Joint Statement Regarding the Insolvency of Mt. Gox
blog.coinbase.com
blog.coinbase.com
http://en.wikipedia.org/wiki/Panic_of_1907
What is (so far) missing in the world of Bitcoin is a single actor powerful enough to play the organizing role that Morgan played during that previous crash:
"Morgan summoned the presidents of the city's banks to his office. They started to arrive at 2 p.m.; Morgan informed them that as many as 50 stock exchange houses would fail unless $25 million was raised in 10 minutes. By 2:16 p.m., 14 bank presidents had pledged $23.6 million to keep the stock exchange afloat. The money reached the market at 2:30 p.m., in time to finish the day's trading, and by the 3 o'clock market close, $19 million had been loaned out. Disaster was averted. Morgan usually eschewed the press, but as he left his offices that night he made a statement to reporters: "If people will keep their money in the banks, everything will be all right""
http://www.npr.org/blogs/money/2013/12/20/255839292/episode-...
Everyone with a brain knew Gox was dying a month ago. In relation to the panic you quote, this isn't a panic over the price falling - it is equivalent to one stock exchange back then stealing your money and going insolvent. Functionally, it is a private company failing, with the collateral that anyone stupid enough to have given them money is pretty much sure to lose it.
But that just means that the business failed, and it doesn't reflect much on the overall bitcoin economy at all. Hell, I was into bitcoin 2 years ago and knew right away MtGox was an incompetent lot that were bound to crash and burn. I also always kept my coins in local wallets and only had USD on an exchange long enough to wire it out or buy BTC that I could then move to my own wallets.
But clearly others trusted MtGox. I haven't traded a bitcoin since 2011 so I don't know much about the community past what I'd absorb about anything that's on HN daily. But isn't the claim that MtGox lost like 6% of all BTC in existence? If you think this is going to sail by without impacting the larger community, I think the foresight that led you away from MtGox is failing you now.
People are now $500+ million dollars poorer than they thought they were. That has ripples. That will erode confidence. And my bet is that it will erode confidence.
If so, then that would further imply that MtGox has lost ~3.5% of all BTC that will ever exist.
PS: Don't forget holding bit-coins does not get you a vote it's the miners that decide how things evolve.
If your bitcoin economy is full of nerds who really understand the subjective value of money than that's fine. But if you were to start having lots of normal people using Bitcoin and denominating prices and contracts in Bbitcoin than deflation would be a huge problem. As long as most of the surrounding economy isn't using Bitcoin it still wouldn't have the positive feedback loops that caused the Great Depression under the gold standard, though.
[1]https://en.wikipedia.org/wiki/Loss_aversion [2]https://en.wikipedia.org/wiki/Sticky_prices
That is 1.4 * 10^90 (atomic units of bitcoin) for everyone on earth. There are only around 1.2 * 10^12 actual US dollar coins and notes in the world, and only 1.2 * 10^13 dollars if you count all of M2 money supply.
The impending cap on bitcoin production would dry up the already recession-like liquidity, making it worse than gold as a currency.
Say what? They've fallen 10-15% over the last hour or so (depending on whether you look at Coindesk ot bitCoinTicket) and they're still going down.
The challenge here is that the Bitcoin system is built on faith. If enough faith disappears, so does the value of Bitcoin. In this manner, it is similar to a bank run.
It'll be interesting to see how many of them can provide such a proof... I'm guessing most of them can (but only time will tell)
If they successfully provide this proof, there's no reason to expect a bank run.
I already remarked once that Bitcoin is remarkable democratic in a way; perhaps this is a good time to leverage that...
Quantitative easing is buying financial assets at marginally above-market price with printed money in order to boost inflation and lower real wages. It's a useful policy (assuming you believe in Keynesian stimulus) because the distributional effect is close to nil, unlike fiscal stimulus or mailing money to specified individuals.
The distributional effect is small because the bank buys a bond worth $9,000 for $9,003 or so. This puts $9,003 in circulation but the person receiving $9,003 in cash receives only $3 of profit. So you've increased the money supply by $9003 but you've given the beneficiaries of QE only $3.
QE is a far more efficient way to increase inflation than fiscal stimulus since fiscal stimulus nearly always results in malinvestment/malconsumption (e.g., building bridges to nowhere, etc) and usually has highly non-stimulative side effects (raising nominal wages of government workers).
A bailout is highly targeted. Inflation is a side effect. The people receiving the money trade nothing of value in return for the money. It's totally not the same policy.
Except that we don't really see QE causing the hyperinflation many feared or the lowering of real wages. If it is intended to do these things, it is a miserable failure.
The fact is that when you dump a whole lot of money into what Steve Keen called "the slowest part of the system" it isn't going to actually have much effect. Velocity in money matters if you want the money to actually circulate.
...we are in effect getting a test of the market monetarist view right now, with the Fed having adopted more expansionary policies even as fiscal policy tightens.
http://krugman.blogs.nytimes.com/2013/04/28/monetarism-falls...
The results are in:
http://econlog.econlib.org/archives/2014/01/the_parrot_is_s....
By the criteria laid out by QE's detractors, it worked.
patio11: that is not how the Bitcoin protocol works.
Even if 99% of the Bitcoin miners agree, they cannot create extra bitcoin; it is simply impossible because that is not something that miners control. Every full node (client) on the Bitcoin network verifies the validity of each block. A block that created more bitcoins than allowed by the protocol would be rejected by the clients (and the miners who follow the original rules). The "extra" bitcoins would be on a hard fork and thus invalid to anyone on the main (original) blockchain.
More info: https://en.bitcoin.it/wiki/Weaknesses#Attacker_has_a_lot_of_...
If the most common bitcoin clients are updated to allow this "bonus", and at least 51% of the network installs this update, their blockchain will become the authoritative one. Older or other clients will have to accept it if they still want to participate in the chain.
A transaction that conjures Bitcoin out of nothing is certainly invalid. Patio11 got this wrong.
Transactions that make up bitcoin out of nothing are already used as rewards for mining a block.
If 51% of miners start using an inflationary version of Bitcoin "Bitcoin-QE", but the clients (exchanges, merchants, wallet providers, etc) don't approve, they won't update the client and use the partition of the network that is secured by the remaining 49% of miners. People wouldn't want to accept the Bitcoin-QE mined on the inflationary branch and the investment wouldn't pay off.
Of course Bitcoin-QE miners could start an attack on Bitcoin in other ways, but that also woudn't be necessarily economical.
It's very hard to tell what 51% will do, but it is clear that you don't have full control of the currency.
Gaining 51% can allow you to double spend your own transactions, but you can't spend other peoples money or make more coin, because the clients will reject those transactions even if 100% of the miners put it through. The nodes verify what the miners do. Even 100% control does not give you God power. The best you can really do is deny all transactions and thus destroy Bitcoin.
You can't do this with BTC, because there is no credit market at this point.
Everything in BTC is full-reserve, all the time; there is no fractional reserve banking of BTC - it is in your wallet, or it is in my wallet.
The other piece of the puzzle is that stock exchanges would allow trading on margin, often as much as 10:1 margin or more (an error repeated in the lead-up to the 1929 crash). Because of transactions, local banks were further implicated.
The trust lost wasn't in the exchanges' and banks' fiduciary responsibility but in their creditworthiness, and what Morgan accomplished was to say "don't trust their credit, trust ours". Not a foolproof gamble, but one which worked. The Federal Reserve takes this one step further by being a lender of last resort: if you're a bank and you need a loan, you can always go to the Federal Reserve's lending window to get more cash (though the FDIC may end up owning you). Stockholders can be wiped out (bank stockholders), but depositors are insured (subject to limitations).
The problem with Mt. Gox is, apparently, one of fiduciary trust or negligence -- it's not clear who's made off with the coin, but it's not creditworthiness that's in question.
Did I miss the part where Coinbase, Kraken, Bitstamp, BTC China, Blockchain.info, and Circle met those essential requirements?
I guess those things are just essential now, not in the past.
Because that has worked wonders for the other industries -- let's have pharma companies, oil, food producers, just self regulate.
Not sure you're helping yourself here. The established movie industry uses its content rating system as a bludgeon against independent filmmakers. The video game industry's content controls are largely a joke, assigned arbitrarily by people who never actually play the game.
which are pretty much a joke. PG is now a worthless rating
http://www.forbes.com/sites/scottmendelson/2013/11/26/disney...
The difference between PG-13 and R in many cases is completely arbitrary.
The ratings lump many kinds of movies together and says absolutely nothing about their content.
No movie can be NC-17 or unrated because that is a kiss of death. No theaters will play it, no big box stores will sell it. I think what R can get away with has broadened considerably because of that.
For example, here in Indonesia, if I buy eggs at the supermarket I don't really have to worry about them carrying salmonella. Why? Because truth in labelling laws and demand for salmonella-free eggs means that the farms that sell to the big food distributors all get tested so they can label their eggs as salmonella-free.
One really wonders why this hasn't taken off in the US. I can think however of a few reasons (it's not just too much or too little regulation but the wrong regulations).
At some level it comes back to regulation. It is part of why I feel bitcoin is misguided.
As a Distributist, my feeling is that successful regulation supports decentralization. The problem with the regulation vs deregulation dichotomy is that regulation is usually pushed as a centralizing power, while deregulation is usually also pushed as a centralizing power.
Solvency, the ability to pay what you owe people when it falls due, is easy to prove at any point in time. The state of insolvency occurs the first time you have an obligation to pay, which you cannot satisfy.
The thing is, if you're a de facto bank (by virtue of holding customer demand deposits) then your future expectations of solvency could turn out to be wrong because everyone wants their money at the same time (i.e. there's a bank run).
My point about solvency was a general one (applying to all people and companies) but I overlooked an important point: the Bitcoins entrusted by customers to MtGox do not become MtGox assets. The Bitcoins are always owned by the customer (not owed to the customer). They are less like bank deposits than they are the contents of safety deposit boxes at a bank branch.
I don't think it would be a big "feature" for me. As far as confidence in my bank goes the big thing is the FDIC sticker on the door/website.
Bitcoin itself has the potential to replace the need for certain types of regulation entirely, but we're not there yet.
Perhaps I'm wrong though.
Regulation is often associated with political states and are often enforced through brute force. I think if we could, as a community, regulate without any state intervention that would be ideal.
Maybe the exchanges can join together and offer something like FDIC Insurance?
• Receipt of insurance is contingent on meeting requirements for insurance, so it's not blind assistance in the face of incompetence. The 3 years of account thefts reported to have occurred at Mt. Gox would, hopefully, have been detected. Even collaborating on more secure storage and trading systems. There's a precedent for this: it's how the large credit card companies (BankAmericard, I mean, Visa and Interbank/Master Charge, I mean, MasterCard), were formed.
• Rates would correspond to perceived risk, providing a market feedback mechanism.
• Some risks are incidental and random. Weaknesses in protocols, problems in network or technology stacks (independent of individual exchange software).
• The end result is a greater level of trust in the entire marketplace as a whole, so: more transactions, more members, more profits.
Have to say the BTC price is holding remarkably well considering - maybe because the mainstream media hasn't picked up on it yet - but still...
Although why anyone would have had money in Mt. Gox after they had their stateside accounts frozen is beyond me. It's not like there weren't any warning signs http://www.techmeme.com/130620/p53#a130620p53
This is the wagons being circled to stop the non MtGox price from tanking further.
It isn't going to happen as MtGox has been a boil that's needed to be lanced for a while now. This is the first step given that MtGox has decided to stay silent.
>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.
2008 and 2009 were so successful with these "controls" that were supposedly in place !
This is very different from money just disappearing out of checking accounts, which is what happened with MtGox. Even if that did happen, the FDIC would make the depositors whole.
It's like the beanie baby industry, minus the stuffed animals.
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.
The best way to build trust in the 'resilience of Bitcoin' would be to leverage the blockchain technology to help document who lost what and monitor if/when any of those coins appear in the future. This is going to cost money as well as development time.
It's one thing wax pious about how and why this happened and to say it must never happen again etc. But the best thing the exchanges could do for their long-term credibility would be to each put up a chunk of cash and engage an expensive law firm to set up a trust and audit the whole affair as completely as possible. That's going to require a collective commitment of of a million dollars, or possibly a few million.
It's either that or get put under the microscope of existing financial regulators on their schedule, which (IMHO) will relegate BTC to the status of a disaffection currency that is only convertible in fringe markets.
This was a huge mistake, one which I am sure will haunt all involved for a long time.
Coinbase is making the exact same mistake.
They rely on their own implementation of the bitcoin protocol.
Their client has been hard forked repeatedly.
Some of these incidents were random, but many were forced; not by attackers but by whitehats trying despirately to show them their error.
The danger of using their own implementation cannot be overstated.
For the love of god move to the reference client.
FYI, after some time, Coinbase followed up with my support ticket and said tough luck, bitcoins lost, better luck next time. No mention was made of any effort to track-down the hacker or fraudulent transaction. They probably didn't even block the hacker's IP address.
And yet, Coinbase declares, "We strongly believe in transparent, thoughtful, and comprehensive consumer protection measures. We pledge to lead the way."
:(
There's a supposedly internal document floating around that describes Gox's insolvency plan (which many consider a hoax).
Then this joint letter which initially used the word "insolvency" in the title but was edited several minutes later.
Not usually this much nay-saying (denial?) on here.
I highly doubt Gox's coins are "gone" though. Someone has those wallets and almost certainly is going to make a pretty penny fucking over the customer base, but caveat emptor.
According to a quick search, the total M2 money supply of USD is $11,011.5 Billion and the largest US bank is Chase with $2.3 Trillion in assets (4%).
So this is as newsworthy to those interested in Bitcoin as the failure of a bank 50% larger than the largest US bank would be to those interested in USD.
Bitcoin is not a revolution, it is not a movement, it's an iteration, and a significant one.
The same thing for the internet, today vs 1996, all the same huge media companies as before dominate the web with some new ones mixed in that jumped in early.
[0] I mean no slight against Wikipedia, I only mention this since the statement "He now runs a bitcoin start up in Boston" is supported by no citation (as of 2014-02-24).
Travis Skweres - Cofounder, CoinMKT
Words are cheap.
Then again, I just spent most of my btc on tigerdirect 3 weeks ago, so I don't even have much left to call myself an investor with.
Are you aware that any investment that produces nothing other than a rising market price is pretty much guaranteed to have very high volatility?
The new Russian President found a note in the desk of the old Russian President, "To my successor: When you find yourself in a hopeless situation which you cannot escape, open the first letter, and it will save you. Later, when you again find yourself in a hopeless situation from which you cannot escape, open the second letter."
A few months later, there was a massive problem. The new Russian President opened the first letter, which said, "Blame it all on me." He did. It worked great.
A little bit later, there was another massive problem. The new Russian President opened the second letter, which said, "Sit down, and write two letters."
I feel like this is the Bitcoin community collectively blaming the old Russian President. (Never mind the inherent flaws in the system.)
Jesse Powell — CEO of Kraken
Nejc Kodrič — CEO of Bitstamp.net
Bobby Lee — CEO of BTC China
Nicolas Cary — CEO of Blockchain.info
Jeremy Allaire — CEO of Circle
Fred Ehrsam — Co-founder of Coinbase
but NOT:
Brian Armstrong - CEO of CoinBase?
Edit: now blockchain.info has also removed "insolvency" from the headline but not the first sentence.
Quick get it out of the headline!
You idiot, it's still in the url!
You fool, it's right in the first sentence!
Damnit, the first letter of every line spells out "insolvency"!
It's an interesting object lesson for armchair economists, and I'm sure some hay will be made drawing comparisons to the US housing market crash and the value of the dollar.
It might be a good idea, but it's antithetical to the community.
the leaked "Crisis Strategy Draft" slideshow seems like it was actually authored by these companies, not MtGox.
As someone with funds stuck in gox, I optimistically hope that "all customer funds" includes gox customers, in the form of some sort of industry-led bailout.
A "bailout" could have been mutually beneficial. 740k BTC is way too much.
There's actually some precedent for this in the March 2013 blockchain fork, when miners on the abandoned fork were reimbursed for lost block rewards from Bitcoin Faucet funds.
Also Save Dogemas was a community effort just a few months ago. It's goal was to reimburse Dogecoin users who lost their funds on a hacked/scammed web wallet (although Save Dogemas may have itself been a scam-- I don't know and didn't follow up on it).
But if it's 700k+ Bitcoins, no way it's happening.
"Duuuuuuuuuuust in the wiiiiiiiind...all my coins are duuuuussssssssst in the wiiiiiiiiiiiiiiind..."
(in doge we trust)
See, for example, Circle's statement[1], which styles itself as a joint statement regarding "the Insolvency of Mt.Gox", and describes Mt Gox's actions as "abhorrent". At the end of Circle's statement, after listing some of the high standards to which Bitcoin custodians should be held, the author(s) make this observation: "It does not appear to any of us that MtGox followed any these essential requirements as a financial services provider."
The statements of Kraken[2], BTC China[3] and Blockchain.info[4] also describe Mt Gox's actions as "abhorrent" and make the same observation about Mt Gox in relation to its compliance with appropriate standards.
Coinbase's statement[5], on the other hand, does not use "abhorrent" and does not express any view on whether Mt Gox complied with the "essential requirements" of a Bitcoin custodian. But the Coinbase statement does include this sentence: "Mtgox has confirmed its issues in private discussions with other members of the bitcoin community". That sentence is conspicuously absent from the other statements.
Finally, the Bitstamp.net[6] statement is completely different. It says that the "known losses" of fiat currency and Bitcoin "are limited to those balances that were in MtGox's care", and that Mt Gox "can best explain how this happened".
The names of the industry leaders appear at the bottom of each statement. Have they signed off on all of them?
Did some leaders edit the "joint" statement to avoid potentially defaming Mt Gox?
Or do some of them know something we don't?
---
[1] Circle: http://www.circle.com/2014/02/24/joint-statement-regarding-i...
[2] Kraken: http://www.reddit.com/r/Kraken/comments/1yux6n/joint_stateme...
[3] BTC China: https://vip.btcchina.com/page/notice20140225
[4] Blockchain.info: http://blog.blockchain.info/2014/02/25/joint-statement/
[5] Coinbase: http://blog.coinbase.com/post/77766809700/joint-statement-re...
[6] Bitstamp.net: https://www.bitstamp.net/article/Statement-by-Bitstamp-regar...