Bitcoin In Crisis: Mt Gox Claims To Be Fixing Network-Wide Vulnerability

Bitcoin lost over a quarter of its value over the weekend, after Mt Gox, one of the largest and oldest virtual currency exchanges in the world, temporarily suspended all withdrawal orders.

The Tokyo-based exchange has since resumed exchanging virtual currencies into cash, but said it will not be transferring Bitcoins into wallets operated by other parties. The interruption was blamed on a little-known issue within the Bitcoin peer-to-peer protocol itself.

“The problem we have identified is not limited to MtGox, and affects all transactions where Bitcoins are being sent to a third party,” explained a statement on the Mt Gox blog. “We believe that the changes required for addressing this issue will be positive over the long term for the whole community. As a result we took the necessary action of suspending Bitcoin withdrawals until this technical issue has been resolved.”

According to the CoinDesk Bitcoin Price Index, BTC was trading around $645 (£394) at the time of publication.

Time to buy

Mt. Gox was established in 2010 as Magic: The Gathering Online Exchange – a platform for trading collectible game cards, but its focus soon shifted to a more lucrative business – transactions in digital currency.

The problems started last week when Mt Gox users started encountering problems during the withdrawal process, while management noticed “unusual activity” inside Bitcoin wallets. On Friday, the exchange stopped all withdrawals, explaining that it needed to shut down transactions in order to investigate the problem.

“We apologize for the sudden short notice. All Bitcoin withdrawal requests will be on pause, and the withdrawals in the system will be returned to your Mt Gox wallet and can be reinitiated once the issue is resolved,” said the company.

The announcement agitated Bitcoin owners and triggered a panic sale, since Mt Gox did not say when it would resume withdrawals, only that it would post another update on Monday.

Now, it seems that the worst fears of the investors were unjustified: Mt Gox is once again allowing users to exchange Bitcoins into Yen and Euro (it hasn’t been able to dispense US dollars since the “two-week hiatus” in 2013). The company explained that the suspicious activity was likely caused by someone exploiting the method in which Bitcoin transactions are verified.

No reason to panic

“A bug in the Bitcoin software makes it possible for someone to use the Bitcoin network to alter transaction details to make it seem like a sending of Bitcoins to a Bitcoin wallet did not occur when in fact it did occur. Since the transaction appears as if it has not proceeded correctly, the bitcoins may be resent,” said the exchange. “MtGox is working with the Bitcoin core development team and others to mitigate this issue.”

According to Mt Gox, this is not a new problem, but one that has been largely ignored by developers. The vulnerability requires a set of specific circumstances in which a dishonest trader can request and receive the bitcoins from a wallet or an exchange, and then make it look like they had never been sent.

Mt Gox has proposed using an additional hash for transaction tracking to remedy the issue, which would work exactly the same way as the current hash used to identify Bitcoin blocks within a blockchain. The exchange promised to allow Bitcoin withdrawals as soon as this solution has been standardised.

Meanwhile, it has advised competitors to be “extremely careful” with anyone claiming their Bitcoin transaction was not processed.

“To put things in perspective, it’s important to remember that Bitcoin is a very new technology and still very much in its early stages. What Mt Gox and the Bitcoin community have experienced in the past year has been an incredible and exciting challenge, and there is still much to do to further improve.”

What do you know about Bitcoin? Take our quiz!