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Bitcoin theft calls currency into question

A major theft leads to the closure of a principal Bitcoin exchange and raises doubts about the security and future of digital currencies.
Bitcoin buttons are displayed on a table at the Inside Bitcoins conference in Berlin on Wednesday, Feb. 12, 2014.

It was a heist for the digital ages.

Once the most active website for the buying and selling of Bitcoins, Mt. Gox ceased operations on Thursday night following the publication of a document titled “MtGox Situation: Crisis Strategy Draft," by blogger and Bitcoin entrepeneur Ryan Selkis

Over 744,000 Bitcoins worth close to half a billion dollars at current - though highly volatile - exchange rates “are missing” and that the theft has gone “unnoticed for several years.” The theft represents some 6 percent of the 12.4 million bitcoins in circulation and if unrecovered would represent one of the most valuable robberies of all time. 

Mt. Gox blames the theft  on a so-called “transaction malleability” issue within the digital architecture of Bitcoin that allows sophisticated hackers to steal Bitcoins undetected.  The gyst of the hack is a trick where counterparties emptying out their Bitcoin accounts – known as wallets – into the hackers account without realizing it. The crisis strategy document characterizes the glitch and the theft as potentially spelling “the end of Bitcoin.”

Tokyo –based Mt. Gox had already been under tight scrutiny from users since early February when what the company referred to as a series of glitches kept users from being able to withdraw their Bitcoin balances. In another ominous move, Mt. Gox CEO Mark Karpeles resigned on Sunday and all tweets from his and Mt. Gox’s account were subsequently deleted.

The problems with the site contributed to a crash of Bitcoin prices on the exchange, from around $900 at the beginning of the year down to around $100 earlier this week.  The price of Bitcoins on other exchanges have also suffered in recent weeks with Bitcoins across all exchanges currently trading for around $486 each, down from a high of near $1,150 reached just last December.  The total value of all Bitcoins in circulation currently sits around $6.9 Billion.

The Mt. Gox statement also warned that "The problem we have identified is not limited to MtGox, and affects all transactions where Bitcoins are being sent to a third party.”  A consortium of Bitcoin exchanges quickly responded in a joint statement pillorying Mt. Gox for its “tragic violation of trust,” and pledging a new commitment to bitcoin security.

Bitcoin has come under regulatory scrutiny in the U.S. several times over the past year including a pair of Senate hearings as well as a hearing in front of the New York Superintendent of Financial Services. Much of this scrutiny has focused on the use of Bitcoin as an anonymous means of payment for illegal goods and services online or as a method of financing terrorism. Treasury Secretary Jack Lew told CNBC last month, "From the government's perspective, we have to make sure [Bitcoin] does not become avenue to funding illegal activities or to funding activities that have malign purposes like terrorist activities.”

Japanese regulators, on the other hand, have failed to enact any regulatory controls on the currency, opting instead to treat Bitcoin similarly to other noncash investments such as gold or artworks.  

The Bitcoin cryptocurrency was created by one or more unidentified persons in 2009 as an alternative to government sponsored denominations. Bitcoins are generated through running specialized computer software that ‘mines’ for Bitcoins by calculating a complex algorithm, different ‘miners’ compete for a ‘block’ of Bitcoins, with the spoils usually going to the group with the highest computer processing power.  The program's architecture is designed to cap global supply at 21 million units.