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[Suspicious link removed]j.com/digits/2014/04/30/londons-new-bitcoin-exchange-hopes-to-avoid-mt-gox-fate/
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A new London-based bitcoin exchange wants to prove it won’t be the next Mt. Gox – the now-bankrupt exchange of the online currency – by challenging customers to find any whiff of a problem in its books.
The U.K. exchange, called Coinfloor, is one of the first to try to prove it is solvent by publishing a list of accounts and balances…all encoded of course so only users with account keys can read it.
“We are letting the entire world audit our books, essentially,” said Mark Lamb, Coinfloor’s chief executive. “After the bankruptcy of Mt. Gox, we’re trying to make a stand for accountability.”
It is the latest example of a bitcoin business trying to calm nerves over the safety and reliability of the virtual currency. The five-year-old currency suffered a major blow in February when Japan-based exchange Mt. Gox shut down and appeared to have lost track of a half billion dollars’ worth of bitcoin.
Bitcoin enthusiasts say that if there were a way for customers to check in on their accounts, the problems at Mt. Gox could have been caught sooner. Coinfloor is one of a few exchanges trying out this new method, known as “proof of solvency.” A few days after Coinfloor published its balances, Ontario-based Vault of Satoshi did something similar.
Coinfloor is essentially relying on users to check and make sure the company has the bitcoin it says it does. When Mt. Gox ran into trouble, customers rushed to try to withdraw funds but were frozen out. The exchange said 850,000 bitcoins “disappeared.”
The stand for accountability might seem out of place for a product known for the anonymity it provides users. But more bitcoin businesses are trying to step toward the mainstream. Last week, U.S.-based exchange Atlas ATS said it would work with a small U.S. stock exchange to try to get regulatory approval. San Francisco-based Kraken boasts that it has a third party audit its books. Some companies are building actual bank vaults deep underground that would store bitcoin code on computer drives.
Lamb said Coinfloor is trying to become regulated by the U.K.’s Financial Conduct Authority, and the company requires three employees to sign off on transactions.
An FCA spokesman declined to comment specifically on Coinfloor. The authority says it doesn’t regulate bitcoins.
“However, businesses providing services related to bitcoins, or other digital currencies, should consider whether they are carrying on regulated activities,” an FCA spokesman said.
Lamb, originally from outside L.A., runs a team of six full-time employees out of an office on Chancery Lane in London.
The proof of solvency tests, in theory, work by using some of bitcoin’s fundamental properties.
A bitcoin isn’t made up of nickel, copper or zinc, like physical coins, but long strings of numbers and letters. Each slice of a bitcoin contains a record of all of its previous transactions. It is the equivalent of checking out a library book before everything was digitized: You would sign your name on a card below the list of everyone else who previously borrowed it.
Coinfloor will take advantage of this by sending the entire batch of bitcoin it holds between two of its accounts. That transaction has to be recorded and verified on a public ledger known as the block chain.
But bitcoin transactions are valued for their anonymity, and the exchanges don’t want to make any type of list of account holders public. Coinfloor encrypts the account and publishes a code that the individual account holders can identify, alongside their balance on that day.
The theory is that if one person’s account balance is wrong, they will speak up.
“It’s not complete accountability, but it’s essentially the best that can be done,” Lamb said. ”It is theoretically enough for … a situation like Mt Gox to be prevented.”
Some bitcoin entrepreneurs and security specialists say that it is potentially a step in the right direction, but doesn’t get all the way home.
“It’s a marketing ploy to make them feel trustworthy, and it’s saying it on laymen’s terms,” said Shawn Sloves, chief executive of the Atlas exchange. “That doesn’t make anybody trustworthy. There’s no reason why they can’t disappear with the money a week later, we never hear from them.”
Lamb said that could be prevented by another feature: Anyone who wants to withdraw the bitcoins will have to be signed off by several parties within the company, to prevent a single person from running off with the stash.
Raj Samani, a European executive of security-software company McAfee, said the move was an “important measure to add trust.,” but added that it wasn’t enough.
“There still exists multiple considerations that customers need addressed in order to reach greater levels of confidence and to encourage wider adoption of Bitcoin,” he said. “Some considerations are related to broader Bitcoin concerns, such as fluctuating prices, whilst others are directly related to exchanges, such as greater forms of security to validate users.”
