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Thefts of $470M in bitcoins spur lawsuits, calls for regulation; a ‘bitcoin paradox,’ law prof says

Posted Mar 5, 2014 6:30 PM CDT
By Martha Neil

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Following recently discovered thefts of some $470 million in virtual currency that shut down the world's largest bitcoin exchange and a Canadian bitcoin bank, hundreds of investors who lost assets are looking to seek redress in class actions.

But observers are wondering how it will be possible to solve crimes concerning funds created to be transferred anonymously on the Internet and who, realistically, can be held liable for the losses to investors.

We do not now know, and may never know, who stole some $470 million worth of bitcoins from the Tokyo-based Mt. Gox exchange and another $586,000 or so in bitcoins from the Flexcoin bank, according to the New York Times (reg. req.) and the Wall Street Journal's MarketWatch.

Although the Department of Justice has issued subpoenas to try to find out what was going on at Mt. Gox, the transfers in which bitcoins were stolen are likely to be untraceable, the New York Times' DealBook (reg. req.) reports, and Mt. Gox lacks assets to make it an attractive defendant to civil litigants.

However, Illinois resident Gregory Greene has already filed suit against Mt. Gox, seeking class action status, in federal court in Chicago, Bloomberg reports. The complaint, which was filed Feb. 27, is linked to a Bloomberg article republished by Crain's Chicago Business (reg. req.). It asks for a constructive trust and an accounting.

Another version of the Bloomberg article reports that Greene is represented by attorney Jay Edelson. He says the misappropriation case may be able to proceed on behalf of what could be thousands of U.S. investors despite a Mt. Gox bankruptcy filing outside the U.S. and notes that neither the parent company nor the head of Mt. Gox has filed for bankruptcy.

A United Kingdom law firm, Selachii, says it has signed up some 400 potential plaintiffs for an unusual London class action suit it expects to file soon over the Mt. Gox collapse, Reuters reports. Firm co-founder Richard Howlett says the suit will be filed against the exchange's parent company and operations chief. Neither the Mt. Gox chief nor his lawyer could be reached by Reuters for comment.

Meanwhile, officials in Japan are pondering potential rules for handling the cryptocurrency in the future, another Reuters article reports.

Law professor Eric Posner of the University of Chicago called the bitcoin concept "a fantasy" that "resembles a Ponzi scheme" in an article he published in Slate nearly a year ago.

In a post on his own Eric Posner blog late last month, after the Mt. Gox implosion, he says the massive thefts have pointed to a "bitcoin paradox." Without regulation, individuals can't trust middlemen to safeguard their bitcoin investments, yet regulation would destroy the anonymity that made bitcoins a hit with investors internationally.

See also:

ABAJournal.com: "Mt. Gox files for bankruptcy after possibly losing all customer Bitcoins in hacker attack"

Chicago Tribune (opinion): " Bitcoin's return on investment may be the education it provides"

Computerworld: "Withdrawal vulnerabilities allowed bitcoin thieves to hit Flexcoin and Poloniex"

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