Mt. Gox, the Tokyo-based exchange that helped turn the virtual currency known as bitcoin into a tradeable commodity, is teetering on the edge of the abyss. The site froze all withdrawals Friday in the wake of some unusual transactions, which it subsequently blamed on a serious flaw in bitcoin's computer code.
A second exchange, Bitstamp, which is based in the bitcoin-friendly environs of Slovenia, blocked all customer withdrawals Tuesday after falling victim to a denial-of-service assault from hackers.
It's never good when players with an important role in a hot new digital offering suffer technical glitches that force them to shut down, even temporarily. But when it comes to bitcoin, these are merely the latest examples of the tremendous risks of jumping into the heavily hyped means of exchange, which has neither effective oversight nor proper safeguards.
When Mt. Gox – which was until recently the world's biggest bitcoin-for-real-money exchange – suspended withdrawals, some panicked speculators stampeded for the exits, knocking more than one-fifth off the going bitcoin price at its low.
The surprise is not the dramatic selloff that sent the volatile virtual currency reeling down to $535 (U.S.) at one point. The surprise is that despite its considerable teething troubles and intensifying opposition from governments and other minders of the traditional payments system, bitcoin retains a stubbornly loyal following. No wonder critics have likened its more ardent supporters to tech-savvy versions of traditional gold bugs who remain unshakeable in their conviction that the international monetary system is a conspiracy that's ultimately doomed.
Mt. Gox said that it had traced the unusual activity to a glitch in bitcoin's underlying software that could enable hackers to alter transactions after the fact, making it appear that none had occurred and collecting twice for a single transfer of funds. Yet even after the embattled exchange issued the statement, bitcoin's price rebounded to the mid-$600s. Others in the bitcoin community were quick to blame the exchange's own technological shortcomings and noted that the problem it cited is one that has been known since 2011 and that other exchanges have taken steps to prevent.
"This is a good reminder that bitcoin is still young and experimental," Gavin Andresen, lead developer at the Bitcoin Foundation, said in a statement Monday.
Why that should bolster confidence in the integrity and security of the crypto-currency is anyone's guess.
The new brush fires come amid growing efforts to crack down on the use of virtual currencies to launder the proceeds of drugs and arms deals or to evade taxes or currency controls. China has imposed currency-trading restrictions on bitcoin action. Russia is threatening to ban it altogether. The FBI is rounding up suspicious bitcoin traders. And the new federal budget unveiled Tuesday promises to extend existing Canadian money-laundering and anti-terrorism financing regulations to all virtual currencies, including bitcoin.
But what really hurts is Apple's decision to remove the apps needed to transfer bitcoins and other digital currencies through its devices. This has sparked a strong backlash in techland from people who regard Apple as a leader of the great march into the future. Of course, Apple could be planning its own 'iBuck' to compete with bitcoin, not to mention actual money. But a more likely reason for Apple's ban is the regulatory headache it will face if it is found to be facilitating illegal currency transactions.
The idea of an easily tradeable, widely accepted crypto-currency is attractive in theory. But as with every unit of payment ever devised, putting it into practice involves politics and politicians, who today view it as a threat, because it can too easily be commandeered by the criminal classes. The potential benefits of a properly regulated and supervised bitcoin may well outweigh the obvious risks one day. But we're not there yet.