As Bitfinex, the digital-currency exchange that suffered a debilitating hack this week, tries to determine if it can go on, a wider question is again being asked about bitcoin: Is it really a better mousetrap?
On Tuesday, Hong Kong-based Bitfinex was the victim of a hack that led to the theft of about 200,000 bitcoins worth $65 million from its digital vaults. It was one of the largest hacks in the currency’s history.
Bitcoin has lost about 12% of its value this week. The exchange was forced to halt operations and is working to retrace the hack and recover the funds. It also expects to reopen its site on a limited basis sometime Friday.
For the bitcoin industry and investors curious about it, a more fundamental questions is emerging: Has bitcoin’s original premise been compromised? If the idea was to give society a secure currency that couldn’t be tampered with by governments or fee-happy banks, what does it mean that bitcoin still seems far less safe than putting put money in those very banks?
Bitfinex, meanwhile, is wrestling with the issue of whether its so-called custodial business model may have aided the hacker. The company had said it deployed higher-level security measures, but like all bitcoin companies it must deal with the irreversible nature of bitcoin transactions that makes it a target for hackers.
For the general public, though, it just again looks like bitcoin and the army of anonymous technologists behind it can’t guarantee funds are secure. That is a problem for a platform striving for mainstream acceptance.
“It’s an understatement to say this doesn’t help,” said Jerry Brito, the director of Washington, D.C.-based CoinCenter.
Bitcoin was launched in 2009 as an alternative currency, one that didn’t require government support or financial middlemen to clear and confirm transactions. It does this through an open ledger that also serves as an official record that can’t be altered after the fact.
During the financial crisis, bitcoin gained attention as an alternative to a system widely believed to be broken. But its own growth over the years has been hampered by a string of frauds, Ponzi schemes, and thefts.
All entities that operate online—from bitcoin businesses to J.P. Morgan Chase & Co., Target Corp., and the U.S. government—have to worry about getting hacked. The central bank of Bangladesh lost $81 million in February when a hacker compromised its accounts at the Federal Reserve Bank of New York.
More than the details of the security breach, though, the Bitfinex hack illustrates for consumers one stark difference between bitcoin as a store of value and traditional banks. For bitcoin, the immutability of the public record is paramount. Once a transaction is recorded, it is set in digital stone, no matter what. It is a core principle of the people who developed the idea.
That may build trust, but the problem is thefts can’t be undone as easily. In the traditional finance world, consumer fraud transactions are routinely undone and errant trades erased with the victim not having to shoulder the financial burden.
Traditional banks also offer one backup that bitcoin doesn’t: deposit insurance ultimately backed by the federal government and the willingness and resources to reverse fraudulent transactions.
Bitcoin doesn’t have either of those, and almost certainly won’t anytime soon. One bitcoin exchange, Coinbase, has private insurance, but the idea of a public, Federal Deposit Insurance Corp.-style insurance plan doesn’t sit well with bitcoin’s libertarian fans.
Reversing transactions is technically feasible, but also politically toxic. A bitcoin rival, Ethereum, in June implemented a “fork” of its software to reverse a large theft of funds, but the controversial measure has riven the platform’s supporters in two.
The challenge for bitcoin remains building an infrastructure sturdy enough to repel hacks and fraud, while maintaining the currency’s independent roots.
“We need standards set by the industry that take into account the regulatory and cultural environment,” said Joseph Colangelo, the executive director of Consumers’ Research, a consumer-focused trade group involved in bitcoin. “There are a hundred different ways to skin the cat here.”
By: Paul Vigna (The Wall Street Journal).
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