Mt. Gox, the oldest Bitcoin exchange recently shut down, leaving customers high and dry. This Tokyo based company that once dominated the crypto-currency trading scene is reported to be filing for bankruptcy protection. Indications are that they are insolvent, with more than 744,000 Bitcoins missing worth around $423 million at current rates. At a press conference held on Friday night, Mt. Gox CEO Mark Karpeles appeared in front of the camera bowing deeply. He spoke in Japanese, claiming that a “weakness in the system caused the bitcoins to disappear.” This Mt. Gox meltdown shook up the Bitcoin community and controversy is still raging over what really happened. A class action lawsuit was filed in the US against Mt. Gox.
The actual cause of those vanished coins remains unknown. It is not clear whether they were confiscated, stolen or voided by technological flaws. Behind the wall of secrecy and obfuscation, it seems possible that a massive case of theft or fraud was involved. Rick Falkvinge, founder of the first Pirate Party in Sweden wrote a comprehensive timeline of Mt. Gox's actions offering forensic analysis of possible management's complicity in this insolvency.
The dramatic story unfolded quickly when Mt. Gox indefinitely ceased withdrawals on February 7th. They then claimed it was caused by a transaction malleability - a known technical issue, thereby blaming the company's problem on Bitcoin. Baseless rumors about a flaw in the Bitcoin protocol quickly spread and were swiftly debunked by many developers. As protesters called for an investigation into where all their bitcoins had gone, the mainstream media conflated this one company's failure with the idea that the whole currency was on the verge of collapse. Some urged international regulation of crypto-currency and Japan's Finance Minister Taro Aso told reporters he considers this a sign of Bitcoin's imminent collapse.
Let's step back for a moment from all the reactionary hype and gain some perspective. The Mt. Gox implosion sounds very familiar. In March 2013, a crisis of forced austerity hit the small Mediterranean island nation of Cyprus. When the government closed the country's second largest bank in return for an international bailout by Eurogroup, people rushed to protect their savings, but the bank had already raided their accounts, outright stealing the citizens' money. The Cypriots got Goxed.
In the US, the 2008 financial crisis and bailout of Wall Street banks that followed was basically a theft of close to a trillion dollars from the US taxpayers. The Americans got Goxed. This was papered over with more debt and money printing.
The Ukrainian currency just fell by 50.14% against gold in 2014 and was down by 28% in the last four days alone. And now, according to the new Ukrainian Prime Minister Arseniy Yatseniuk, withdrawals of about $70 billion were made over the last three years amounting to an outright theft by those in power under a veil of secrecy. The Ukrainians just got Goxed.
Recently, Argentina's national currency fell in the steepest loss since the country's 2002 economic collapse. This ongoing debasement of currencies like the Argentinean Peso along with the parabolic expansion of debt bubbles has ushered in another wave of currency meltdowns. With HSBC Bank limiting customer's cash withdrawals, these crises of the periphery are now moving closer to the core of the Western economic hegemony. As publisher of The Economic Collapse Blog Michael Snyder pointed out, the global economic crisis is starting to catch fire.
How is all this related to the Mt. Gox collapse? The mainstream media has been painting it as a fundamental failure of Bitcoin itself, yet this crisis runs much deeper - into the current and structure of the fiat and central banking model. It is now becoming clear that instead of following basic Bitcoin security and transparency practices, Mt. Gox was operating in an opaque centralized model more akin to existing banking systems.
The Mt. Gox crash mirrors the inherent tendency toward corruption of the centralized financial system itself, where States and banks can regularly siphon off trillions of dollars from the hard work and savings of ordinary people. For years now we have all been getting Goxed, the only difference with this one is there will be no government bailout or debasing the currency. The whole world has been Goxed and what we are seeing now is a crisis of the centralized financial system.
Bitcoin responds to this crisis of legitimacy. The underlying technology of the Bitcoin currency is the blockchain, which offers a decentralized solution to this flawed and corrupt global economy. As a distributed asset ledger, the blockchain creates consensus through proof of work. It keeps track of every transaction processed in the Bitcoin network and exists as a public record for all to see. The importance of this fundamental Bitcoin innovation can be understood through looking at the specific failure of Mt. Gox, especially in the apparent lack of understanding or fidelity with Bitcoin's distributed trust system.
On Feburary 24, 2014, a leaked internal document titled Crisis Strategy Draft indicated there has been a leak from Gox's cold storage (offline form of storage). Current chief security officer at Blockchain.info, Andreas Antonopoulos pointed out the contradiction in their use of the term, as a cold storage cannot leak. He noted this is "either a stunning misrepresentation of their security or an outright lie”.
Antonopoulos described how Mt. Gox represents the “failure of a poorly managed exchange that had full centralized control of customer funds, in custodial accounts, off the bitcoin blockchain”. He emphasized how the company did not use the “the trust mechanisms offered by bitcoin’s blockchain technology” and that this failure is not reflective of the “decentralized trusted system (bitcoin)”. He continued:
“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”.
So how does this Bitcoin trust model differ from the old centralized trust model? Derek Khanna, columnist for Politix elaborated Bitcoin's trust model, which articulated by its mysterious creator Satoshi Nakamoto is a “system for electronic transactions without relying on trust”. Khanna also described it as “an option to 'trust in math' rather than politicians or bankers to manage currency and verify transactions”. He summed up by saying the “digital currency crowd aptly counters the US motto, 'In God We Trust,' with 'In Math We Trust.'”
Bitcoin's algorithmic asset ledger allows those who agree to trust the consensus-based proof of transaction to interact in a manner where both parties can trust one another without needing to trust anyone. Antonopoulos describes Bitcoin's seismic shift from the old trust model, explaining its security model as “trust by computation”.
In the traditional model of current banking and payment systems, Antonopoulos notes “trust is achieved through access control, by carefully vetting participants and excluding bad actors”. This requires those systems to be closed. Bitcoin on the other hand ensures trust by “requiring participants to demonstrate proof-of-work, by solving a computationally difficult problem”. Unlike centralized trust systems, he shows how this new model does not require trust from anyone, making the network open to all. This is perhaps the most inclusive monetary system humanity has ever seen. Antonopoulos further illustrates that:
“Trust does not depend on excluding bad actors, as they cannot 'fake' trust. They cannot be pretend to be the trusted party, as there is none. They cannot steal the central keys as there are none. They cannot pull the levers of control at the core of the system, as there is no core and no levers of control”.
In the current hierarchical banking system, third party authority depends on trust in that authority, stemming from a fundamental distrust of common people manifested in exclusive access. The use of this system is enforced by coercion or perceived necessity. By eliminating the need for this centralized authority, the public blockchain makes us free from the institution of exclusive trust. Mt. Gox apparently further violated Bitcoin's trust by computation by heading down the slippery slope of a fractional reserve banking style.
The Mt. Gox saga seems to reflect the most problematic aspects of the centralized financial trust model and the deepening crisis of legitimacy it has spawned. It has been a very hard but invaluable lesson for the cryptocurrency world. Trying to fit Bitcoin in the framework of trust vested in a powerful authority shows a basic lack of understanding of this innovation.
The revolutionary change brought by blockchain-based cryptocurrency is in how it eliminates the need for financial institutions or third parties to act as intermediaries for basic transactions. We now have digital cash we can send in any amount to anyone in the world instantly without asking permission or having account holds, exorbitant fees or charge-backs. With a simple application on a smart phone, basically everyone can now control their own money and become their own bank.
In light of the Mt. Gox meltdown, prominent entrepreneur Marc Andreessen indicated how he sees the collapse of Mt. Gox as just one isolated bad apple and its death actually means progress for Bitcoin. He clarified that this was a crisis of an outmoded exchange, equating it with the MF Global fiasco a few years ago. As usual, the predictable economists, politicians and pundits crowed about the 'end of Bitcoin', while the prices in all the functioning public exchanges remained quite stable and confidence in the currency itself continued unshaken.
Bitcoin has time and again been fiercely attacked and each time has shown powerful resilience. The demise of Mt. Gox is spawning the usual smear pieces from corporate and government talking heads, but this event actually will likely open an even more hopeful chapter for this young currency. This will weed out unreliable and incompetent companies, making way for serious entrepreneurs.
Mainstream reactions to the fall of faulty Mt. Gox show how people are still steeped in the traditional centralized model. It will take some time for a majority to truly understand the revolutionary effect this technology is bringing, just as it took a while for the Internet to be understood and accepted.
From Cyprus to Buenos Aries, from Kiev to Tokyo, what we are seeing around the world is a crisis of legitimacy in the centralized trust model of authority. Perhaps the Mt. Gox implosion is giving everyone an opportunity to reexamine our taken for granted ideas regarding money and trust.
Whether it is JP Morgan's Jamie Dimon or Mt. Gox's Mark Karpeles, the whole world has been getting Mt.Goxed for years! Good news is we now have an alternative to that system. Bitcoin's blockchain technology allows us to say thanks, but no thanks to the old paradigm. We no longer need bankers, CEOs and politicians to control our lives and our assets. We no longer need to allow illegitimate authority to control what is ours behind closed doors. With open source distributed asset ledgers, now anyone can keep their money in their own hands.
Edit: Jamie Dimon’s name was originally misspelled and is now corrected.