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Bitcoin, the world’s biggest and most notable virtual currency, is experiencing a major crisis as Mt. Gox, once one of its biggest exchanges, has gone dark, its CEO having disappeared. As a result, Bitcoin owners the world over may have lost a sizeable chunk of their investment as questions swirl about both Mt. Gox’s future and the whereabouts of its CEO, Mark Karpeles.

Mt. Gox’s troubles began to mount earlier this month, reports an article in Reuters, when the Tokyo-based exchange was the target of hacks, prompting the company to indefinitely suspend Bitcoin withdrawals after it had detected “unusual activity.” Then, early this morning, Mt. Gox’s website went down, and CEO Karpeles wasn’t answering the intercom in his apartment, and that his “mailbox was so stuffed with mail that the flap would not close.”

As of this writing, the Mt. Gox webpage offers up a simple statement to its visitors:

“In the event of recent news reports and the potential repercussions on MtGox’s operations and the market, a decision was taken to close all transactions for the time being in order to protect the site and our users. We will be closely monitoring the situation and will react accordingly.”

For comparison’s sake, this turn of events is something of a microcosm of the bank crisis that took place in the early twentieth century. During the Great Depression, there was a serious risk that the bank in which you’d stored all your money could suddenly close up, leaving you penniless and without much in the way of recourse. The result was the Banking Act of 1933, which created the Federal Deposit Insurance Corporation, or FDIC, that reliable acronym you see at just about every bank you visit today. That means that if something happens to a member bank that could jeopardize your money, the FDIC will swoop in and insure your investments for up to $250,000.

As of now, no such coverage exists for Bitcoin, largely because until very recently, Bitcoin itself was not officially considered actual currency, and by some regulatory institutions—such as Japan’s Financial Services Agency—it still isn’t. But in March 2013, the United States Financial Crimes Enforcement Network, or FinCEN, issued a guidance report that now recognized Bitcoin and other virtual currencies as not simply a way to exchange other currencies, but a currency in and of itself.

This is where Mt. Gox’s troubles truly began. Suddenly the onus was on Mt. Gox to register for licenses to operate within each state in the US, and hit several stumbling blocks on the way. As time went on, longtime Bitcoin investors moved away from Mt. Gox for other exchanges that seemed more secure. The company was pulling in less money to cover investors’ holdings, and its apparent downward spiral continued to this morning’s shut-down.

Many virtual currency and Bitcoin proponents say that the problems being reported on today are restricted to Mt. Gox and the way it was run, and not the viability of Bitcoin itself. And considering the relatively arbitrary way currencies are established and can fluctuate from day to day and country to country, there’s little reason not to believe them. Even now, the other still-active exchanges, as well as the Bitcoin community, are looking for ways to better insure investments and prevent widespread losses.

Bitcoin investor Bill Strait, a software developer in Minnesota (and, full disclosure, a friend of mine), explained that there’s already efforts underway to bring in more transparency and regulation to keep the virtual currency going, and to make it stronger than ever.

“The community has been calling for Karpeles to be removed from the Bitcoin Foundation for several months,” he said. “They are also demanding more transparency from Bitcoin exchanges, which can be easily provided by the protocol itself. Some are calling for an industry driven, opt-in regulation and insurance system—imagine FDIC crossed with the ESRB.”

For his part, he had lost faith in Mt. Gox last year after FinCEN shut the company down for operating without a license.

“I stopped doing business with Mt. Gox in May, after the Department of Homeland Security seized their funds.” Since then, his investment has been handled by other exchanges, and his commitment to Bitcoin remains as strong as ever.

But the questions surrounding the money lost in Mt. Gox’s apparent meltdown—at least 744,408 Bitcoins, or roughly six percent of all Bitcoins in existence according to a report on Business Insider, though that figure is as-yet unverified—have yet to be answered.

“It’s important to remember this didn’t come out of the blue, if you were paying attention you saw the smoke,” said Strait. “If you’re not paying attention in an unregulated market, bad things are going to happen.”

[Sources: Reuters, Business Insider]


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