Federal prosecutors in Manhattan issued a subpoena to one of the highest-profile Bitcoin businesses in the United States on Wednesday, apparently expanding an investigation into Mt. Gox, the world’s largest Bitcoin exchange, which shut down earlier this week amid controversy.
The subpoena sent to Circle Internet Financial, a bitcoin services startup that received $9 million in venture capital funding in October, asked for information “pertaining to a criminal investigation that the (Department of Justice) is undertaking” into “a company,” Circle CEO Jeremy Allaire told Al Jazeera on Thursday.
Allaire declined to identify the company named in the subpoena but said he suspected Circle had received the request because of its public response to the Mt. Gox shutdown.
The exchange, which is based in Tokyo and had already halted withdrawals earlier this month, received a subpoena from federal prosecutors in New York City sometime in February requesting that it preserve documents, among other things, The Wall Street Journal first reported on Tuesday.
Mt. Gox halted all transactions on Tuesday and removed its website, replacing it with a message that said it had closed its business “for the time being” because of “recent news reports and the potential repercussions on Mt. Gox's operations and the market.”
Mt. Gox blocked all withdrawals on Feb. 7 after it and other bitcoin exchanges were targeted by an apparent “distributed denial of service” hacking attack. But the exchange, used by more than 1 million people around the world to buy and sell bitcoins with cash, had already raised suspicions among analysts and investors owing to its slower-than-usual transaction times and opaque safeguards and business practices, which were the subject of criticism in a lawsuit raised by a former business partner.
An apparent “crisis strategy” document drafted by Mt. Gox in recent days and leaked on the Internet by blogger and Bitcoin investor Ryan Selkis stated that the exchange was essentially bankrupt and had lost 744,408 bitcoins due to a “malleability-related theft which went unnoticed for several years.” That amount would represent around 6 percent of all bitcoins in circulation and was worth more than $450 million on the major bitcoin exchanges trading in U.S. dollars on Thursday.
After the document leaked, Circle and five other major Bitcoin businesses issued a joint statement Monday condemning what they called Mt. Gox’s “abhorrent actions,” which they said did not meet the company’s basic requirements as a financial services provider and represented a “tragic violation of the trust of the users.”
“It may just be because we issued a statement of concern that somehow it was thought that we had other interactions with them, or dealings with Mt. Gox,” Allaire said Thursday, referring to the subpoena.
Allaire, who founded Circle last year in Boston, said his company had never had commercial dealings with Mt. Gox and that “serious” businesses in the Bitcoin community had stayed away from the exchange for nearly a year.
“Everyone from an industry perspective was aware of these things; a lot of people wouldn’t touch them (Mt. Gox) with a 10-foot pole,” he said.
Allaire said he welcomed what he predicted would be “an accelerated effort” to establish more regulations and “common rules of play” for Bitcoin in the wake of the shutdown.
In November, the Senate Homeland Security and Governmental Affairs Committee held the first-ever federal hearings on virtual currencies, and the New York Department of Financial Services followed with its own in January. New York regulators have said they are considering issuing specially tailored "bitlicenses" to those who do business in the field.
On Thursday, Federal Reserve Chairwoman Janet Yellen, testifying before the Senate Banking Committee, said the Fed has no authority to regulate Bitcoin "in any way" and suggested the responsibility lay with Congress.
Bitcoin is not easily regulated because it has no central issuer, Yellen said.
Allaire, the Circle CEO, said the “big question” about Mt. Gox had little to do with Bitcoin itself, but rather basic financial best practices.
He questioned whether Mt. Gox had traded and lost its customers’ investments without informing them, and also whether the exchange’s “standards of accounting even existed” — issues he hoped would “come to light under criminal prosecution.”
“We’re going through a phase where the industry is growing up,” Allaire said. “The key is just executing on those products and making Bitcoin an easier-to-use financial product for consumers and businesses.”
Mark Karpeles, the French self-described “geek” founder of Mt. Gox, moved to Japan in 2009, The Wall Street Journal reported. Late Wednesday, a message on the exchange’s website signed with his name said that he was still in Japan and “working very hard with the support of different parties to find a solution to our recent issues.”
Mt. Gox’s problems began in earnest last spring when the U.S. Department of Homeland Security seized $5 million in accounts that the exchange held in Wells Fargo and Dwolla, an e-payment company, because the exchange had not properly registered as a “money services business.”
The Treasury Department’s Financial Crimes Enforcement Network had issued guidelines in March 2013 requiring virtual currency exchanges to comply with standard anti-money-laundering rules. After the Dwolla seizure, in May, Mt. Gox announced it would double its staff to comply with laws requiring it to verify its customers’ identities, and in June, after the Wells Fargo seizure, it registered as a money services business. But withdrawals moved achingly slowly after the incidents.
“I think that a lot of these early enthusiasts who had built a lot of startup ideas were in over their heads,” Allaire said.
The Mt. Gox crisis document, which Karpeles called “more or less” legitimate in a leaked online chat reported by Fox Business, lists $32.4 million in assets held by the exchange and $55 million in liabilities, not including the 744,408 bitcoins lost to “theft.” It recommended that Karpeles step down as CEO.
In another document published by Selkis on Thursday, a Mt. Gox presentation of its business plan for Europe prepared earlier this year, the company lists under its “weaknesses”: “The demand is growing faster than the company’s structure.”