MtGox Halts Withdrawals, Cites Flaw in Bitcoin Protocol

MtGox, one of the oldest, and largest bitcoin exchanges has suspended bitcoin withdrawals due to what they claim is a bug in the bitcoin protocol, which has led to the crippling of the value of the digital currency.

The price of one bitcoin currently sits at around $600, which is a steep drop from the $950 it was just a week ago.

The exchange, which is located in Japan, allows for the buying, selling, and transfer of bitcoins. MtGox claims that a design flaw in bitcoin, called transaction malleability, allows for people to corrupt and defraud the exchange. An attacker would be able to claim that a successful bitcoin withdrawal was unsuccessful and could essentially trick the exchange to dole out bitcoins at will.

MtGox has released a statement that addresses these issues in a more technical manner. It goes on to say that services will be halted and that they are currently working with bitcoin developers to fix this exploit.

While it has caused a stir within the bitcoin community, curiously enough, the problem of transaction malleability has only affected MtGox so far and not any other exchange.

It would appear that the way MtGox programmed their bitcoin wallet was flawed, since the issue of this vulnerability was made aware to the community in 2011. Other bitcoin exchanges adjusted to account for this vulnerability, but MtGox did not.

By suspending withdrawals, it is probable that MtGox does not have enough bitcoin on hand to remain solvent, since this news has likely stirred up something similar to the bank runs in the past.

What is most troubling however is that MtGox would publicly claim that there is a fundamental flaw in bitcoin, which would have an obvious negative effect on the community.

This is in combination with the fact that this flaw had a clear solution as worked out by other bitcoin exchanges, and the obvious frustration from MtGox customers who still have money tied up with the exchange.

It is unclear when this issue will be resolved, but it is clear that MtGox had too much influence on the bitcoin economy.

The Bitcoin Foundation has released a statement on the matter.