Bitcoin security breaches raise questions about digital currency's future

In one of the largest security breaches in the history of digital currency, nearly 120,000 units of bitcoin, which at the time of the breach was worth nearly $78 million, was stolen from the Hong Kong exchange and currency-storage platform Bitfinex.

The company has notified law enforcement and halted trading of all digital currencies that the platform supports (though only bitcoin was affected), plus withdrawals and deposits, after learning of the breach, it says in an announcement on its homepage.

“We are investigating the breach to determine what happened, but we know that some of our users have had their bitcoins stolen,” writes Bitfinex, the largest US dollar trading exchange in the world. “We will look at various options to address customer losses later in the investigation,” is all that Bitfinex has said so far to reassure investors who were hacked.  

Bitfinex partnered with a Palo Alto company called BitGo last year to offer multiple-signature “wallets” that allow people to store their digital currencies online. In effect, the wallets are highly-secured bank accounts that require permission from multiple people to access the money. BitGo has insurance against bitcoin theft, which is unusual for a digital currency company, Andrew M. Hinkes, an attorney with expertise in virtual currencies at the Berger Singerman law firm in Fort Lauderdale, tells The Christian Science Monitor. Digital currencies are traded on exchanges run by the people who use them. They are not backed by banks, which makes them volatile and hard to regulate. 

So far, BitGo says that it has found no evidence of a breach to any of its servers. It is not immediately clear whether Bitfinex has insurance for investor losses, but since the company used BitGo as a wallet provider, claims against Bitfinex could also be brought against BitGo, thereby tapping its insurance policy, says Mr. Hinkes. He also says that Bitfinex investors should not expect to be reimbursed.

“[Insurance] is an important frontier to be resolved in order for the industry to offer up custodial exchanges as something consumers can rely upon,” says Hinkes.

If digital currency is to be widely used, as many hope, insurance – like FDIC insurance for bank accounts – will be a critical component. For now, security breaches of this type raise questions about bitcoin’s future.

The most notable past breach was the 2014 collapse of Mt. Gox, a Tokyo exchange that that lost hundreds of thousands of bitcoins in a hack that law enforcement officials are still trying to untangle. More recently, in June, a hacker stole more than $50 million worth of Ether, another digital currency, from an experimental virtual currency project called the Decentralized Autonomous Organization, according to The New York Times.

Mt. Gox filed for bankruptcy and was subject to a class-action lawsuit in the United States. It is expected to award $91 million in compensation to thousands of claims made against it, which is far below the amount claimed by investors, reports ZDNet.

Bitcoin’s trading value slumped by 20 percent early on Wednesday, local time in Hong Kong, but had rebounded by Wednesday morning in the United States.