Digital Transactions Authoritative, insightful and timely information for payments professionals
For electronic currency provider Bitcoin, 2012 is proving to be a problematic year. In March, a well-known Bitcoin trading platform, Bitcoinica, announced a security breach in which hackers stole 43,554 Bitcoins. In May, a Federal Bureau of Investigation report warned that criminals could use Bitcoin for illicit purposes. And later that month, Bitcoinica reported a second security breach, this time resulting in the loss of 18,547 Bitcoins. Bitcoinica shut down following the second breach, which resulted in an estimated $90,000 loss. Other Bitcoin exchanges are still in operation.
In the latest blow to the Bitcoinica exchange, four of its users have filed suit in the Superior Court of California seeking $460,457 from the company. The users accuse Bitcoinica of negligence and breach of contract, and allege that the company refuses to return their deposits. The suit, filed Aug. 6 in San Francisco, names Bitcoinica LP, Bitcoinica Consultancy, Intersango Ltd., Donald Norman, who developed a firm called Bitcoin Consultancy, and others.
The lawsuit is “entirely misguided, it fails to go after the persons responsible and names the entirely innocent and uninvolved Intersango Ltd.,” Norman said in an e-mail response to Digital Transactions’s questions. Intersango is a United Kingdom-based registered company that develops Bitcoin exchanges.
“It is necessary to understand the Bitcoin is an open-source project,” Norman said. “It is not a company or a single person.”
Bitcoin is an electronic currency developed and maintained by a decentralized network of cryptologists and application developers. It offers anonymity, international utility, and inflation protection, and has no connection to the existing payment systems. Users can download software from a number of so-called exchanges that provide Bitcoins at prevailing exchange rates. Specialist processors serve merchants.
To send Bitcoins, users enter the recipient’s e-mail address and the amount to be transferred. The user’s computer then digitally signs the transaction and sends the information to the Bitcoin network. The network verifies that the person sending the Bitcoins is the current owner. Once the transaction is validated, recipients can spend the Bitcoins. The process, which typically takes a few minutes, is not reversible.
In the suit, the plaintiffs state that in announcing the breaches, Bitcoinica assured users that the overwhelming majority of Bitcoin deposits were not stolen and that the monies stolen came from Bitcoinica itself, not users. They allege that Bitcoinica said all withdrawal requests would continue to be honored. But later, Bitcoinica announced that it would initially return 50% of all verified claims, with the remainder returned later on a pro-rata basis, based on the total amount of verified claims and remaining monies, the suit alleges.
Although Bitcoinica has returned a portion of the users’ claims, it refuses to return the remaining amounts, according to the suit. The users also allege that Bitcoinica management has conspired to “hinder, delay and deprive” them of their monies.
But Bitcoinica is a company that accepted Bitcoins, Norman said, and is not part of Intersango or the Bitcoin Consultancy. According to published reports, Zhou Tong, creator of Bitcoinica, announced the sale of Bitcoinica to Intersango around the time of the hacking incidents. However, it’s not clear whether the sale was completed.
While the May FBI report that was leaked on the Internet didn’t specifically address data-security issues or the Bitcoinica exchange in particular, it warned that criminals could use the Bitcoin electronic currency for money laundering and other illicit activities because of the anonymity its system provides. At that time, Bitcoin Consultancy cofounder Norman said the benefits of Bitcoin outweighed any criminal use of the currency because it gives consumers a digital currency that can’t be manipulated by government enforcement agencies like national currencies or payment methods based on those currencies.
