3 Silver Linings in Bitcoin's Current Problems

Friday, 21 Feb 2014 06:39 AM

By Ed Moy

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This year has not started well for bitcoin. A couple of events have created a growing public perception that bitcoin is not ready for prime time. While the digital cryptocurrency may be down, it is not out. Detractors, hold off on popping the champagne corks just yet.

Trouble began in late 2013 when regulators shut down Silk Road, a website suspected of being the eBay of illegal transactions, and found a big cache of bitcoins. To add insult to injury, a Bitcoin Foundation member was arrested early in 2014 on alleged money laundering charges. This further solidifies the fear that bitcoin's pseudonymous nature makes it easy to fund illegal activities and launder money.

Then this month, Mt. Gox, the world's largest bitcoin exchange, suspended all bitcoin withdrawals. Initially blaming a bug in the bitcoin software, this was the latest in a string of problems for the exchange including customer complaints of slow withdrawal requests, the U.S. government seizing $5 million of Mt. Gox funds over alleged noncompliance of money laundering laws and a $75 million lawsuit from a former business partner.

Not surprisingly, MasterCard's CEO crowed recently. He was likely relieved that a potential low cost challenger to the credit card duopoly is dying of self-inflicted wounds and confident that they can continue raking fees of 3 to 4 percent on all transactions.

But to focus on these problems ignores three silver linings.

First, bitcoin's public register coupled with its pseudonymous nature helps regulators and law enforcement catches the bad guys doing bad things. Cash has no such register and illegal transactions are usually totally anonymous. Further, regulators and law enforcement seem to have enough basic tools in their current regulatory arsenal to carry out their jobs. New regulations and laws may eventually be needed, but what is on the books seems to be working to catch some infractions.

Second, the technical problem that caused Mt. Gox to suspend bitcoin withdrawals was due to Mt. Gox, not bitcoin. As early a 2011, bitcoin developers warned that companies might be vulnerable to attack if they did not customize its software properly to account for bitcoin's code written for transaction verification. Successful attacks prevented some transactions from confirming. Mt. Gox chose the cheap and easy route and paid the price. The bitcoin development team is working with the exchanges to develop a fix.

Third, regardless of whether Mt. Gox survives, there are other exchanges that will take its place. It rose to the top because it was effectively the only place to go. But because of competition, customers have been migrating to other exchanges that have better customer service, more resources and improved technology. The distinct advantage that bitcoin's open-source technology platform offers is that its success is not dependent on any one company.

Is this the beginning of the end of bitcoin? I am not sure, but I would not bet on it. I am even more hopeful that this is not the end of digital currency but instead just the beginning.

© 2014 Moneynews. All rights reserved.

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