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US subpoenas handed out in mounting Bitcoin crisis

Shuttered exchange Mt Gox, others served in cyber attack investigation

Cyber pranksters exploited a flaw in bitcoin’s software platform, known as 'transaction malleability'.
Cyber pranksters exploited a flaw in bitcoin’s software platform, known as 'transaction malleability'.

Out-of-commission Bitcoin exchange Mt Gox has been served with subpoenas for information on what action it took in response to recent cyber attacks, Reuters reported.

Manhattan U.S. Attorney Preet Bharara issued the subpoenas to Tokyo-based Mt Gox and other bitcoin-related exchanges and businesses after cyber pranksters exploited a flaw in bitcoin's software platform, known as "transaction malleability", which allowed duplicates to be made of thousands of transactions that had not been completed. The duplicates had to be examined by the exchanges to ensure the integrity of the system, and this led to a significant degradation of performance.

At least three exchanges suspended operations on 7 February, as their hubs were flooded with the ghost transactions in a DDoS-style attack.

On Monday Mt Gox CEO Mark Karpeles resigned from the board of the Bitcoin Foundation and his exchange continued suspension of transactions before going offline on Tuesday, leaving customers unable to recover their funds.

Karpeles sought to allay fears by stating on the company website: "As there is a lot of speculation regarding Mt Gox and its future, I would like to use this opportunity to reassure everyone that I am still in Japan, and working very hard with the support of different parties to find a solution to our recent issues."

Bitcoin has no central bank or regulatory framework, both of which are associated with state-controlled currencies. Creating a unit of the currency relies on the ability to carry out computationally expensive mathematical operations, which leads to a limited supply of bitcoin.

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Advocates point to these features as long-term agents of stability, but concerns over accountability and reports of the virtual currency being used for money laundering purposes, have hindered widespread adoption of bitcoin.

The recent cyber attacks have prompted a drop in the value of the currency, most notably on Mt Gox, where it fell from $828.99 to around $135 before February 7.

"Mt Gox has been broken and it was obvious there was something really bad going on there for nearly a year," said Mike Hearn, a bitcoin developer in Zurich, Switzerland. "They were processing withdrawals very slowly and generally being very opaque about what was going on there."

Following Mt Gox's closure, a number of authorities in Tokyo have reportedly begun investigations into the circumstances behind the decision. Reuters claimed the US Federal Bureau of Investigation is also taking an interest in the exchange.

A leaked document cited by several media outlets, which takes the form of a risk-management report for Mt Gox, says that more than 744,000 bitcoins are unaccounted for as the result of the malleability flaw. The report also pointed out that Mt Gox had $174m in liabilities against $32.75m in assets. No media outlet has yet been able to independently verify the document, but if accurate, it would suggest, based on an estimated 12.4m bitcoins in circulation, that 6% of the virtual money supply is missing.