Rumours of the death of Bitcoin have been greatly exaggerated.
By now, you've probably read numerous headlines about the (possibly temporary) shutdown of Mt. Gox, the world's oldest online Bitcoin exchange, after allegedly losing 744,408 BTC to theft. (Fun fact: Mt. Gox is an acronym that stands for Magic: The Gathering Online Exchange, which tells you a little about its origins).
It's worth noting that, prior to going offline this week, the Japan-based Mt. Gox was no longer the largest Bitcoin exchange by volume. That title goes to Slovenia's Bitstamp. And due to a series of past troubles, Mt. Gox wasn't exactly in good standing with many in the Bitcoin community.
Obviously, it's a bad time for anyone who had funds stored at Mt. Gox. But if the Chicago Board of Trade went kaput today, would we be talking about the death of futures and options?
On Monday night (February 24), some of the most prominent Bitcoin industry leaders—a cofounder of Coinbase, and the CEOs of Kraken, Bitstamp.net, BTC China, Blockchain.info, and Circle—issued a joint statement stressing that the problems at Mt. Gox are, well, problems at Mt. Gox, and not problems affecting the digital currency itself:
This tragic violation of the trust of users of Mt.Gox was the result of one company’s abhorrent actions and does not reflect the resilience or value of bitcoin and the digital currency industry. There are hundreds of trustworthy and responsible companies involved in bitcoin. These companies will continue to build the future of money by making bitcoin more secure and easy to use for consumers and merchants. As with any new industry, there are certain bad actors that need to be weeded out, and that is what we are seeing today.
Mt. Gox's woes have contributed to a slide in the price of Bitcoin. CoinDesk's Bitcoin Price Index dropped to US$418.76 today (February 25), but it's recovered somewhat to US$516.58 at time of writing.
Andreas Antonopoulos, the chief security officer at Blockchain and an outspoken critic of Mt. Gox, has in the past called on people to keep their bitcoins away from the headline-making exchange. In a statement today, he said:
We will face a storm of negative media, conflating Gox with bitcoin and hurting the bitcoin community in the short term. First and foremost, we must all be thinking of the people affected by the loss of funds in Gox and I extend my heartfelt sympathy to them all. We must honestly and directly address the concerns of all users and interested parties, emphasizing the difference between a decentralized trusted system (bitcoin) and the failures of a single company that did not use the trust mechanisms offered by bitcoin’s blockchain technology.
Gox represents a the failure of a poorly managed exchange that had full centralized control of customer funds, in custodial accounts, off the bitcoin blockchain. By keeping the funds off the blockchain, Gox removed the protections of transparency and end-user control and replicated the model of a centralized bank without any of the controls and oversight such institutions require.
There is a better way: bitcoin companies can maintain customer funds on the bitcoin blockchain with full transparency and accountability. We can offer client-side key-management solutions that put full control in the hands of the customers and remove them from the control of custodians, be they exchanges, markets or web-wallets. If a bitcoin company keeps custodial access to customer funds (holds their keys), then they can and must offer cryptographic-proof of solvency through the blockchain.