Hack attack pushes Bitcoin to the brink

Stephen Foley
Tuesday 21 June 2011 00:00
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Bitcoin, an online currency beloved of libertarians and technophiles, which had been threatening to break into the mainstream, was facing the worst crisis of its two-year existence last night after hackers brought down its biggest exchange.

The attack, an apparent attempt to steal the contents of users' online accounts and convert them into real money, is the latest in a string of disasters to hit Bitcoin in the past few weeks, raising questions over whether the currency has a future.

In the UK, supporters of Bitcoin made an urgent appeal to the Financial Services Authority to regulate the largest London-based exchange, so as to reassure people that using Bitcoin is safe. "Unregulated businesses don't usual cry out for regulation," said Donald Norman, co-founder of the exchange Britcoin. "But because we are unusual, and because we are dealing with people's money, and because of all the scary stories around Bitcoin, we would like nothing more than to have a government authority looking into our accounts – especially now."

The exact nature of the attack on the Japan-based Mt Gox exchange was not immediately clear. Mark Karpeles, who runs Mt Gox, said attackers gained access to a computer that had details of all account users and their encrypted passwords. As of last night, the company was still running "intrusion tests", as rumours swirled about how much money might have been stolen in the heist.

Bitcoin was invented as an open source project in 2009 as a decentralised alternative to real world currencies. By setting an absolute limit on the amount of Bitcoins that could be created, its adherents believe, the currency could one day become a "gold standard" against which government-operated currencies could be valued. The currency could also become an easy way to conduct commerce online, away from expensive taxation, regulation and bank fees.

As of 2pm, New York-time on Sunday, the number of Bitcoins in existence were worth more than $100m (£61.7m), on electronic exchanges that valued them at $17.50 apiece. Moments later, the price appeared to crash to just pennies, because of irregular trading on Mt Gox.

The latest disaster will fuel the online debate over whether Bitcoin can become a serious currency, or is simply too volatile. As mainstream interest began to take off last month, the US dollar-value of Bitcoins surged 1,000 per cent. Earlier this month, it crashed by 30 per cent on a single day.

Hundreds of small online merchants and Bitcoin adherents have started to accept the currency as payment for goods and services, though no major retailers do.

The currency has started to attract the attention of politicians in the US after reports that Bitcoins have been used to purchase illegal drugs. Last month, US Senator Chuck Schumer called Bitcoin "an online form of money laundering used to disguise the source of money".

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