Mt. Gox Bitcoin exchange files for bankruptcy protection

After a series of bad news from Mt. Gox comes the ultimate blow to its users: the prominent Bitcoin exchange has filed for bankruptcy with the Tokyo District Court in Japan.

The move is believed to be – at least partially – a reaction to the US Attorney’s office in New York filing a subpoena against the company (Mt. Gox is registered as a money-services business in the US), but it might also have something to do with the fact that Japanese financial authorities, the police, the Finance Ministry and others are looking into the sudden shutdown of the popular Japan-based exchange on Tuesday.

The closure of the exchange means that customers cannot access their accounts and withdraw bitcoins deposited there. Whether they will have the opportunity to do so in the future remains to be seen.

In the filing, Mt. Gox stated that 750,000 of its customers’ bitcoins and 100,000 of its own had been lost, which closely corresponds with the numbers cited in a document that has been circulating on the Internet for the last couple of days.

The veracity and source of the document has not been discovered, and Mt. Gox has said they weren’t the authors.

The theft was apparently the result of a flaw in bitcoin software that allowed malformed transactions, and its existence and exploitation has caused several Bitcoin exchanges – including Mt. Gox – to halt trading and withdrawals earlier this month. Trading was later resumed, but withdrawals haven’t been possible since.

Mt. Gox CEO Mark Karpeles, who has recently resigned from the board of the Bitcoin Foundation, has tried to reassure users that they are working on a solution and that he is still in Japan.

Customers are, understandably, angry and have been venting both online and protesting before the Mt. Gox headquarters. Unfortunately, this and other incidents involving other Bitcoin exchanges show the disadvantages of digital currency in the form it currently takes, as well as the technology used.

There is no doubt that the idea of digital currency has gained traction with Internet users and investors, but some changes will have to be made for it to realize its full potential.

Clearly defined laws, policies, and a much more transparency will be needed. In the meantime, teething problems will continue, and should be expected – not that this will comfort Mt. Gox customers and other digital currency owners that lost it due to theft.

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