The Closure of Mt. Gox May Be the Best Thing to Happen to Bitcoin

What's to come?
Feb. 25 2014 5:54 PM

Good Riddance to Mt. Gox

The now-shuttered bitcoin exchange was a relic of the currency’s reckless, immature youth.

A man looking at the bitcoin exchange website of MtGox in Tokyo on February 25, 2014.
Mt. Gox has infected the wider bitcoin community with fear, uncertainty, and doubt.

Photo by YoshikazuTsuno/AFP/Getty Images

It is over. Mt. Gox, bitcoin’s oldest—and once its most popular—exchange, was taken offline Monday night, leaving behind angry customers and acrimonious debate about where the world’s first popular cryptocurrency goes next.

At one point in bitcoin’s short history, the Japan-based company reigned supreme, with 70 percent of bitcoin transactions occurring on the platform. That it was originally founded as a place to exchange trading cards (Mt. Gox is an acronym for “Magic: The Gathering Online eXchange”) was merely part of its charm in the raucous and optimistic bitcoin community.

Now, its death poses serious questions about how long advocates of the digital currency can resist regulation. But it  also offers a glimmer of hope that bitcoin’s reckless youth may finally be behind it.

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Trouble began a few weeks ago, when Mt. Gox stopped allowing its customers, who used the site to trade bitcoin for ordinary currency, to withdraw their bitcoins.

For some time people had been complaining of long delays on withdrawals, and accusations flew that the company was insolvent. But like an aged heavyweight boxer who refuses to admit he’s not fit for the ring, Mt. Gox promised the measure was only temporary.

It blamed a widespread flaw in the bitcoin protocol, the core code that underpins the currency, that needed to be patched—but while other exchanges quickly fixed the flaw, known as transaction malleability, and resumed normal business, Mt. Gox remained shut.

Signs that something was seriously wrong kept piling up—it moved out of its offices in Tokyo, and  CEO Mark Karpeles stepped down from the board of the Bitcoin Foundation, the foremost bitcoin advocacy group. Soon Mt. Gox began covering its tracks, deleting all of its tweets.

The killer punch came Tuesday: A leaked Mt. Gox document suggested almost 750,000 bitcoins ($350 million) had been plundered from the company over the space of three years. Mt. Gox toppled and hit the canvas: The website closed.

The rumors appeared to be true: Mt. Gox was insolvent and had lost its customers’ money.

Governments across the world have been warning of the danger of using bitcoin for months now. You could set your clock by the consistency with which regulators issued statements to the effect of: “Bitcoin is very, very bad, and you should steer clear.”

Mt. Gox’s corpse is a glittering trophy to people arguing for regulation. If all the allegations are true, the company is a near-comical stereotype of all the things associated with bitcoin: recklessness, zero accountability, and dodgy behavior.

Business leaders in the bitcoin community—including direct competitors to Mt. Gox—were quick to distance themselves following the leak of the document. Coinbase, Kraken, Bitstamp, BTC China, Blockchain, and Circle issued a joint statement lamenting the “tragic violation of the trust of users of Mt. Gox” and saying it did not reflect the wider “digital currency industry.”

Crucially, the statement indicated an acceptance of some sort of independent regulation of exchanges and other bitcoin operators involved with holding customer funds: “Acting as a custodian should require a high-bar, including appropriate security safeguards that are independently audited and tested on a regular basis.”

U.S. regulators have already jumped on the news as proof of the need for regulation, with the chairman of the Homeland Security and Governmental Affairs Committee, Tom Carper, saying: “If today’s news is true, it is a sad violation of consumer trust, whether through malicious action or simple incompetence. Regardless, it’s unacceptable.” In the future, when bitcoin traders argue that oversight isn’t required, critics will need to do no more than whisper “Mt. Gox” to win the argument. For some in the bitcoin community, regulation is a welcome way to gain legitimacy; for others, the thought of the government regulating bitcoin runs counter to the core principles of a currency that has been associated with libertarianism. 

There’s still some debate as to whether the leaked document is real or fake. Digital currency news site CoinDesk reported that “sources close to the company suggest the document is real.” (Full disclosure: I freelance for CoinDesk.) Importantly, Mt. Gox hasn’t denied the accusations. CEO Mark Karpeles told Reuters on Tuesday that the company is “at a turning point” and that they’d be making a full announcement “soon-ish.”

There are signs that Mt. Gox intends to rebrand and relaunch under a different name, “Gox”— Karpeles has purchased the domain name gox.com, which is in keeping with suggestions in the leaked document. Additionally, for a short time, MtGox.com’s source code included a line that said: “put announce for mtgox acq here.”

If Mt. Gox does live on in another form, it will be to the detriment of bitcoin. Mt. Gox has become a gangrenous limb, infecting the wider bitcoin community with fear, uncertainty, and doubt.

Its reputation has been in a slow decline for some time now—toward the end of last year, news emerged that $5 million of Mt. Gox’s cash had been seized by the U.S. government. The revelations appeared to explain why withdrawals from Mt. Gox had been slow since June 2013, when the seizures occurred. As new and better-run exchanges sprung up, Mt. Gox increasingly became a burden, a holdover from bitcoin’s teenage years. Today’s bitcoin businesses are graduating and heading for serious jobs on Wall Street. Mt. Gox was still doing keg stands at frat parties.

For ordinary people considering whether to trust bitcoin and other digital currencies, Mt. Gox is a clear deterrent. And it will only stop being a deterrent if it admits its mistakes and lets the rest of the community get on with rebuilding bitcoin’s reputation.

Meanwhile, it’s important to note that real people have lost real money in this debacle. One bitcoin entrepreneur, Erik Voorhees, says he has lost 550 bitcoins (almost $300,000 as of today). Voorhees is nowhere near bankrupted by this loss, but there will be others who are less able to absorb their losses—perhaps including this Redditor who claims to have lost 4,700 bitcoins ($2.4 million).

One day, these events may be considered growing pains as bitcoin came of age. Confidence in the currency will no doubt return, and its price may recover. (It has already shown signs of rising since the low it reached earlier today.) But not all of the damage done will be repairable—it’s unlikely that Mt. Gox’s customers will get their money back. More importantly, bitcoin regulation is now all but inevitable.

This article is part of Future Tense, a collaboration among Arizona State University, the New America Foundation, and Slate. Future Tense explores the ways emerging technologies affect society, policy, and culture. To read more, visit the Future Tense blog and the Future Tense home page. You can also follow us on Twitter

Kadhim Shubber is a freelance technology journalist based in London. He writes for digital currency news site CoinDesk. He tweets @kadhimshubber.

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