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Few regulations over virtual currency disadvantage clients
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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 February 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 regulatory matters.
“The practical reality is, even if you do get a judgment against Mt Gox, do they have the ability to pay?” Friedberg said.
A document circulating online that purports to be a crisis plan for Mt Gox indicated that the exchange had US$174 million in liabilities against US$32.75 million in assets, though its veracity could not be confirmed.
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 over Mt Gox and other exchanges.
New York State’s top banking regulator is exploring licensing requirements for bitcoin exchanges.
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