Houston Law Firm suspends acceptance of Bitcoins following market instability

MtGox, Bitcoin’s once largest exchange falls silent amid rumors of poor accounting and widespread theft. Around 8 PM CST 2/24/14, MtGox’s website went dark. This comes almost 2 weeks after halting Bitcoin withdrawals from the exchange, all the while assuring account holders that the problems prompting the halt were being worked on and near resolution. MtGox officially cited Bitcoin’s “transaction malleability” as the cause for concern. While other competing exchanges followed suit, agreeing that a problem exists, they took steps to mitigate it’s effects and returned to active transfers with little downtime.

Although a long known issue, the Transaction Malleability should not have been problem for any properly designed accounting system. To explain the issue, when transactions are submitted to the Bitcoin network, they are signed to prevent manipulation, as is the Transaction ID. The Transaction ID is sometimes not as closely scrutinized as the rest of the transaction when considered for verification. A 3rd party may manipulate the ID and submit the transaction back into the network hoping it will be accepted into the blockchain before the original transaction. If it is accepted before the original, the original is deemed invalid; since it is the exact same transaction, the original ends up being ignored. Think of the blockchain as an open account ledger, recording every single transaction between every address from inception until now for all to see, and a copy in everyone’s hands, updated only by majority acceptance. The transaction has not changed, the originating and receiving addresses are the same as is the amount, only the ID is different, not a huge deal.

The automated systems used in large exchanges and other organizations that handle a lot of Bitcoin transactions may rely on this ID. They may use the transaction ID to quickly confirm whether a transaction has gone through to the network or not. If a transaction doesn’t go through right away, there is a chance that it ended up in a rejected block, so they may attempt to send the transaction again either automatically or upon recieving a complaint from the reciever (who may or may not be aware of the actual status of the transaction.) The problem lies in the fact that the transaction DID go through, just with a different ID, and so their system can be fooled into sending the same transaction twice or even multiple times. Most properly written accounting systems would use other methods to double check for transaction confirmation, such as searching the Bitcoin network for the transaction itself instead of relying solely on the ID, or even refusing to resend without manual review.

Many are speculating MtGox has a very poor accounting system that did not use any checks and balances to confirm transactions. Some say this may have been happening for a very long time, and they’ve lost hundreds of thousands of Bitcoins. Although we won’t know until they make an official statement regarding their disappearance, the toll it has taken on Bitcoin value, public perception and acceptance has been devastating, leading many to think twice about investing in such a volatile and uncertain “currency.”

Although we here at Arguello Law Firm believe in supporting new technological innovations, we will be suspending acceptance of Bitcoins until the market stabilizes and poorly run companies like MtGox become a thing of the past.

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