEO Says Leaked Documents More or Less Legit
Mark Karpeles, CEO of troubled Japan-based bitcoin exchange Mt. Gox, has responded informally to reports of major problems at his business and rumors that his company will be rebranding its services.
In an online chat conversationpublished by Fox Business, Karpeles told consultant Jon Fisher that he is not giving up on Mt. Gox.
When asked by Fisher if documents purporting the exchange’s insolvency are true, Karpeles replied:
“As the name suggests it’s a draft, and it’s a bunch of proposals to deal with the issue at hand, not things that are actually planned and/or done.”
Karpeles also revealed his company was not the author of the document, titled‘Crisis Strategy Draft’, saying:
Major news outlets are reporting that Mt. Gox’s problems “spell doom” for bitcoin, or that there is at least “bitcoin turmoil”.
Jon Matonis, the president of the Bitcoin Foundation, tweeted that a systematic failure of this major bitcoin exchange is quite different from centralized financial systems:
Barry Silbert, founder and CEO of New York-based alternative investment marketplaceSecondMarket, has confirmed he will be spinning off the entity’s bitcoin businesses into a separate organization dedicated to the exchange of digital currencies, and that this new business aims to be operational by this summer.
Silbert told CoinDesk that he will serve as CEO of the as-yet-unnamed entity, and that the new business will include Bitcoin Investment Trust, its private investment fund for high-wealth investors, and an 11-person trading desk that will support this offering.
The CEO suggests that SecondMarket will be contributing $20m in cash and bitcoin assets to the new endeavor, and that injections from other founding members could potentially increase this total by the time of its 2014 launch. He added:
“The company on day one will be well-capitalized, it will have two fast growing businesses.”
In addition to this big picture vision, Silbert also revealed detailed plans that suggest the process is in motion, and that the exchange has already cleared a number of potential hurdles on its path to market.
A new kind of exchange
The extensive plans represent a drastic shift in how bitcoins have been traditionally bought and sold through exchanges, with the company adopting a “hub-and-spoke” model that will find the exchange only interacting with formal members.
Non-members will not be allowed to facilitate transactions on the exchange, however. Silbert said he doesn’t see this as exclusionary, as such restrictions would inspire the creation of new businesses for the exchange.
Initial members are expected to include Wall Street banks, as well as bitcoin startups such as Circle and Coinbase. Silbert explained:
“If you want to buy and sell bitcoin you have to go through one of the members, and the members are all going to be regulated businesses. They’ll be banks, they’ll be MSBs, they’ll be bitcoin companies, they’ll be broker dealers. The idea is the other exchanges of the world could actually become members of the exchange.”
The result, Silbert said, would be an environment similar to the New York Stock Exchange (NYSE), where individual customers go through brokers such as Fidelity or TD Ameritrade in order to complete transactions. The idea for the market itself is based on the IntercontinentalExchange (ICE) Group.
Founded in 1997, ICE is a 24-hour, Internet-based high capacity trading platforms focused on the global commodity and financial products marketplaces.
By providing a similar environment to existing structures, Silbert hopes money services business (MSBs) and banks will be more open to dealing with bitcoin and bitcoin-related investment services.
How the exchange will work
According to Silbert, the exchange will have three main functions.
Firstly, it will focus on price discovery. Using the gold market as a model, the exchange will attempt to fix the value of bitcoin once or twice a day to allow trading to be pegged at certain values and create a true indicator for the derivatives and mining markets.
“We’re going to attempt to slow things down a bit and create a true indication of bitcon value, once or twice a day, and each of the members though they can trade all day long, or they can tie price to the spot price,” Silbert said.
The new business will also provide clearing services and have a self regulatory organization (SRO), which will ensure that all transactions properly clear with member firms and that exchange activities are governed according to input from regulators and major banks.
A shift in strategy
The news, while not entirely new to observers in the bitcoin industry, does indicate that Silbert has advanced his plans significantly since they were first released. Silbert had not previously suggested that the exchange would be a separate business entity from SecondMarket.
Silbert noted, though, that this change in strategy is not due to regulatory concerns, but is rather a “structural, branding initiative”, one that he saw as intrinsic given that SecondMarket’s core business, which extends beyond bitcoin, has its own customers and brand identity.
Silbert first revealed plans to move SecondMarket toward becoming a licensed, regulated bitcoin exchange on 7th February, when he announced it would begin allowing bitcoin users to sell bitcoins to Bitcoin Investment Trust, though no timeline was given for the proposed launch.
Stemming the Mt. Gox fallout
Silbert suggested that though he has been working on the plans for some time and has even collaborating with unnamed state regulators on the efforts, the apparent failure of Japan-based bitcoin exchange Mt. Gox inspired him to come forward with the news more urgently.
“We did accelerate the announcement with the intention to provide a counterbalance to the news so we could demonstrate to the press at least that there is an effort to fill the void of Gox,” Silbert said.
As for next step, Silbert suggested that with capital secure, the focus would be on finding founding members and formalizing the structure of the new entity’s SRO and clearing business.
Bitcoin exchange Mt. Gox has received a subpoena from federal prosecutors in New York, the Wall Street Journal reported, citing a person familiar with the matter.
The subpoena was sent this month and asked Mt. Gox to preserve certain documents among other things, the Journal said.
The only way to avoid the subpoena is to jump. Or bounce really high.
Despite its penchant for high-tech toys, Japan has been oddly silent on bitcoin, though that could soon change.
Coming off the greatest financial collapse in modern history because of unregulated derivatives backed by dodgy collateral, it is more than a little disconcerting that we are now forced to use our digital ink to explain the pitfalls of investing in a digital currency backed by air.
What Mt. Gox allegedly wanted was a bailout, like the one JP Morgan arranged for the largest banks during the panic of 1907 or the ones put together by the US government after the 2008 financial crisis. Possible strategies above include a debt-for-equity swap, capital injections, and even the equivalent of preferred shares—anything to restore solvency with the promise that future profits will make up the difference. But there are no clearinghouses between bitcoin customers and their exchanges, there is no central bank for bitcoin, and its major players apparently will not bail out Mt. Gox.
Despite its penchant for high-tech toys, Japan has been oddly silent on bitcoin, though that could soon change.
Submitted by Tyler Durden on 02/26/2014 12:16 -0500
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