It was a slap in the face, a kick where it hurts most, a knockout punch a lot of governments might have been waiting for. Those phrases might be the best description of what happened to Mt. Gox and the bitcoin community as a whole.
The once front-runner bitcoin trading exchange Mt. Gox has declared bankruptcy Friday. While its CEO Mark Karpeles blamed a weakness in the system, it is not yet clear how the company will address the missing 750,00 bitcoins worth almost half a billion dollars.
The declaration of bankruptcy came days after Mt.Gox gave up its seat on the board of the Bitcoin Foundation and after Karpeles confirmed that he was still in Japan trying to find solutions.
"...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," a statement on the Mt. Gox website read. This was posted on Feb. 26 but the site has never been updated.
The customers have been left in the dark.
The authorities in the United States and in Japan, where Mt. Gox is based, are clueless on how to help the victims. The virtual currency does not exist technically as it is an alternative currency not regulated by authorities, nor backed by deposit insurance.
While the code used by the bitcoin system should allegedly mark each electronic money when transaction happens, this does not guarantee that victims or even the digital wallet companies can go after the thieves.
Experts think that bitcoin should expect for more strikes. There willl be more transaction frauds, identity theft, and criminal organizations that will try to steal from bitcoin vaults just like what happened to PayPal in its early years.
"If Bitcoin is to continue growing as an alternative currency, it is likely to face all of the same types of fraud that hit PayPal. While Bitcoin does not have the same credit card chargeback risk, a hypothetical evolution into a widely accepted payment option would expose the payment system to increased risk of transaction fraud, given the inevitability of buyer/seller disputes. Theft of private keys will certainly grow as Bitcoin users become increasing targets for phishers; encryption security is no guarantee against users being tricked. And as for organized crime getting involved, Mt. Gox's demise suggests that this is already happening," PayPal co-founders Eric Jackson and Christopher Grey wrote.
There are two things that can happen to Bitcoin - die or live on.
With the possible weakness seen at Mt. Gox, it will be a miracle effort for other digital wallet companies to convince their customers to keep trusting their systems. Just like how markets behave, speculations of what can happen will rock the value of the cryptocurrency.
The digital money can become bits (pun intended) of bad memory once people give up on the system.
The U.S. authorities, as well as their Japanese counterpart, have launched investigations to understand how bitcoin works, how transactions happen, and how disasters such as what happened to Mt. Gox can be prevented.
A case has been filed in Illinois to pin the fallen company for fraud as the company made everyone believe that their deposits were protected all along. A class action law suit might be impending.
On the flipside, Mt. Gox might be the price the bitcoin community has to pay to pave the way for the legitimacy of bitcoins. If regulations will be created by governments to protect customers and set standards, that could serve as a jolt to bring the electronic money back to life.
For now, customers of Mt. Gox do not have a lot of options. Losses might be considered as part of the experience when they risk on believing in the alternative currency.
