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Bitcoin Exchange Mt. Gox Files for Bankruptcy Protection; May Have Broader Implications for Digital Currency Industry

Duane Morris LLP - Philadelphia Office

March 7, 2014

Previously published on March 3, 2014

On February 28, 2014, international Bitcoin exchange Mt. Gox filed for bankruptcy protection in Tokyo, capping what is likely the most tumultuous month yet in the history of the controversial virtual currency. Mt. Gox—the largest and most prominent Bitcoin exchange in the world until last week—cited security weaknesses that allowed hackers to steal 750,000 of its customers' Bitcoins, in addition to 100,000 of its own. The total losses attributed to the security breaches and alleged hackings are reportedly worth a half-billion dollars. In its bankruptcy filing under Japan's Civil Rehabilitation Law, Mt. Gox claims 6.5 billion yen, or around $64 million, in liabilities and 3.84 billion yen, or around $38 million, in assets.

All Bitcoin withdrawals from Mt. Gox have been halted since February 7, with the company initially citing a software bug. Recently, however, Mt. Gox released statements attributing the lockout to security concerns. Last week saw a series of fast-moving developments signaling the exchange's imminent demise, as (i) its CEO resigned from the board of the Bitcoin Foundation; (ii) its Twitter account was wiped clear; and (iii) it froze all accounts and its website went offline entirely.

Bitcoin's volatility and soaring values, a source of disapproval among skeptics, is viewed by some investors as opportunity. Earlier this month, the Winklevoss twins, Cameron and Tyler (once known primarily for their legal disputes with Mark Zuckerberg over the creation of Facebook, as depicted in the 2010 film "The Social Network"), unveiled their own Bitcoin financial index, the Winkdex. However, Mt. Gox's security breach is a significant hit to the fledgling virtual currency. Bitcoin's defenders maintain that Mt. Gox's collapse resulted from problems limited to the company itself and were not reflective of the entire currency's legitimacy. However, as details emerge from its bankruptcy case, the true cause of Mt. Gox's collapse may be revealed, which may have broader implications for the entire digital currency industry.


The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

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