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U.S. attorney subpoenaed Mt Gox, other bitcoin businesses: source

Some Bitcoin are pictured in this photo illustration in Sandy, Utah, January 31, 2014. REUTERS/Jim Urquhart REUTERS/Jim Urquhart
Some Bitcoin are pictured in this photo illustration in Sandy, Utah, January 31, 2014. REUTERS/Jim Urquhart REUTERS/Jim Urquhart

By Emily Flitter

NEW YORK (Reuters) - Manhattan U.S. Attorney Preet Bharara has sent subpoenas to Mt. Gox, other bitcoin exchanges, and businesses that deal in bitcoin to seek information on how they handled recent cyber attacks, a source familiar with the probe said on Wednesday.

In the attacks - known as distributed denial of service attacks - hackers overwhelmed bitcoin exchanges by sending thousands of phantom transactions. At least three exchanges were forced to halt withdrawals of bitcoins on February 7, including Mt. Gox, which was the largest at the time.

Mt. Gox never resumed service before going dormant on Tuesday, leaving customers unable to recover their funds. [ID:nL3N0LU1OX] The Tokyo-based company's chief executive, Mark Karpeles, said earlier on Wednesday that he is working with others to solve the problems.

"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," Karpeles said in a statement posted on the Mt. Gox website.

A spokesman for Bharara declined to comment.

Bitcoin, a form of electronic money independent of traditional banking, relies on a network of computers that solve complex mathematical problems as part of a process that verifies and permanently records the details of every bitcoin transaction that is made. At current prices, the bitcoin market is worth about $7 billion.

Investors deposit their bitcoins in digital wallets at specific exchanges, so the Mt. Gox shutdown is similar to a bank closing its doors - people cannot retrieve their funds.

While proponents of bitcoin hail its anonymity and lack of ties to traditional banking, regulators have become increasingly interested in the digital currency due to its usage by criminal elements and its volatile nature.

It has been a rough month for bitcoin investors, with cyber attacks on several exchanges, a sharp fall in bitcoin's value, and rising pressure from regulators. Bitcoin's price varies by exchange, but the losses were most dramatic on Mt. Gox, where it fell to about $135 from $828.99 before February 7.

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

A second source familiar with the case said U.S. federal law enforcement is investigating Mt. Gox. A third source said the U.S. Federal Bureau of Investigation was monitoring the situation.

Japan's Finance Ministry and police are also looking into the abrupt closure of Mt. Gox, according to the Japanese government's top spokesman.

"MALLEABILITY"

Bitcoin has gained increasing acceptance as a method of payment and has attracted a number of prominent venture capital investors, including Andreessen Horowitz and Union Square Ventures.

The digital currency has also caught the eye of hackers. The recent cyber attacks exploited a process used by some bitcoin exchanges that introduced "malleability" into the code governing transactions, experts said.

Simply put, this allowed hackers to slightly alter the details of codes to create thousands of copies of transactions. These copies slowed the exchanges to a crawl, forcing them to independently verify each transaction to determine what was real and what was fake.

A document circulating on the Internet purporting to be a crisis plan for Mt. Gox, said more than 744,000 bitcoins were "missing due to malleability-related theft," and noted Mt. Gox had $174 million in liabilities against $32.75 million in assets. It was not possible to verify the document.

If accurate, that would mean approximately 6 percent of the 12.4 million bitcoins minted would be considered missing.

According to a Bloomberg report, the federal probe was spurred by information provided by the Bitcoin Foundation, an advocacy group for the digital currency.

The Bitcoin Foundation could not be reached immediately for comment. Mt. Gox's CEO Karpeles, one of the founding members of the foundation, resigned from the foundation's board on February 24.

Developers are working on fixes to bitcoin's software to guard against cyber attacks, though many larger service providers have already implemented such changes, according to Gregory Maxwell, one of the bitcoin software's core developers.

He said some malleability in the software protocol was necessary - for example, in transactions where multiple people can put in money, but the transaction is not valid until enough funds are contributed.

"None of these fixes are especially complicated, but because the correctness of the software is important we use a conservative release process that avoids rushing anything out," Maxwell said, adding that the bulk of the recent work on the software is being done by four people.

BITSTAMP

Jacob Dienelt, who trades bitcoins and sells paper bitcoin wallets, said people he knows in the bitcoin community in New York stopped using Mt. Gox when the exchange halted dollar withdrawals several months ago and said all withdrawals had to be in bitcoin. Dienelt said has not been subpoenaed.

With Mt. Gox's shutdown, Bitstamp has handled the most volume in the last two days, with more than 165,000 U.S. dollar transactions, according to Bitcoincharts.

Bitstamp had temporarily halted customer withdrawals earlier this month, citing "inconsistent results" and blaming a denial-of-service attack.

The price of bitcoin was lately at $588 on Bitstamp, up about 7 percent on the day.

"Right now is a sweet buying opportunity. I don't think you're going to see bitcoin go this low for awhile - if ever again," said Jordan Kelley, chief executive of Robocoin, which launched the world's first Bitcoin ATM in Vancouver, Canada, in the fall. "The more that bitcoin is on the front pages, the more that people are discussing it and educating one another, the better for the currency."

Kelley said Robocoin has not been subpoenaed in the U.S. regulatory probe; nor has New York-based exchange Coinsetter, according to a spokesperson.

Bitstamp did not respond to requests for comment.

(Reporting by Emily Flitter in New York and Jim Finkle in Boston; Additional reporting by Chris Francescani in New York, Julie Gordon in Toronto, and Chris Peters in Bangalore; Writing by David Gaffen; Editing by Tiffany Wu)

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