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Home > Blogs > Anthony Harrington > Bitcoin and alternative currencies after the Mt. Gox debacle

Bitcoin and alternative currencies after the Mt. Gox debacle

Bitcoin and alternative currencies after the Mt. Gox debacle Anthony Harrington

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Perhaps the most surprising thing about the failure of one of the earliest and largest bitcoin exchanges, the Tokyo based Mt. Gox, which filed for bankruptcy after admitting it had “lost” some 850,000 bitcoins with a total value of around $480 million, has been the resilience of bitcoins on other exchanges. Sure, the price fell back a bit, but not by a huge amount – at least not on the day after the implosion of Mt. Gox. Moreover, the multitude of other “alternative” currencies, many modeled on Bitcoin (which is open source, and so can be modified to create a vast array of alternative currencies) also shrugged off the demise of Mt. Gox relatively easily.

The consensus view emerging seems to be that Mt. Gox was unusually sloppy, with inherent weaknesses in its procedures, and was therefore ripe to be hacked in a way that other exchanges are not. On this view, the Mt. Gox catastrophe, for it is surely at least that for those who lost real money in this fiasco, is a singular event with no follow through for alternative currencies generally, and bitcoin in particular. That seems an excessively complacent view. What the Mt. Gox loss highlighted above all else is that bitcoins - and all other electronic currencies - are just so many electrons whirling neatly about in the system, and if the system goes belly up, either as a result of internal faults or external malicious acts, there is no compensation to be had. The market knows how to price an active bitcoin. It has no use at all for a lost bitcoin.

This is qualitatively different from someone discovering that inflation is gradually eating up the dollar in their pocket. Yes, the dollar is losing value, relatively slowly most days, but at least it's still tangibly there, in your pocket. Hunting for a lost bitcoin is just an exercise in staring at an empty cupboard.

Shortly before Mt. Gox went belly up, two more US real estate companies, both of whom are selling luxury condominiums, announced that they would accept bitcoins as the consideration for any purchase, instead of dollars. They are just a few of the many hundreds, if not thousands, of companies around the world that accept bitcoins. We are going to have to wait a while to see if Mt. Gox causes a retraction in what had been the growing popularity of bitcoin as a payment mechanism. Some pullback seems inevitable. According to Andrew Couts, writing for Digital Trends, the failure of Mt. Gox has pushed some 127,000 Mt. Gox creditors into bankruptcy. That is a massive amount of misery to inflict - and of itself it means that the glory days of alternative currencies, when they appeared to be able to swan along with little or no overt state supervision or regulation, are definitely fading into history.

As I point out in a soon-to-be-published Viewpoint in QFinance, the US regulatory machine had already swung into action well before the Mt. Gox event. In a hearing on bitcoin before the Senate Homeland Security Committee in November 2013, Jennifer Shasky Calvery, Director of the Financial Crimes Enforcement Network (FinCEN), said that they would require all bitcoin exchanges to file regular reports, just as banks have to. So anyone in the business of exchanging bitcoins for cash on behalf of a number of users, will be swept up into this traditional reporting net. Would that have stopped Mt. Gox from going under? Of course not. Would it compensate users for losses? Of course not. Or not yet. One can easily foresee a levy system being imposed on alternative currency exchanges in order to set up a compensation fund for users who suffer a "Mt. Gox" event. FinCEN is going to impose a raft of anti-money laundering, record keeping and reporting responsibilities on exchanges like Mt. Gox and this is going to be a jolt to the industry. However, looking at the scale of the damage done by Mt. Gox, it may well be that more regulation is simply the price that alternative currencies are going to have to pay to avoid a head on clash with the authorities.

On that score it is worth noting that even Janet Yellen, the new chairman of the Federal Reserve has said that it is just about impossible to ban bitcoin or any other alternative currency that does not operate through the banking system. FinCEN is looking to get its reports from the transactions that happen between a bitcoin exchange and the banks that its many users operate from on a "follow the money" principle. Bitcoins are not free and as users pay to acquire new coins that provides information, via the exchange's financial reporting, on where the money flows into bitcoins are coming from. It's not much, from a regulator's point of view, but it is something. What is certain is that on 27 February 2014 Yellen told the Senate Banking Committee very plainly that the Fed "does not have the authority to supervise or regulate bitcoin in any way". Like alternative currencies? Distrust legal tender? Fine. But you are on your own...


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Tags: alternative currencies , Bitcoin , Federal Reserve , fiat currency , Janet Yellen , Mt. Gox , Tokyo
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