| NEW YORK
NEW YORK Feb 27 What can you do if you
deposited bitcoins at Mt. Gox, which shuttered on Tuesday with
little explanation? Probably not much.
Customers of the bitcoin exchange may have little chance of
recovering their funds if they prove to be missing, legal and
regulatory experts said.
Clients could file lawsuits, claiming negligence or breach
of contract, but the virtual currency is subject to very little
regulatory oversight and no government guarantees.
Japan-based Mt. Gox went dark on Tuesday, weeks after a
spate of cyber attacks, leaving customers unable to access their
accounts and underscoring the risks associated with bitcoins.
Bitcoins, which exist in electronic form, depend on a
network of computers to solve complex mathematical problems in
order to verify and record every transaction. Investors deposit
their bitcoins in digital "wallets" at various exchanges; Mt.
Gox had been the largest as recently as Feb. 7, when it and
other exchanges were forced to halt withdrawals following
several cyber attacks.
Unlike bank accounts in the United States, bitcoin deposits
have no government-backed insurance. Instead, customers would
have the same avenues of legal redress as anyone who entrusted
property to an institution that failed to keep it protected,
such as negligence, breach of contract or even fraud, said James
Grimmelmann, a professor at the University of Maryland who
focuses on Internet law.
"To me, the first really important conceptual hurdle to get
over is that these things really are property," he said. "When
you take money from the public and store it somewhere you claim
is secure, you put property law in play."
If Mt. Gox has no assets, however, individual claims would
fail to recover any funds, said Daniel Friedberg, a lawyer with
Riddell Williams in Seattle who specializes in financial
"The practical reality is, even if you do get a judgment
against Mt. Gox, do they have the ability to pay?" Friedberg
A document circulating online that purports to be a crisis
plan for Mt. Gox indicated that the exchange had $174 million in
liabilities against $32.75 million in assets, though its
veracity could not be confirmed.
The Tokyo-based Mt. Gox could also file for bankruptcy in
Japan, leaving it up to a court to distribute any remaining
assets to its creditors.
Several regulatory and legal experts said they expected the
Mt. Gox shutdown could spur regulators to take more immediate
steps to protect future customers.
Jeffrey Matsuura, a lawyer at Alliance Law Group in Virginia
who specializes in online commerce issues, said he wouldn't be
surprised if state or federal consumer protection agencies
eventually take some kind of action regarding Mt. Gox and other
But Jerry Brito, a senior research fellow at the Mercatus
Center at George Mason University, said people who deposited
bitcoins with Mt. Gox knew that the exchange had experienced
problems in recent months.
"At this point, bitcoin is speculative," he said. "People
are going in with eyes wide open."
Thus far, the only U.S. regulatory agency with specific
oversight of Mt. Gox is the U.S. Treasury Department's
anti-money laundering unit, the Financial Crimes Enforcement
Network, or FinCEN, after the exchange agreed to register as a
money services business last summer.
New York State's top banking regulator is exploring
licensing requirements for bitcoin exchanges, while the
Commodity Futures Trading Commission has considered whether to
set rules for the virtual currency. And federal prosecutors in
New York have issued subpoenas to Mt. Gox and other exchanges
seeking information on how they had handled recent cyber
attacks, a source told Reuters.
"Bitcoin in many ways is terra incognita for the regulatory
system," said Joseph Grundfest, a law professor at Stanford
University and a former SEC commissioner.
But, he added, that would not stop federal prosecutors in
Manhattan from investigating criminal activity involving
bitcoins if any of the transactions had a connection to New
"The lack of clarity about formal regulatory status provides
no safe harbor for liability for criminal fraud," he said.