“This could be the end of Bitcoin”: leak shows massive theft at Mt. Gox, price falls below $500 amid pleas for calm

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The Bitcoin community is on edge as a leaked document (below) shows that the Mt. Gox exchange, a longtime pillar of the virtual currency, is missing hundreds of millions of dollars worth of customer money and is heading for bankruptcy.

Meanwhile, the leaders of high profile Bitcoin companies, including Coinbase and Circle, issued a public letter promising to re-establish the trust “squandered” by Mt. Gox even as the value of bitcoin continues to fall. As the Winkdex shows, it’s off more than 17 percent in the last 24 hours (Update: the price has stabilized around $490 as of Tuesday morning and was back above $500 by noon):

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These are just some of the facts that came to light during a fast-moving series of events on Monday that also saw Mt. Gox’s website and Twitter account go blank, and that come on the heels of the CEO of Mt. Gox leaving the Board of the Bitcoin Foundation.

Taken together, the events represent an existential crisis for Bitcoin at a time when the virtual currency is starting to get mainstream consumer adoption, and governments are granting it cautious approval. As the leaked document, which is a crisis management guide for Mt. Gox, noted:

with Bitcoin/crypto just recently gaining acceptance in the public eye, the likely damage in public perception to this class of technology could put it back 5~10 years, and cause governments to react swiftly and harshly. At the risk of appearing hyperbolic, this could be the end of Bitcoin, at least for most of the public.

The provenance of the document, titled “Crisis Strategy Draft” (embedded below) and leaked by a Bitcoin blogger, is unclear but a source has confirmed to Gigaom that it is authentic. It says that Mt. Gox has lost 744,408 bitcoins due to theft, and includes this table that says the company is in the red for tens of millions of dollars in fiat currencies (such as dollars or yen) as well as millions of bitcoins:

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The document also contains slides that propose ways to reassure the public, such as the orderly resignation of CEO Mark Karpeles and his replacement by a team of technocrats. It also states that the “damage has already been done” as a result of “transaction malleability” — a weakness that permits bad actors to tamper with transaction records (Mt. Gox had been alerted about the vulnerability but failed to fix it, leaving its ledgers a muddle).

As with so many things Bitcion, it’s hard to tell what’s really going on here: Who stole the Mt. Gox money? And are they, as has happened in past crashes, exploiting the current crisis? Conversely, are figures like Circle’s Jeremy Allaire or the Winklevoss twins, who own millions of bitcoins, stepping in to halt the currency’s current slide — much like a central bank would do?

I’ll report more soon but, for now, it’s enough to repeat my recent argument (“Is this any way to run Bitcoin?”) calling for proper governance from the Bitcoin Foundation and other self-styled leaders of the virtual currency. They better hurry before this thing gets even worse.

Update: Fortune reports that Second Market is launching a New  York-based bitcoin exchange; the company’s CEO, Barry Silbert, holds significant amounts of bitcoin. Meanwhile, the Mt. Gox site is finally back up, but now only consists of a brief statement, saying “a decision was taken to close all transactions for the time being in order to protect the site and its users.”

Late Tuesday morning, New York state’s head financial regulator, Benjamin Lawsky, issued a statement about the Mt. Gox mess, saying they “underscore that smart, tailored regulation could play an important role in protecting consumers and the security of the money that they entrust to virtual currency firms.”

MtGox Situation: Crisis Strategy Draft by twobitidiot  (One page is redacted, but has since been leaked too; see it here )

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