Bitcoin: Mitigating Risks – BankInfoSecurity

Experts warn of volatility around the virtual currency

Jeffrey Roman (gen_sec) •
May 6, 2014

Banking institutions considering accepting and possibly integrating virtual currencies such as Bitcoin into their offerings need to keep abreast of the latest developments and be aware of the main risks, including the possible use of the currencies for money laundering programs.

See also: Live webinar | A Buying Guide: What To Consider When Evaluating a CASB. is to be observed

In one of the most significant recent developments in the virtual currency arena, customers in the US and Canada of the failed Mt.Gox bitcoin exchange have agreed to a partial settlement of their class action lawsuits against the exchange. Japan-based Mt.Gox, one of the largest Bitcoin exchanges in the world, was abruptly taken offline in February, raising concerns about the viability of online virtual currency (see: Bitcoin Trading Website Goes Dark). The company claimed almost 850,000 bitcoins had been stolen from the exchange by hackers.

The plaintiffs in the class actions agreed to support a plan by Sunlot Holdings, a private equity firm, to buy the closed exchange and restart it.

In other bitcoin-related news:

  • The Wisconsin Department of Financial Institutions recently warned consumers about the risks of virtual currency.
  • Robocoin, which developed the world’s first bitcoin ATM, announced that its ATMs will soon also serve as banks where consumers can store their bitcoins.
  • And a collective of programmers are planning to release an application called Dark Wallet, which is supposed to protect the identities of Bitcoin users more strongly, potentially increasing the risk of money laundering.

Banking institutions that choose to accept virtual currencies must develop payment strategies even if the security risks are not fully understood, says Mike Urban, director of portfolio management for financial crime at Fiserv (see: How Safe is Virtual Currency?).

Banks need to determine values ​​for virtual currencies, which is challenging because their value is fluid, says Urban. And the flowing value suggests that virtual currency transactions like foreign exchange transactions need to be processed, which raises even more questions about money laundering risks.

Nathalie Reinelt, an analyst at Aite Group, says Bitcoin is under scrutiny due to recent events, which is likely causing some previously interested consumers to take a break before converting cash to Bitcoin. “I wouldn’t necessarily say that consumers and investors should stay away from cryptocurrency, but that they should educate themselves about the risks associated with Bitcoin in order to protect their assets,” she says.

Mt.Gox lawsuits

Mt.Gox clients agreed to a partial settlement of their proposed class action lawsuits alleging the company defrauded them of hundreds of millions of dollars, according to Chris Dore, partner at Edelson PC, the law firm that filed lawsuits on both cases and Canada.

Mt.Gox has been in bankruptcy in Japanese courts since nearly 850,000 bitcoins were stolen from the exchange by hackers, according to Forbes.

However, on March 20, Mt.Gox issued a statement saying it had found 200,000 bitcoins in an unused “wallet”. According to, which offers best practices and advice on digital currency, a wallet enables transactions with other Bitcoin users.

On April 24, Mt.Gox issued another statement stating that Tokyo District Court has initiated bankruptcy proceedings for Mt.Gox.

Plaintiffs in the lawsuits agreed to support a plan by Sunlot Holdings to buy the closed exchange and accept their stake in bitcoins still held by Mt.Gox, Dore says.

Dore says this is only a partial settlement agreement with two of the defendants in the case, founder Jed McCaleb and Gonzague Gay-Bouchery, who was once the exchange’s chief marketing officer. Class action lawsuits against Mt. Gox’s CEO Mark Karpeles, parent company Tibanne and the company’s banking partner Mizuho Bank Ltd. continue, he says.

“We believe that the remaining companies may be responsible for the loss or possible theft of bitcoins and own some or all of them and know where they are. These are the main players handling bitcoins and we believe they are still liable. “

The settlement must be approved in the US and Canada, says Dore. Once that happens, it will be taken to Japan where it will need to be approved by the bankruptcy court.

“The proposed Mt.Gox comparison should be a wake-up call for Bitcoin customers that their investments will not be protected in the event of a breach,” says Reinelt of the Aite Group. “Unlike traditional bank accounts, which are insured and where financial institutions complete customers after a fraudulent attack, there is no such protection for Bitcoin customers.”

Warning of banking regulator problems

Given the growing interest in Bitcoin and the publicity surrounding the Mt.Gox incident, the recent warning from the Wisconsin Department of Financial Institutions to consumers advises that cryptocurrencies carry multiple risks.

“In contrast to traditional currencies, these alternative currencies are not backed by tangible assets, are not issued by a state authority and are not subject to any or no regulation,” says Peter Bildsten, Secretary of the Department. “The value of virtual currencies is very volatile and the concept behind the currency is difficult to understand even for a seasoned financial expert. Investors should be aware that investments that involve virtual currencies involve very real risks.”

The Internal Revenue Service recently stated that virtual currency is treated as property, not currency, and therefore transactions may be subject to certain taxes under the IRS Code, the notice advises.

It is also cautioned that virtual currencies can be stolen or otherwise exposed to cybercrime and investors must rely on the strength of their own computer security systems as well as those of third parties to protect their e-wallets from theft.

Reinelt says warnings like these are likely to become more common as consumers become more aware of Bitcoin. “With so many recent events increasing media coverage of Bitcoin, consumers are trying to understand what it is,” she says. “Financial institutions are smart to issue consumer warnings to protect consumers from investing in Bitcoin without understanding the risks involved, especially since Bitcoin holders have no legal recourse once their e-wallets are compromised.”

Robocoin bank

Meanwhile, entrepreneurs continue to launch new Bitcoin businesses.

Robocoin, which developed the first Bitcoin ATM, will be offering the service known as Robocoin Bank this summer.

“Robocoin will control the coins and private keys,” CEO Jordan Kelley told Fox Business. “We can move it to and from anyone in the Robocoin kiosks. That makes it friendlier and safer for the masses.”

The ATM kiosks, which are available in 13 countries including the US, allow users to exchange cash for Bitcoin and vice versa by providing email, handprint, government identification, face scan and cash.

Particularly worrying are the large amounts of personal information Bitcoin ATMs ask for, says Reinelt of the Aite Group. “Customers should learn more about how Robocoin stores their personal information, including their handprint,” she says. “If the Robocoin platform is ever attacked, customers will not only lose their uninsured investment, but also their phone number, email, handprint and all of the data on their government-issued ID could be compromised.”

Dark wallet

And as banking regulators around the world, like the Monetary Authority of Singapore, take steps to regulate virtual currencies, including verifying customers’ identities, some Bitcoin advocates are working harder to make sure users remain anonymous.

A collective of political programmers calling themselves unSystem, according to Wired, are planning to release Dark Wallet, a Bitcoin application designed to protect users’ identities more than the privacy protection Bitcoin currently offers.

“This is a way of using Bitcoin that mocks any attempt to sprinkle regulation over it,” says Cody Wilson, an organizer behind Dark Wallet. “It’s a way of telling the government, ‘You set out to regulate Bitcoin. Regulate this.'”

Further encrypting Bitcoin payments could make it more difficult to track the flow of money online, which could help fuel criminal activity in the underground economy (see: Turning Off the Underground Economy).

Comments are closed.