Mt. Gox halted trading in Bitcoin on its exchange late yesterday (February 24), after suspending payments to customers on February 7. This morning (February 25 Eastern Time) their website is down except for the silly message
Dear MtGox Customers,
In the event of recent news reports and the potential repercussions on Mt Gox’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.
Why is this silly? Coindesk (a bitcoin news source) reports on a document suggesting that Mt. Gox has large losses, on the order of 750,000 bitcoins. This is about $370 million U.S. dollars at a price of $500. If the losses are anywhere near this big, Mt. Gox is gone. It would do well to be working out its insolvency and making the insolvency clear to customers with accounts. Instead, the document, which supposedly is a plan for resurrection, is wildly unrealistic about the options at an insolvent financial firm.
Bitstamp – the largest exchange by number of trades recently – recovered from the software issue in days and began trading again. The long suspension of payments indicates that the problem is serious.
Mt. Gox suspended payments almost three weeks ago and has been issuing nothing but rare, cryptic messages since. There is no evidence the losses aren’t very substantial and all efforts should be devoted to winding down the operation, not supposedly protecting “the site and our users.”
Fraud by Mt. Gox is not necessary to get to this sad end for the exchange. Instead, naiveté is sufficient to explain it. Some of it was on display in Wired in November when they used the prescient title “The Rise and Fall of the World’s Largest Bitcoin Exchange.”
The bankruptcy rules in Japan will have a big effect on the resolution for Mt. Gox’s customers. I know nothing about whether Japan even has “bankruptcy” laws as the U.S. does. Arrangements for insolvent firms and people are very different even in the United States and European countries. Japan may not be so different if General McArthur’s staff wrote the first version at the end of World War II but even that is not necessarily what is in force now.
The history of non-governmental currency indicates that the hit on bitcoin’s reputation is likely to be substantial. Some people have lost quite a bit of money. The Coindesk article says that one person had 550 bitcoins at Mt. Gox, which is a rather startling amount: $275,000 at $500 U.S. dollars per bitcoin. I would think twice before having that much deposited at my credit union, let alone at a startup operation in Japan. This person says that he has no one to blame but himself, which is admirable.
Unfortunately, many others are likely to want the government to protect them in the future and politicians will be happy to oblige. New York State already was floating the notion of BitLicenses.