For better or worse, Bitcoin has been in the news quite a bit recently.
A couple of weeks ago, Mt. Gox suspended all withdrawals.
And now that Mt. Gox has filed bankruptcy, some are questioning the viability of Bitcoin.
Such as Senator Joe Manchin, who is calling for more regulation of the decentralized currency.
The problems at Mt. Gox were not caused by a lack of regulation. In fact, before the bankruptcy filing was announced, a joint statement was released by the heads of several major Bitcoin companies which reads, “This tragic violation of the trust of users of Mt.Gox was the result of one company’s actions and does not reflect the resilience or value of Bitcoin and the digital currency industry.”
“There are hundreds of trustworthy and responsible companies involved in Bitcoin. These companies will continue to build the future of money by making Bitcoin more secure and easy to use for consumers and merchants.”
“As with any new industry, there are certain bad actors that need to be weeded out, and that is what we are seeing today.”
The statement concluded, “Acting as a custodian should require a high-bar, including appropriate security safeguards that are independently audited and tested on a regular basis, adequate balance sheets and reserves as commercial entities, transparent and accountable customer disclosures, and clear policies to not use customer assets for proprietary trading or for margin loans in leveraged trading.”
The one things that I find very satisfying in that statement is something that banks and other financial institutions could learn from, “clear policies to not use customer assets for proprietary trading or for margin loans in leveraged trading,” i.e. no fractional reserve lending. While no one knows for sure, some have speculated that the actors behind Mt. Gox were committing this fraud, selling more coins than they actually had. Sadly, this practice is all too common when dealing with banks and other financial institutions, and has backfired in the past.
However, the problems at Mt. Gox are slightly different than the problems faced by Bear Stearns, Wells Fargo, AIG, JPMorgan Chase, and others in 2008.
The main difference is that during the economic downturn of 2008 few, if any, questioned the viability of the US Dollar as a currency.
The other major difference, aside from the fact that banks and other financial institutions are heavily regulated, is that there is no lender of last resort in the Bitcoin system. There is no central authority to bail out Bitcoin businesses with bad business practices.
Bitcoin, unlike the US Dollar and other currencies controlled by centralized institutions, is a vibrant system that relies on people working together voluntarily. Bitcoin works as a means of exchange because people, and businesses, have faith in it as a means of exchange.