Commentary on the economic , geopolitical and simply fascinating things going on. Served occasionally with a side of snark.
Friday, March 28, 2014
Bitcoin news March 28 , 2014 - Bloomberg reports - Bitcoin prices plunged nearly 10 percent today after a report that China’s central bank ordered banks and payment companies to close the trading accounts of more than 10 exchanges. Accounts must be shut by April 15, preventing investors in the commodity that advocates promote as a digital currency from doing fund transfers to the exchanges, according to a Caixin news report citing a notice sent to banks and third-party payment companies this month..... From Coin Desk -- News that the Chinese government would penalize any bank transacting with bitcoin exchanges after 15th April started to break around mid-morning China time on Thursday 27th March. This time, it was reported as fact by a number of news services....... Mt Gox updates - Mt. Gox CEO Karpeles refuses travel to U.S. for questioning , scale of lossses questioned - might the bitcoins lost due to alleged transaction malleability been just 386 coins ? Where did the rest go , if anywhere ?
Bitcoin Price Drops After New Chinese Bank Rumours
UPDATE (28th March, 10:00 GMT):Sources in China have reported since this article appeared that the ‘rumors’ contained in the Caixin story appear to be true, though bitcoin exchanges still have received no official notice from the People’s Bank. The bitcoinprice has continued to drop, now sitting just above $500.
Less than a week after a fake Chinese news report sent bitcoin and litecoin prices plummeting on some exchanges, another similar rumour hit the Internet on Thursday.
News that the Chinese government would penalize any bank transacting with bitcoin exchanges after 15th April started to break around mid-morning China time on Thursday 27th March. This time, it was reported as fact by a number o fnews services.
The bitcoin price, already on a downward trend, dropped to a low of $561.61 on CoinDesk’s BPI and below the $550 mark on Chinese exchanges.
The latest report gave all the usual reasons a government might want to restrict digital currencies: money laundering, crime, price volatility and investor risk. Given that the People’s Bank of China had previously warned banks to stay away from bitcoin transactions, the fake news seemed plausible, but this was the first report of an outright prohibition.
Cracks started to appear in the story when China’s exchanges claimed they hadn’t heard the news and tried to verify it with the PBOC itself, finding no information.
“We didn’t get any official announcement,” said Star Xu, CEO of major exchange OKCoin.
“We haven’t seen any concrete evidence of any of this yet,” said Bobby Lee, CEO of BTCChina, saying the story seemed to be just a rumour, but that he’d stay tuned for any updates.
OKCoin later posted on its Weibo account (a ‘human’ translation via Reddit):
“In order to prevent panic (and large volume of trading) like the last time false news came out on 21 March, we have already set up enough resources to deal with situations like this when they arise. There is no related press release on the website of People’s Bank of China. We condemn the use of false news news used to cause panic. OKcoin will pay close attention to news about regulation.”
The leaders of Huobi and BTCTrade also both reportedly denied receiving any official announcement from the People’s Bank.
Could it be true?
There is a twist in the tale, though: the reporter who wrote the story for Caixin, generally regarded as a reputable news magazine, said he is sticking by his story, and has posted on various social media sites about its verity.
Last week’s hoax not only saw bitcoin prices fall, it caused a ‘flash crash‘ that dropped the litecoin price to 1 RMB on Huobi, which had only begun trading the currency two days earlier.
Prices recovered soon after and Huobi compensated those who lost money, but the exchange was then hit by a day-long DDoS attack just two days later.
The poster of last week’s hoax remains unknown, and there was no named source in today’s news reports.
Bitcoin prices plunged nearly 10 percent today after a report that China’s central bank ordered banks and payment companies to close the trading accounts of more than 10 exchanges.
Accounts must be shut by April 15, preventing investors in the commodity that advocates promote as a digital currency from doing fund transfers to the exchanges, according to a Caixin news report citing a notice sent to banks and third-party payment companies this month.
“I’m aware of the rumors circulating on the topic,” Bobby Lee, chief executive officer of BTC China, one of the largest bitcoin exchanges in the Asian nation, said by phone today. “I haven’t heard of anything else to confirm that. We are still waiting to see what happens.”
The price of bitcoin was off 9.38 percent at $524.77 at 12:06 New York time, according to the CoinDesk BitcoinPrice Index.
The restrictions would be the latest on the commodity from the People’s Bank of China, which has sought to limit dealings that may be used to launder money or evade capital controls. The central bank issued a notice on Dec. 5 barring financial institutions and payment companies from buying and selling bitcoin or dealing in linked products.
The Chinese monetary authority didn’t respond to a faxed inquiry about today’s report. In a March 21 statement on its microblog, the PBOC denied unspecified media reports that it had banned bitcoin trading.
Bitcoin has been hard hit since Tokyo-based exchange Mt. Gox, once the world’s largest, halted withdrawals on Feb. 7, sending prices tumbling more than 8 percent. The exchange filed for bankruptcy weeks later after about $470 million in bitcoins belonging to its customers and the firm disappeared from its registries.
Prices dived by about 36 percent from its intraday high immediately after the PBOC notice on Dec. 5. BTC’s Lee said at the time he was in favor of government regulation of the bitcoin exchanges as it would benefit consumers. BTC China announced two weeks later that it stopped accepting deposits, triggering another price drop.
Sheng Songcheng, head of the PBOC’s statistics department, said at a briefing on Jan. 15 that people needed to be reminded of the risks of dealing in the “virtual commodity” that wasn’t “fundamentally a currency.”
As usual confusion is surrounding the most recent news out of China. Early Thursday it was reported by multiple media outlets that the PBOC had ordered banks to close the accounts of virtual currency exchanges. At first many thought the news was just another false rumor for the purpose of depressing the market to allow a cheap buy in. It appears, however, that the reports may have been correct (including those at CryptoCoinsNews) and that Chinese domestic banks may no longer do business with websites that trade in digital currencies. According to the reports the PBOC will require the banking accounts of the various Chinese virtual money exchanges to be closed by April 15. The news was mostly discounted at first with Reddit bloggers calling it FUD and markets reacting reluctantly. However, the Wall Street Journal is also reporting this story with quotes from Bobby Lee, Chief Executive Officer of BTC China.
It is also important to note that the story has been reported as fact by the Chinese news media, including by the online business news service Caixin. The Wall Street Journal Reported that Bobby Lee, Chief Executive Officer of BTC China had stated that he had not seen the document but is concerned the reports could be true. When Bobby Lee was asked if customers would no longer be able to use banks to deposit funds he said:
“If the rumor turns out to be true, that’s what’s going to happen.”
“At this time it’s too early for me to elaborate on what steps we will take, …We will take it one day at time.”
Though banks may no longer be able to deal directly with exchanges, it may be possible for customers to make deposits directly. Perhaps this is the reason the markets did not react with extreme price drops as seen in early December when the PBOC issued similar statements saying that banks could no longer engage in Bitcoin business. If customers are allowed to make deposits directly into the exchanges, it may represent more of an inconvenience than an actual halt to the trading. In any case, relatively speaking, the Chinese markets so far have not reacted with the same quick and dramatic price falls as previously with PBOC news. Possibly some of this has been priced in as the rumors have already been circulating.
Prices slide after PBOC issues new statement on exchanges
As of the writing of this story, Bitcoin Markets are down 21% from 592 to 470. (Price was falling during the writing of this article) This fall compares to the early December drop of over 50%. Of note is the fact that, in early December, we were coming off the highs and now much of these negative news stories have already been priced into the market. It will be interesting to see how the Chinese markets continue to react to this news that cannot be positive for trading there. It should be noted that the Chinese markets are, in fact, quite important for Bitcoin so we will not see US markets reacting much better. In particular Litecoin is heavily traded on the Chinese markets.
In writing this article, it was clear that many bloggers and online commenter s seem to criticize the Chinese for the actions of their central bank. In fact, it is important to realize that many Chinese yearn for the freedom that virtual currencies represent while many in the West easily fall for Banker sponsored FUD. For example, as if the recent IRS ruling is some empirical finding, the Bloomberg article on this story repeatedly refers to Bitcoin as a commodity. More than likely the Bloomberg article represents a continued inability of mainstream journalists to understand the Bitcoin protocol and what it is about. In reality Bitcoin has many superior qualities as a transactional currency and does not do so well as a commodity. This is because its value depends so heavily on what the state might do to restrict its use, as this story is evidence of.
It is clear that the PBOC is intent on controlling Bitcoin. It will be interesting to see to what lengths they will go to in order to achieve this. Many people in China mine Bitcoin for a profit and sell and build Bitcoin mining equipment. The actions of the PBOC have cost Chinese investors a lot of money. Will the PBOC out of its own monetary interests continue to punish so many profitable enterprises?
Mt. Gox CEO Mark Karpeles refuses to travel to the U.S. for questioning. Plaintiffs find this unacceptable, after they offered to pay all travel expenses.
Mark Karpeles must be one of the most talked about people in the world of Bitcoin. Normally, one would be happy to be a trending topic but in Karpeles’ case, I highly doubt that’s the case. The Mt. Gox CEO is held responsible for all the bankruptcy of his exchange and has several lawsuits waiting. Today, news came out Karpeles is refusing to travel to the United States for questioning, after creditors of the failed exchange were trying to force him.
Gregory Greene and Joseph Lack asked a U.S. judge to order Karpeles to go to the U.S. for a deposition, according to a motion filed Tuesday in U.S. Bankruptcy Court for the Northern District of Texas, Dallas division, which granted the exchange temporary protection from creditors.
The filing states that Karpeles has to testify in the U.S. in order to protect domestic creditors. As CEO, he was heavily involved with the management of Mt. Gox and he has extensive knowledge of its coding and operations.
Karpeles did not like this order. It’s clear he does not want to travel to the U.S., and he proposed to go to Taiwan instead. There, he would allow lawyers to question him in person or via video link. Obviously, Greene and Lack found this unacceptable, calling it “an unjustifiable misuse of judicial resources.”
To show how much the plaintiffs would like to see Karpeles board a plane to the States, they offered to pay all travel expenses. ”He is someone who has availed himself of the protection of the United States courts and he wants all the advantages of a foreign representative who’s been forthright, transparent and open without being forthright, transparent or open,” Steven Woodrow, a Colorado-based lawyer for the plaintiffs, said.
“Most foreign representatives, from our research, who have availed themselves of the United States courts, are more than willing to come to the United States to justify the relief that they’re seeking,” Woodrow added. “For some reason, Mr. Karpeles seems averse to coming to the United States. His attorneys won’t tell us why.”
A story of lies
Greene and Lack are plaintiffs in a class-action lawsuit against Mt. Gox. This lawsuit accuses Japan based Bitcoin exchange of massive fraud and theft of Bitcoin and currency worth hundreds of millions of dollars.
Since the shutdown of Mt. Gox in February, the exchange has filed for bankruptcy protection in Tokyo and Texas. It became clear that Mt. Gox was missing 850,000 Bitcoins, supposedly due to a bug in their system called transaction malleability. Whether this is true or not, has been topic of debate all over the internet. People doubt Karpeles is telling the real story behind the exchange’s failure. Especially since a few days ago, when Karpeles announced Mt. Gox suddenly found a lost wallet containing 200,000 Bitcoins.
On top of that, several sources are reporting that the whole transaction malleability story is ready to be debunked. CCN wrote an informative article on this just yesterday. The whole story is unfolding into a complete saga, where people won’t know who or what to believe anymore. As usual, we’ll have to wait a while before we get to see the truth behind this. Let’s just hope that day comes swiftly so we can move on past the remnants of this disaster. It has hurt Bitcoin long enough.
Study: Mt. Gox May Have Lost Just 386 BTC Due to Transaction Malleability
A new report by researchers at ETH Zurich University in Switzerland has concluded that the now-bankrupt Japan-based bitcoin exchange Mt. Gox may have lost only 386 bitcoins ($203,000) due to issues stemming from transaction malleability.
The finding provides new evidence that Mt. Gox’s continued claims thatissues with the Bitcoin protocol were the primary reason for its insolvency are perhaps misleading or untrue.
Overall, the authors found that only 302,000 bitcoins could have ever been involved in malleability-related attacks, and that of this figure, only 1,811 were likely to be part of attacks that could have prevented Mt. Gox users from making withdrawals.
Concluded the report:
“Even if all of these attacks were targeted against Mt. Gox, Mt. Gox needs to explain the whereabouts of 849,600 bitcoin.”
The researchers provided a detailed overview in their 13-page report of the steps they took to reach this conclusion, first noting how they identified potential double spending attacks and the limitations they faced in doing so.
To trace and dump all transactions from the Bitcoin network, the researchers created specialized nodes, allowing them to detect any double-spending attacks observed by peer nodes. The first, and most prominent limitation, for example, was that the researchers were only able to extend their research as far back as January 2013.
Explained the report:
“The following observations therefore do not consider attacks that may have happened before our collection started.”
The limitation is significant as evidence suggests that Mt. Gox lost its bitcoinsover a period stemming multiple years. The researches estimate their nodes were connected to 992 peers, or approximately 20% of reachable nodes.
The next task was identifying double-spend attacks.
While double spending attacks could be determined by associating transactions with the outputs they claim, researchers chose to remove signature script from the transactions, and looked instead at the unique keys produced by the malleability attacks.
Read the report: “The unique key is then used to group transactions together into conﬂict sets.”
The report indicates that approximately 29,139 conflict sets were identified over the course of the research and later confirmed by the block chain. More than 6,000 transactions were labeled as invalid due to incorrect signatures or because they were part of further double spending.
Researchers then detailed how they were able to reach the 302,700 BTC estimate.
“The conﬂict set value is deﬁned as the number of bitcoins transferred by any one transaction in the conﬂict set. The outputs of the transactions in a conﬂict set are identical, since any change to them would require a new signature.
In particular, the value of outputs may not be changed. Each transaction in a conﬂict set therefore transfers an identical amount of bitcoins. Summing the value of all conﬂict sets results in a total of 302,700 bitcoins that were involved in malleability attacks.”
The most prominent type of malleability occurred when attackers replaced a single byte OP_0 with OP_PUSHDATA2, resulting in signature script that was 4 bytes longer. Roughly 28,500 of the 29,139 confirmed attacks had this type of modification.
The effectiveness of malleability attacks
The report also took a look at whether the transaction malleability attacks launched against the exchange were successful, meaning that they resulted in a modified transaction later confirmed.
Overall, the report estimates that of the 28,595 malleability attacks it detected, only 19.46%, or 5,670, were confirmed. It estimated that the total profit from successful attacks was 64,564 BTC (roughly $33.7m at press time).
However, the researchers noted that this conclusion was based on the assumption that conflict sets were the results of attacks directed at Mt. Gox. In order to find this correlation, the researchers set out to verify the claim by finding the transactions used for the attacks.
“The above mentioned total amount of 302,700 bitcoins involved in malleability attacks already disproves the existence of such a large-scale attack. However, it could well be that malleability attacks contributed considerably in the declared losses.”
Mt. Gox’s role in encouraging attacks
The report further analyzed the timeline of the attacks, using as a basis three periods in the exchange’s lifecycle.
Period 1, which stretched from January 2013 to February 2014, was the period before Mt. Gox halted withdrawals
Period 2 included 8th to 9th February, when withdrawals stopped but no attack details were public
Period 3, lasting from 10th to 28th February, included the time after Mt. Gox had blamed issues with the Bitcoin protocol for its substantial loss of customer funds.
During Period 1, the report found 421 conflict sets, equating to roughly 1,800 BTC. During Period 2, the number of conflict sets spiked to 1,062, affecting 5,470 BTC, with the number of attacks increasing from 0.15 per hour to 132 per hour.
The report, therefore, concluded that Mt. Gox’s announcements relating to the attack dramatically increased the frequency of attacks. Attack activity was also high on 10th and 11th February, when the researchers detected 25,732 individual attacks, totaling 286,000 bitcoins.
“The strong correlation between the press releases and the ensuing attacks attempting to exploit the same weakness is a strong indicator that the attacks were indeed triggered by the press releases.”
Though, the report notes that Mt. Gox had disabled withdrawals at this time, and as such, the attacks could not have been aimed at the exchange.
At press time, discussion of the paper was limited to Bitcoin Talk forum, where the bitcoin community mostly greeted the research as a validation of previous assumptions.
Still, there were some critics who pointed to the limited period of study, the limited reach of the information the study collected and the inability of researchers to observe how Mt. Gox may have modified transactions.
Bitcoin is getting hammered today. The Caixin website says it has seen the draft of a Chinese central bank ruling that would require banks and payment service providers to stop dealing in Bitcoin as of April 15. The implications:
This means people will only be able to use cash to buy bitcoins, an analyst who has been following the matter said, and will force all trading websites in the country to close…
The requirement, which Caixin saw in a document the central bank’s headquarters recently sent to regional offices, says money can be taken from the accounts before the deadline, but no deposits can be made. Banks that fail to close the accounts will be punished, the PBOC said, but it did not elaborate on what those punishments would be.
And notice how the thinking of the Chinese authorities is similar to that of their counterparts in Japan and the US, albeit even more forceful:
The circular said bitcoins are a commodity, not a currency. It added that investors are free to trade in bitcoins at their own risk, but should know they cannot be used as legal tender.
The IRS has spoken: Bitcoins are property, not currency. This was hardly a surprise, but it has some important implication that tells us a lot about what it takes to make a currency work.
For a payments geek, the real lesson from the IRS Bitcoin ruling is that for a currency--or any payment system--to work, its units must be completely fungible. One reason dollars work really well as a currency is that one $20 bill is entirely fungible with another $20 bill. This means that when I pay, I don't have to make a decision about which $20 bill to use (unless I have some idiosyncratic attachment to the crisp ones or the like). It means that when I accept a payment, I don't care which $20 bill I am given, in part because I know that my ability to spend that $20 bill will not depend on which $20 bill it is. If payment were in, say, camels, then it would probably matter a great deal which camel were tendered. Camels aren't fungible. And we know that's not going to make for a very good payment system.
So what does this have to do with Bitcoin?
The IRS ruled that Bitcoin and other virtual currencies are property, not currency. This means that they are subject to capital gains taxation. And that means that Bitcoins are not fungible. The price at which a particular Bitcoin was acquired (and this is traceable) determines the capital gains on that particular Bitcoin when spent. If I spend Bitcoin A, which I bought at $10, but is now worth $400, I’ve got a very different tax treatment than if I spend Bitcoin B, which I bought at $390. (Poor Satoshi--he's got a lot more capital gains than most...) This means Bitcoins are not fungible, and that makes it unworkable as a currency. If I have to figure out which particular Bitcoin in my wallet I want to spend and what the tax treatment will be, Bitcoin just doesn't work as a commercial medium of exchange. Bitcoin still works as a speculative medium, but Bitcoin's claim has always been to being more than the latest iteration of the trading sardines--it aspired to be a commercial medium. I don't see that happening now.