Oh my Gox, it’s Mt. Bitcoin (Part 1 of 2)

It was not until an episode of  the TV show “The Good Wife” last year that the legal community realized that bitcoins were here to stay.

In the episode,

Stephanie Wickouski is a New York bankruptcy lawyer. A partner with the NY office of Bryan Cave LLP, she has practiced bankruptcy law for more than 30 years.

Alicia Florrick tries to find the developer of Bitcoin. In a surprise twist in the show, Satoshi Nakamoto turns out to be a young woman.

Called “crypto-currency,” Bitcoin is essentially a pseudo-currency that utilizes a form of encryption.  Bitcoin is a network for transferring payments in transactions where the buyers and sellers are anonymous. While there is nothing per se illegal about anonymous transactions, illegal transactions tend to require anonymity. Examples include buying and selling large quantities of illegal drugs or weapons, trading in stolen rare art, illegal gambling, and hiring hit men.

The charm of anonymity is also its fatal flaw: chargebacks are nearly impossible, and loss recovery is out of the question.

Last week, Mt. Gox, a Tokyo Bitcoin exchange, filed for bankruptcy in Japan.  The reasons for the filing were massive losses due to hacking or technological flaws, or both.

Japan’s finance minister was quoted as saying (I’m paraphrasing): “I told you so.”

In recent months, the price of bitcoins has risen and fallen dramatically. The extreme volatility is a function of the fact that Bitcoin is not a government-issued currency and thus is not regulated or controlled as such. Big spikes in price occurred as the use of bitcoins expanded from  a means of exchange, to a means of investment. In essense, Bitcoin became the first enterprise in history where it was the putative creditors which turned an ostensibly legitimate enterprise into a Ponzi scheme.

Late last year, well before Mt. Gox’s bankruptcy,  I was asked  by a group of financial advisors to analyze the complications which would arise in a Bitcoin chapter 11 case.  In my next blog post (Part 2), I will outline the highlights of that discussion.

Bitcoin wallet

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