Policy: Economy

Bitcoin faces big test as major exchange fails

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PennAve,Joseph Lawler,Economy,Technology,Bitcoin,Currency

The fledgling digital currency Bitcoin faces another test of its viability amid the implosion of what was once its biggest online exchange.

The Tokyo-based exchange, called Mt. Gox, suspended trading and went offline Monday as evidence appeared to suggest that it was insolvent and unable to repay customers with accounts worth in the hundreds of millions.

A blogger and Bitcoin entrepreneur posted what was purportedly an internal Mt. Gox document showing the loss of nearly 750,000 Bitcoins and mapping out a business strategy for handling the fallout. Although the document was not verified by anyone affiliated with Mt. Gox, the exchange's removal of its website and social media presence confirmed that it was in trouble.

The price of a Bitcoin fell steeply following the news, dropping from more than $600 across a number of prominent exchanges over the weekend to as low as $438 Tuesday, according to the Winklevoss Index. Bitcoin frequently sees wild fluctuations in price: It traded over $1,150 as recently as December.

Yet the price had rebounded to $524 by Tuesday afternoon, suggesting that much of Mt. Gox's collapse had already been priced in to the virtual currency's value.

People involved in trading and promoting Bitcoin had long anticipated bad news regarding Mt. Gox, which had already lost its status as the largest exchange. On social media and message boards, many enthusiasts and users seemed to take the news in stride.

And while Mt. Gox failed, Fortune magazine and others reported that the online marketplace SecondMarket had plans for starting a New York-based Bitcoin exchange.

Six owners of major Bitcoin-related businesses defended the integrity of the digital payments system in a blog post on the website of Coinbase, a leading Bitcoin payment company. They wrote that "[t]his tragic violation of the trust of users of Mt.Gox was the result of one company's actions and does not reflect the resilience or value of Bitcoin and the digital currency industry," and promised greater transparency and consumer protection than the failed exchange offered.

Meanwhile, top U.S. regulators reacted to the news by spelling out their plans for overseeing virtual currencies.

Sen. Tom Carper, D-Del., who has taken a lead role in developing a regulatory framework for digital currencies such as Bitcoin, said the Mt. Gox episode demonstrated the need for consumer protection but also clarified that he didn't see the exchange's misdeeds as a flaw inherent in the underlying system.

"As any industry matures it will face growing pains and there will be individuals who believe they can use the fog of uncertainty to cover up their follies," Carper said. But he stopped short of any recommendation for reining in Bitcoin's progress, saying, "When it comes to policy, it is the responsibility of the federal government to steer the boat, not row the boat."

But other regulators weren't as hesitant to suggest that the incident should lead to tighter controls for Bitcoin. New York State Financial Services Superintendent Ben Lawsky, who has held hearings meant to probe the need for regulation of alternative currencies in New York, said, "These developments underscore that smart, tailored regulation could play an important role" in protecting consumers and their money at risk in virtual currencies.

Bitcoin is, however, fresh off a high-profile, if tentative, endorsement. Former Obama economic adviser and Clinton Treasury Secretary Larry Summers said Monday at an event for business economists that Bitcoin "has the potential to be a very, very important development" and that he was "not willing to dismiss" the currency.

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