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Early this morning, Mt. Gox officially filed for bankruptcy protection in Tokyo, Japan, confirming reports that the company had lost 750,000 bitcoins—with a current estimated value of roughly $477 million—were lost. According to CEO Mark Karpeles, who announced the bankruptcy filing at a press conference, another 100,000 bitcoins owned by the employees of Mt. Gox were also lost.

In Karpeles’ announcement, he explained that the bitcoins were lost due to inherent problems in Mt. Gox’s infrastructure. According to the Wall Street Journal, Karpeles apologized for the loss (translated from Japanese):

“There was some weakness in the system, and the bitcoins have disappeared. I apologize for causing trouble.”

Transaction Malleability

Mt. Gox CEO Mark Karpeles bows during the bankruptcy press conference in Tokyo.
Mt. Gox CEO Mark Karpeles bows during the bankruptcy press conference in Tokyo.

What is that ‘weakness’? Many are pointing to an issue with how Mt. Gox dealt with bitcoin transactions, specifically a phenomenon known as ‘transaction malleability,’ which, according to a piece in the Guardian, is a potential loophole built into transactions using the currency that can be seized by hackers. An important note here: the loophole can only be exploited if the exchange doesn’t account for it, almost like a person counting their money before their check has cleared.*

When a user sends an amount of bitcoins, the transaction is digitally signed as a measure of security. “But some of the data used to generate the transaction ID comes from the unsigned, insecure part of the transaction,” explains the post. “As a result, it’s possible to alter the transaction ID without needing the sender’s permission. […. That] can cause problems down the line if the sender is expecting the transaction to show up under a particular ID.”

That explanation speculates that Mt. Gox was “expecting transactions to show up in the public ledger under the specific transaction ID it had recorded. When those transactions didn’t show up—because the thief had edited the ID—the thief could then complain that the transaction had failed, and the system would automatically retry, initiating a second transaction and sending out more bitcoins.”

While many exchanges and bitcoin wallets have found ways to close the loophole, having worked on the known issue since 2011, Mt. Gox apparently never got around to implementing the fix, leading to its loss of 750,000 bitcoins. As to where those bitcoins have ended up—either in the hands of thieves and hackers, or simply having fallen through a digital hole in Mt. Gox’s pocket—remains unclear.

Bankruptcy in Japan

bitcoinTransaction malleability or not, Mt. Gox isn’t initiating any bitcoin transactions at the moment. A post on Bloomberg also quotes an email Karpeles sent out.

“We are in a situation close to what you would call Chapter 11 in the U.S,” he wrote.

Essentially, Mt. Gox had more debt than assets, and no foreseeable plan to cover that debt. Various reports peg that debt at ¥6.5 billion (or $63.6 million) with assets of about half that, coming in at ¥3.84 billion ($37.6 million).

In the United States, Chapter 11 bankruptcy involves a court’s reorganization of a company in order to satisfy its debts—debts that are then also reduced for each creditor. By contrast, Chapter 7 involves total liquidation of a business’s assets, with the company generally ceasing to exist afterwards. The main difference is that Chapter 11 provides a glimmer of hope for a company’s futures, while Chapter 7 typically doesn’t.

A report on Reuters about the proceedings says that Mt. Gox’s filing in Japan will involve “working with others to resolve their problems,” pointing to less of a court-guided process and more inclusion of the creditors themselves.

The Future of Bitcoin

While the current state of Mt. Gox is making headlines across the world, it seems that most bitcoin aficionados remain undeterred, taking their business to other exchanges and discussing the ways that the virtual currency can grow from Mt. Gox’s mistakes.  Others still are exploring other virtual currencies, like the dubiously named “dogecoin,” whose fans actually raised funds using the currency to send the Jamaican bobsled team to the Sochi Olympics this year. Moreover, sites like SeansOutpost allows users to donate bitcoins to help efforts to end homelessness.

In short, the future of virtual currency seems to still be on course. But Mt. Gox’s end may end up keeping more people from getting involved with any virtual currency, bitcoin or otherwise. Will a slower influx of new adherents prove to be a boon or a bane to bitcoin’s future?

[Sources: WSJ, Bloomberg, Guardian, Reuters]

*This paragraph had a different explanation of transaction malleability. It’s been rewritten to better distinguish how the phenomenon can be exploited.

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