Economy
2:35 pm
Tue February 25, 2014

Massive Digital Heist Allegedly Hits Bitcoin Market

Originally published on Wed March 5, 2014 2:09 pm

Transcript

MELISSA BLOCK, HOST:

From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.

The digital currency bitcoin has hit a major hurdle. A leading exchange for bitcoin has halted all transactions and has frozen customer accounts. This exchange is called Mt. Gox. And earlier today, it temporarily disappeared from the Internet. The happened amidst reports that Mt. Gox was hit by an alleged theft that could amount to about six percent of all the bitcoins in circulation.

NPR's Steve Henn joins me to talk about what happened and what it means for the future of the cyber-currency. And Steve, if this was indeed a digital heist, just how big was it?

STEVE HENN, BYLINE: Well, it may well have been enormous. There are widespread but still unconfirmed reports that roughly 740,000 bitcoins were stolen. This was sort of a slow motion robbery that occurred apparently largely undetected over a number of months. And if those reports are accurate, at current exchange rates, those bitcoins are worth somewhere between $350 and $400 million.

BLOCK: Wow. So we're going to get more in a little bit into how that alleged theft happened. Before we do that, why don't you try to walk us through just how bitcoin works?

HENN: Sure. Well, you know, one of the defining characteristics of the digital world is that stuff is easy to copy. I can send you a photo and keep a copy for myself. I can make millions copies. But this is actually a big problem for digital currencies. If I'd buy something from you with a bitcoin or a digital coin, it's tough to ensure that I don't use that same coin to buy something else from, say, Robert Siegel.

BLOCK: For example.

(LAUGHTER)

HENN: Right.

(LAUGHTER)

HENN: In the conventional banking system - trusted third parties, like banks and credit card companies - keep ledgers to make sure I can't do that. But bitcoin solved this problem by creating a public record of every transaction. So if I buy something from you with a bitcoin, a record of that transaction is shared and recorded across the entire bitcoin network - everyone knows.

The theory is that public ledger make it impossible for me to spend a bitcoin twice. Because after I spent it, everyone would know that coin was actually yours. You know, one of the appeals of this system is that it eliminates those trusted third parties, those banks and credit card companies, and at least in theory could make moving money around the world much, much cheaper.

BLOCK: OK. But wait, Steve. If you're telling me that every transaction is supposed to be recorded in a publicly-shared ledger, right, how does it happen that thieves could apparently manage to steal, what you say, could be $350 or $400 million from this exchange, Mt. Gox?

HENN: Well, that's a great question. So sharing and recording all these transactions on the bitcoin network it turns out takes some time. So for this and a couple other reasons, the community developed kind of a short-cut: A temporary ID number that would be attached to each transaction and making tracking transactions in the short-term easier. But these temporary ID numbers can be faked.

Apparently people were approaching Mt. Gox with fake ID numbers, telling the exchange they hadn't received the bitcoins they were owed. And then Mt. Gox was relying on these numbers and giving the thieves real bitcoins. This may well have drained Mt. Gox's resources to the point were it's now insolvent.

BLOCK: So for the people who think that bitcoin is the future, this digital currency is the future, does this set them back? Does it make them think, oh, you know, maybe not so much?

HENN: Well, you know, it's certainly a setback. But I think it's an open question about whether or not bitcoin is dead. You know, any currency, any banking system only works because people believe in it and trust it. And at its peak, Mt. Gox was processing more than a billion transactions a day. It was this key part of this economy.

So when news broke that Mt. Gox was possibly bankrupt, I called around to big bitcoin investors and asked if it was too big to fail, if they were going to bail it out. And I got back a resounding no. Mt. Gox was pretty widely perceived to be mismanaged. Several big investors in the bitcoin economy told me that they hoped that the next exchange would be regulated and based here in the U.S.

BLOCK: That's NPR's Steve Henn, we were talking about troubles for Mt. Gox. That's one of the big trading platforms for the digital currency bitcoin. Steve, thanks.

HENN: My pleasure. Transcript provided by NPR, Copyright NPR.