Home Money Yet Another Bitcoin Exchange Robbed, Closes Doors

Yet Another Bitcoin Exchange Robbed, Closes Doors

by Chris Poindexter

A Bit About BitcoinsAnother week — and another Bitcoin exchange announces it got robbed, and ceases operations. Flexcoin shut down after revealing that a hacker stole all 896 Bitcoins in its online vault. The thief wasn’t able to touch the Bitcoins the company had in “cold storage,” which are kept on computers not connected to the Internet. All the same Flexcoin discontinued operations, and worked with law enforcement to trace the source of the hack.

The Flexcoin announcement was eerily similar to the circumstances that forced Bitcoin exchange Mt. Gox to shut down operations and seek bankruptcy protection. Another exchange, Poloniex, lost 12% of its Bitcoins to hackers. If that wasn’t bad enough, the CEO of First Meta, Autumn Radtke, was found dead in her home.

One exchange that started out life trading playing cards (“Mt. Gox” stands for “Magic: The Gathering Online eXchange”) getting taken by hackers could be dismissed as growing pains — but what’s emerging is a pattern of security lapses, that is raising the question of whether Bitcoin can be trusted as a medium of exchange. The breadth and sophistication of the hacks, some of which may ultimately be traced to highly organized gangs of hackers operating in foreign countries, also raises the question of whether the volunteer programmers at the core of Bitcoin’s code base have the manpower resources to keep up with a constantly evolving and increasingly sophisticated threat landscape.

The sophistication of the hacks raises the question of whether volunteer programmers have the resources to keep up with threats…

Until a more thorough forensic analysis can highlight whether the thefts can be attributed to security issues with the Bitcoin code, how the servers at the exchange were being operated, or some combination of several factors, it’s hard to see how a rational person can trust real world money to a virtual currency with no central authority and no system for reclaiming lost funds, and which is intentionally designed to be nearly impossible to regulate. As it stands, brigands and thieves have stolen more than a couple million dollars in digital currency; they’ve hijacked Bitcoin’s credibility.

The concept of frictionless exchange between two consenting parties, not subject to government snooping or regulation, is certainly popular in some circles, but what the universe of Bitcoin traders is now realizing is that the government regulation that goes along with a traditional bank account does have the advantage of being able to claw back funds that are illegally obtained. We may not like that Uncle Sam has the ability to seize the bank accounts of people suspected of wrongdoing, before they’ve even been convicted of any crime, but nobody seems to mind the FDIC insuring deposits if the bank goes out of business.

What’s certain is that Bitcoin won’t be accepted by the mainstream as it exists today. The situation playing out with Bitcoin is exactly what happens in a totally unregulated market. In a market with no oversight, you don’t get a vibrant economy, you get chaos. That’s fine if your market consists of a handful of computer geeks scattered around the globe, but that’s not going to cut it for a commercially viable medium of exchange. If Bitcoin is going to survive as a thriving commercial entity, there will need to be some type of oversight built into the system, some central authority to insure the legitimacy of trades and to intervene when powerful interests attempt to rig the system.

Another angle to consider, is that going commercial and being widely accepted is not what the Bitcoin community wants or cares about. It is highly unlikely that Bitcoins will ever go away; the system it runs on is designed to be difficult to regulate, and it is quite good at that. Perhaps having the Bitcoin fad disappearing into the misty flats of history would be perfectly fine with the core of the community. People are drawn to projects like Bitcoin precisely because they don’t care what the broader mass of society thinks.

Right now Bitcoins are trading at $672.94 on Bitstamp.net so, at least for the moment, the shine has not worn off the digital currency. The recent thefts have been confined to elements that were mostly marginal in the universe of Bitcoin in the first place. Mt. Gox had fallen out of favor with the bulk of Bitcoin traders years ago, and the others are lightly trafficked exchanges with little significance in the grand scheme of digital currency.

Where we go from here is up to a shadowy core group of programmers and power users, who may not even agree among themselves on the best path forward. That was the nature of the early Internet — and that’s the reality of Bitcoin as it stands today.

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