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 In the attacks - known as distributed denial of service attacks -
hackers overwhelmed bitcoin exchanges by sending thousands of
phantom transactions. At least three exchanges were forced to halt
withdrawals of bitcoins on February 7, including Mt. Gox, which was
the largest at the time.
Mt. Gox never resumed service before going dormant on Tuesday,
leaving customers unable to recover their funds. The Tokyo-based
company's chief executive, Mark Karpeles, said earlier on Wednesday
that he is working with others to solve the problems.
"As there is a lot of speculation regarding Mt Gox and its future, I
would like to use this opportunity to reassure everyone that I am
still in Japan, and working very hard with the support of different
parties to find a solution to our recent issues," Karpeles said in a
statement posted on the Mt. Gox website.
A spokesman for Bharara declined to comment.
Bitcoin, a form of electronic money independent of traditional
banking, relies on a network of computers that solve complex
mathematical problems as part of a process that verifies and
permanently records the details of every bitcoin transaction that is
made. At current prices, the bitcoin market is worth about $7
billion.
Investors deposit their bitcoins in digital wallets at specific
exchanges, so the Mt. Gox shutdown is similar to a bank closing its
doors - people cannot retrieve their funds.
While proponents of bitcoin hail its anonymity and lack of ties to
traditional banking, regulators have become increasingly interested
in the digital currency due to its usage by criminal elements and
its volatile nature.
It has been a rough month for bitcoin investors, with cyber attacks
on several exchanges, a sharp fall in bitcoin's value, and rising
pressure from regulators. Bitcoin's price varies by exchange, but
the losses were most dramatic on Mt. Gox, where it fell to about
$135 from $828.99 before February 7.
"Mt Gox has been broken and it was obvious there was something
really bad going on there for nearly a year. They were processing
withdrawals very slowly and generally being very opaque about what
was going on there," said Mike Hearn, a bitcoin developer in Zurich,
Switzerland.
A second source familiar with the case said U.S. federal law
enforcement is investigating Mt. Gox. A third source said the U.S.
Federal Bureau of Investigation was monitoring the situation.
Japan's Finance Ministry and police are also looking into the abrupt
closure of Mt. Gox, according to the Japanese government's top
spokesman.
"MALLEABILITY"
Bitcoin has gained increasing acceptance as a method of payment and
has attracted a number of prominent venture capital investors,
including Andreessen Horowitz and Union Square Ventures.
The digital currency has also caught the eye of hackers. The recent
cyber attacks exploited a process used by some bitcoin exchanges
that introduced "malleability" into the code governing transactions,
experts said.
Simply put, this allowed hackers to slightly alter the details of
codes to create thousands of copies of transactions. These copies
slowed the exchanges to a crawl, forcing them to independently
verify each transaction to determine what was real and what was
fake.
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A document circulating on the Internet purporting to be a crisis
plan for Mt. Gox, said more than 744,000 bitcoins were "missing due
to malleability-related theft," and noted Mt. Gox had $174 million
in liabilities against $32.75 million in assets. It was not possible
to verify the document.
If accurate, that would mean approximately 6 percent of the 12.4
million bitcoins minted would be considered missing.
Developers are working on fixes to bitcoin's software to guard
against cyber attacks, though many larger service providers have
already implemented such changes, according to Gregory Maxwell, one
of the bitcoin software's core developers.
He said some malleability in the software protocol was necessary
- for example, in transactions where multiple people can put in
money, but the transaction is not valid until enough funds are
contributed.
"None of these fixes are especially complicated, but because the
correctness of the software is important we use a conservative
release process that avoids rushing anything out," Maxwell said,
adding that the bulk of the recent work on the software is being
done by four people.
BITSTAMP
Jacob Dienelt, who trades bitcoins and sells paper bitcoin wallets,
said people he knows in the bitcoin community in New York stopped
using Mt. Gox when the exchange halted dollar withdrawals several
months ago and said all withdrawals had to be in bitcoin. Dienelt
said has not been subpoenaed.
With Mt. Gox's shutdown, Bitstamp has handled the most volume in the
last two days, with more than 165,000 U.S. dollar transactions,
according to Bitcoincharts.
Bitstamp had temporarily halted customer withdrawals earlier this
month, citing "inconsistent results" and blaming a denial-of-service
attack.
The price of bitcoin was lately at $588 on Bitstamp, up about 7
percent on the day.
"Right now is a sweet buying opportunity. I don't think you're going
to see bitcoin go this low for awhile - if ever again," said Jordan
Kelley, chief executive of Robocoin, which launched the world's
first Bitcoin ATM in Vancouver, Canada, in the fall. "The more that
bitcoin is on the front pages, the more that people are discussing
it and educating one another, the better for the currency."
Kelley said Robocoin has not been subpoenaed in the U.S. regulatory
probe; nor has New York-based exchange Coinsetter, according to a
spokesperson.
Bitstamp did not respond to requests for comment.
(Reporting by Emily Flitter in New York and Jim Finkle in Boston;
Additional reporting by Chris Francescani in New York and Julie
Gordon in Toronto; Writing by David Gaffen; Editing by Tiffany Wu)
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