Bitstamp halts transactions. Is Bitcoin too Libertarian to succeed?
Bitcoin鈥檚 bad week? It鈥檚 only getting worse.
Tuesday, the Bitcoin Foundation, the cryptocurrency鈥檚 main trade organization, admitted that prominent Bitcoin exchanges are being hit by hackers, who are sending mutated lines of code through their system and preventing transactions from being processed.
The issue halted transactions from the Slovenia-based exchange Bitstamp Tuesday, after shutting down Japanese-based Mt. Gox over the weekend.
"This is a denial-of-service attack," Bitcoin Foundation spokeswoman Jinyoung Lee Englund said in a press statement. "Whoever is doing this is not stealing coins, but is succeeding in preventing some transactions from confirming. It's important to note that [denial of service] attacks do not affect people's Bitcoin wallets or funds.鈥�
That means users can鈥檛 make Bitcoin transactions for the time being, though Ms. Englund added that a team of software developers were working to fix the problem quickly.
Midday Wednesday, Bitcoin鈥檚 value was down 4.62 听percent on the news, to $660.60.
The cyberattacks mark the latest episode in a series of price swoons, reputation hits, and infighting that have plagued the Bitcoin world in recent days. The spate of bad news begs the question: Are these temporary hiccups, or signs of fundamental problems with virtual currency?
"We are at a critical crossroads,鈥� says Mark T. Williams, a finance lecturer at Boston University and a former risk examiner for the Federal Reserve. 鈥淏itcoin is losing a lot of credibility in the marketplace.鈥�
On Feb. 7, Mt. Gox, the biggest Bitcoin processor, halted transactions due to a 鈥渂ug in the Bitcoin software鈥� which it said was intrinsic to the virtual currency鈥檚 protocol and not limited to Mt. Gox. Bitcoin prices plunged 21 percent on the news Monday, before recovering slightly. The Bitcoin Foundation shot back, arguing that the problem was Mt. Gox鈥檚 fault, not Bitcoin鈥檚.
鈥淭he issues that Mt. Gox has been experiencing are due to an unfortunate interaction between Mt. Gox鈥檚 implementation of their highly customized wallet software, their customer support procedures, and their unpreparedness for transaction malleability, a technical detail that allows changes to the way transactions are identified,鈥� foundation spokesman Gavin Andersen said in a statement Monday.
But the Bitcoin Foundation has its own credibility problem. Its vice chair, Charlie Shrem, was arrested two weeks ago and charged with money laundering and selling bitcoins to users of Silk Road, an online black marketplace.听
Those reputational issues only serve to compound Bitcoin鈥檚 inherent volatility 鈥� absent any true regulating body, its value hinges entirely on speculation and public perception. Amid recent troubles, Bitcoin鈥檚 value has been nearly cut in half over the past few weeks.
听What鈥檚 Bitcoin鈥檚 future?
Mr. Williams argues that if Bitcoin is to succeed, it will have to abandon the feature that made it so appealing to many investors in the first place: a lack of regulation. After the 2008 financial crisis, he says, many of the world鈥檚 Central Banks were seen as mismanaging their nations鈥� currencies. 鈥淏itcoin is regulated by a computer and not tied to any sovereign nation, and that idea has appeal鈥� to Libertarians and others with anti-government leanings. 鈥淚t鈥檚 gained a following partly because it seems to show us how we can do without money issued by the state,鈥� he says.
The catch, is that national governments are a driving force in keeping money stable. 鈥淎ny force that tries to corrupt that is going to meet resistance unless they are willing to be regulated,鈥� he says.
Bitcoin 鈥渉as potential to benefit the financial markets, but it has to do it in a way that鈥檚 beneficial to society as a whole, not just speculators. I don鈥檛 think the creators ever thought they鈥檇 get to this level of acceptance and awareness so quickly. But to be successful they鈥檙e going to have to be regulated, brought under sovereign power, and under the direct control under central banks. To be successful, it鈥檚 going to have to come under the power it has railed against.鈥�
That regulatory push to either stamp out virtual currency or tighten controls so it is less attractive for criminal use is already underway in several countries. National banks in Russia, China, and Finland have already banned merchants from accepting Bitcoin payments. Canada announced yesterday that it will be tightening its rules surrounding virtual currencies, and in the US, regulators are drawing up rules to help govern virtual currency investments and prevent money laundering.
"I see [virtual currencies] offering great opportunities for improving the efficiency of our capital markets, but they need to be regulated and tightly controlled,鈥� Williams says.
