Fragility Of Bitcoin Uncovered By Glitch; Problem is a Technical Issue Relating to Third-Party Transactions

Fragility Of Bitcoin Uncovered By Glitch

Problem is a Technical Issue Relating to Third-Party Transactions

ROBIN SIDEL And MICHAEL J. CASEY

Updated Feb. 10, 2014 7:44 p.m. ET

Prices of bitcoin

have recently fluctuated on factors ranging from government regulation to the virtual currency’s acceptance by real-world retailers. Now add another driver: perceived technical glitches.

A leading bitcoin exchange Monday blamed a long-unresolved technical issue for its decision to abruptly halt customer withdrawals last week. Prices of bitcoin were sent reeling to their lowest level in two months Monday—quickly falling to below $550 from Friday’s close of $703.57, according to an index compiled by CoinDesk, a bitcoin-data provider based in London. By midafternoon in London, the index price had recovered partly, to around $650. However, that rebound was in part explained by Coindesk removing Mt. Gox’s prices from its index, which in recent days had been weighed down by lower quotes from the troubled Tokyo-based exchange.

The exchange, Tokyo-based Mt. Gox, said the software issue could affect all bitcoin transactions to third parties and needed to be addressed in cooperation with the core development team of the payment system. Mt. Gox had said Friday an increase in withdrawal requests “has hindered our efforts on a technical level.” It said Monday it wouldn’t recommence withdrawals until the issue was addressed.

In a statement Monday, Mt. Gox described the problem as a “defect” with a procedure used to identify transactions in the giant digital ledger that records all bitcoin activity. There is a delay between when a transaction is initiated and when it is confirmed in the ledger; during the gap, someone could slightly alter the transaction and thus change its identifying number. Mt. Gox appears to have used that number to keep track of its transactions with customers.

Technical issues at bitcoin exchange Mt. Gox shouldn’t affect the broader use of the virtual currency, said the chief scientist of the Bitcoin Fundation, a not-for-profit organization funded by bitcoin-related businesses.

In an interview Monday, said Gavin Andresen, chief scientist at the Bitcoin Foundation, “Other exchanges may or may not have an issue. I hope that Mt. Gox is the only exchange that falls into this.”

Mr. Andresen played down how widespread the fallout may be from Mt Gox’s issue. “Basically, we think they are overstating it a bit,” said Mr. Andresen. “It is really an unfortunate interaction between what is arguably a flaw in the protocol—I would could it a quirk, not a flaw—and Mt. Gox’s [digital] wallet and their customer support procedures.”

Mr. Andresen said that the recent issue of “transaction malleability,” which Mt. Gox cited as a reason that it halted withdrawals from its exchange on Friday, is well known. Transaction malleability refers to the capacity to make small alterations in the digital signatures used by computers inside the bitcoin network to verify transactions. Those shifts have the potential to alter the way transactions are represented to third-party entities such as exchanges, confusing their understanding of what has or hasn’t occurred.

In online forums Monday, many bitcoin enthusiasts said the virtual currency remained robust and that the solution was for Mt. Gox to change the way it tracked transactions.

It wasn’t immediately clear whether other bitcoin exchanges used similar methods. Mt. Gox representatives weren’t available for comment beyond the statement.

Oleg Andreev, a Paris-based software developer and bitcoin enthusiast, said in an email interview that Mt. Gox’s reliance on the transaction identifier meant some users could make minor tweaks to their transactions—small enough that the transaction goes through, but big enough to change the identifier—and claim that they never got their money.

“One way or another, it creates a lot of confusion for Mt. Gox and initially may even lead them to sending the same money twice, or multiple times to the same user,” Mr. Andreev said.

Wild swings in the price of bitcoin aren’t uncommon. Prices tumbled in December after China’s central bank said that financial institutions shouldn’t provide bitcoin-related business such as deposits, custody services or collateral business. The volatility in the price of bitcoin has created confusion about the virtual currency’s legal status. The U.K. is currently weighing how to treat virtual currencies for taxation purposes.

Last week, Russia’s general prosecutor said on its website that the Bank of Russia and law-enforcement authorities are working together to tighten regulations to protect the property rights of Russian citizens.

“Anonymous payment systems and crypto-currencies, including the most popular one, bitcoin, are money surrogates and cannot be used by citizens or legal entities,” the general prosecutor said in a statement, posted Feb. 6.

Russian law says the ruble is the only official currency and using “money substitutes” is illegal, the statement added.

The move comes as bitcoin falls under increasing scrutiny across the world amid concerns it can be used for illegal activities. Bitcoin is an increasingly popular currency for electronic transactions, and users say they are cheaper and faster than using credit cards or money transfers.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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