Millions at stake but programming mistakes everywhere

(written by lawrence krubner, however indented passages are often quotes). You can contact lawrence at: lawrence@krubner.com, or follow me on Twitter.

How long does this go on? Tens of millions of dollars get traded in virtual currencies, yet the exchanges seem to be slapped together by amateurs, with none of the caution that a bank would use when building its exchange software.

Vircurex had a computer programming bug that caused the loss of a huge amount of virtual currency, so they are now insolvent, and they are trying to offer their own solvency-resque, without going to the courts:

Frozen Funds

In preparation of the following, we have with immediate effect stopped the possibilities to withdraw BTC, LTC, FTC and TRC. All incoming deposits will also not be credited to the users accounts for the time being.

On 24th March 2014 we will be freezing the current BTC, LTC, TRC and FTC accounts, then perform the below distribution of the available coins and reenable deposits and withdrawals. This action will also require us to delete all open sell orders for BTC, LTC, FTC and TRC.

As you may very well be aware, we had two incidents last year that lead to a loss of a significant number of BTC, LTC, FTC, TRC. We had communicated at that time that we will be covering those losses from our income, which we have done so far. We had enough coin balances in our cold wallet to upkeep our platform and the positive cashflow enabled us to gradually refill the wallets.
Unfortunately we had large fund withdrawals in the last weeks which have lead to a complete depletion of our cold wallet balance and we are now facing the option of either closing the site with significant unrecoverable losses for all or to work out a solution that allows the exchange to continue to operate and gradually pay back the losses.
We have obviously chosen the later and hence are going to do the following:
1. We will introduce an additional balance type called “Frozen Funds”. Funds in this balance type cannot be used to trade or withdraw. Those are the balances that the exchange will gradually pay back and hence transfer back to the available balance over time.
2. We will move all current balances for BTC, LTC, TRC and FTC to the “Frozen Balance”, i.e. your balance will be set to 0.
3. We’ll take the current available cold storage balance and distribute it based on the below described distribution logic.
4. Monthly we will take the net profit of the exhchange and credit back that amount distributed to the users based on the described distribution logic.

And also, the Wall Street Journal had an article titled “Mt. Gox Finds 200,000 Missing Bitcoins“.

TOKYO—Major bitcoin exchange Mt. Gox announced Thursday it had discovered 200,000 missing bitcoins in a wallet that the company no longer uses, reducing the total number of bitcoins still missing to 650,000 from 850,000.
“We believed there were no bitcoins left in old wallets, but found 199,999.99 bitcoins on March 7,” Mt. Gox chief executive Mark Karpelès said in a document released Thursday.
Mt. Gox said it reported the discovery of the bitcoins to its lawyers on March 8, and moved the discovered bitcoins to offline storage between the March 14 and 15.
The exchange filed for court protection on Feb. 28. At the time, Mr Karpeles told a news conference it had lost 750,000 bitcoins owned by users and 100,000 held by the company, citing the possibility the bitcoins had been withdrawn without authorization.
The exchange was shut down Feb. 25.

Think about the lack of accounting that must happen for this to be possible. They put 200,000 coins somewhere, then forgot about them. Think about the lack of records, the lack of basic organization, that would allow so much wealth to be lost, and then accidentally found.

The technology behind the virtual currencies is clever, but the exchanges are a disaster.

Post external references

  1. 1
    https://vircurex.com/welcome/ann_reserved.html
  2. 2
    http://online.wsj.com/news/articles/SB10001424052702303802104579452062699281046
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