Investors call for protection after second Bitcoin collapse

Bitcoin investors and entrepreneurs are calling for regulation of the digital currency after the collapse of two major platforms handling the cryptocurrency in less than a week.

The Canadian Bitcoin bank Flexcoin said flaws in its software allowed hackers to pull off a digital heist on Sunday, making off with all 896 coins stored on the site.

The company said in a statement: "As Flexcoin does not have the resources, assets, or otherwise to come back from this loss, we are closing our doors immediately."

It follows the collapse on Friday of one of the world's leading Bitcoin exchanges, Mt Gox. The Tokyo-based company filed for bankruptcy protection and admitted it had lost around 850,000 Bitcoins due to hacking, worth around £330m.

Tom Robinson, director of the UK Digital Currency Association, said the fate of both businesses underlined the need for regulation of Bitcoin operators.

He warned: "Regulation is needed, both to protect consumers but also to bring legitimacy to digital currencies."

On Monday Her Majesty's Revenue and Customs boosted the currency's hopes of legitimacy when it said it would tax Bitcoin as a foreign currency, rather than as a voucher as it had been classified before. The UKDCA, which represents around 20 businesses dealing with the cryptocurrency, has called for the City watchdog, the FCA, to follow the tax authority's lead and clarify its position on Bitcoin.

But Mr Robinson added: "The danger is that heavy-handed regulation stifles innovation in this sector – the risks need to be weighed up against the huge potential benefits the technology brings."

Kolin Burges, a London Bitcoin trader who lost around £200,000 in the collapse of Mt Gox, wants more done to protect investors. He said: "There should be a degree of enforced regulation to ensure some minimum standards of protection of customer cryptocurrency deposits."

Unlike traditional financial industries Bitcoin is largely unregulated, and they are bought and sold independently of central control. While many see this as the digital currency's greatest advantage, it leaves it open to abuse from hackers as well as badly run businesses.

Mr Burges said: "This is a good opportunity for new exchange auditing businesses, which could certify the standards of individual exchanges. This could replace government regulation in countries who do not wish to regulate."

In the short term, however, more Bitcoin businesses could go under due to hacking or ineptitude. Emily Spaven, of the digital currency news service CoinDesk, warned: "I don't think it's going to be the last time we see something like this happen. I think regulation is the way forward."