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Friday, February 28, 2014

How Mt Gox died

Mt Gox is filing for bankruptcyCEO Mark Karpeles says that the nearly $500 million in bitcoin held by the company are gone. The four-year-old Mt Gox, which was the oldest and largest bitcoin exchange, has $63.7 million in liabilities, $37.6 million in assets and 127,000 creditors, Reuters reports.

The problem appears to be in part because of something called transaction malleability attacks. Those attacks work like this: each bitcoin transaction has a unique, individual -- and theoretically impossible to fake -- ID code. The problem is that the user digital signature (the part of the transaction code that shows which user the transaction came from) was vulnerable. That signature could be altered and still potentially accepted. As a result, the same transaction could be sent into the system multiple times: once as a valid transaction from a valid user, and other times as an invalid transaction that looked like a valid transaction.

An exchange could sort through a small number mutant transactions, but not the huge number generated in a “coordinated attack”.  A transaction malleability attack uses this flaw to create massive settlement issues for the exchange. As the exchange tries to sort through the transactions to determine which are valid, it slows to an unusable crawlMotherboard’s Patrick McGuire points out that the malleability problem was a known issue as far back at 2011, but Mt Gox didn’t address it.

In the first weeks of February, Mt Gox was one of many bitcoin exchanges targeted by exactly this sort of attack. The other exchanges seem to have found a coding fix, but Mt Gox didn’t. The exchange’s lax accounting amplified the problems caused by the transaction malleability attack, according to a former employee:

Mt Gox kept 90% of their bitcoins in cold storage—in paper wallets and USB keys. They rented safety-deposit boxes in banks and when they needed to refill the transaction accounts, they took the bitcoins out of storage, and deposited them into the system. Well, there was no reconciliation in the accounting sense between the cold storage and the transactions done. As long as money was coming in at a steady pace, no one realized that actually they had been losing huge amounts of bitcoin. And when they did—all hell broke loose.

Bitcoin diehards aren't too concerned: “Mt Gox really is just another calamity before the win,” writes The Wire’s Allie Jones.

Mt Gox may have been the biggest bitcoin exchange, but it wasn’t necessarily the best. Slate’s Kadhim Shubber thinks that Mt Gox’s failure was an inevitable consequence of its early emergence: “As new and better-run exchanges sprung up, Mt Gox increasingly became a burden, a holdover from bitcoin’s teenage years. Today’s bitcoin businesses are graduating and heading for serious jobs on Wall Street. Mt Gox was still doing keg stands at frat parties.”

Bitcoin, says The Atlantic’s Heather Timmons, now seems to be on a long, halting journey towards regulation. It’s just not entirely clear by whom or how. -- Ben Walsh

On to today’s links:

Bitcoin
For when an unstable, purely synthetic currency just isn't enough: bitcoin derivatives! - Bloomberg

Yikes
Citi finds loan fraud in Mexican subsidiary, takes $360 million pre-tax charge - Citigroup

Crisis Retro
Making the Great Recession worse (by doing nothing) - David Beckworth

Servicey
The best way to read the President's budget: "go directly to the tables" - David Wessel

Oxpeckers
"Excessive fairness provides only one path to truth" - Jack Shafer

Popular Myths
No, your mid-sized American city is probably not "dying"  - Jim Russell

Debates
Can unions be saved? - Brad DeLong

Wonks
Emerging markets have to both grow and cut inequality - Nouriel Roubini

Finally...
"If the efficient market hypothesis is correct, America is poised for a massive expansion of quality tacos" - Matt Yglesias

Oxpeckers
The FT paywall seems to be working: paid circulation hits a record high - Ryan Chittum

Twitter
Bloomberg "found that Twitter is biased to the positive, but that can make negative tweets more important" - Gigaom

Facebook
Nude webcams and diet drugs: How Facebook lets teens see trashy ads - Jeff Elder

It’s Academic
The academic theory behind Internet trolls - The Fibreculture Journal

Cool
A 1976 short film about the first graffiti artist - Laughing Squid

Dubious
A survey finds 95% of Bitcoin users are male -  Adrienne LaFrance

EU Mess
French unemployment hits record high of 11.1% - BBC

Follow Counterparties on Twitter. And, of course, there are many more links at Counterparties.

 

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Business Today: U.S. GDP revised down, but hints of economic thaw emerge

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02/28/2014
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NEW YORK (Reuters) - The Federal Reserve should be willing to let inflation temporarily run above its target level so as to more quickly bring the economy back to health, a top Fed official said on Friday, even as a second policymaker signaled the very idea left him cold.
Mt. Gox files for bankruptcy, hit with lawsuit
TOKYO (Reuters) - Mt. Gox, once the world's biggest bitcoin exchange, filed for bankruptcy protection in Japan on Friday, saying it may have lost nearly half a billion dollars worth of the virtual coins due to hacking into its faulty computer system.
Citigroup reports fraud in Mexico unit, lowers 2013 results
NEW YORK/MEXICO CITY (Reuters) - Citigroup Inc said on Friday that it has discovered at least $400 million in fraudulent loans in its Mexico subsidiary and said employees may have been in on the crime.
Sears says investigating possible security breach
BOSTON (Reuters) - Sears Holdings Corp said Friday it has launched an investigation to determine whether it was the victim of a security breach, following Target Corp's revelation at the end of last year that it had suffered an unprecedented cyber attack.
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PANAMA CITY (Reuters) - The Panama Canal Authority said on Friday it expects to sign a financing deal next week to finish work on expanding the waterway and end a dispute over cost overruns that has held up the multibillion-dollar project.
Japan's Fast Retailing in talks to buy J.Crew: WSJ
NEW YORK (Reuters) - Fast Retailing , parent of clothing retailer Uniqlo, is in talks to buy J.Crew for as much as $5 billion, the Wall Street Journal reported on Friday.
Legal test central to U.S. union challenge of VW plant vote
(Reuters) - A bid by the United Auto Workers union to invalidate the results of an election it lost at a Tennessee Volkswagen plant may hinge on the novel application of a legal test used by U.S. labor regulators to assess third-party interference.
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(Reuters) - Flight attendants at US Airways, which merged with AMR Corp late last year to form American Airlines Group , on Friday approved an agreement to change their union at the merged company.
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