What happens when criminals make off with $2 million in cyber currency? That is a good question. The Bitcoin exchange Gatecoin, based in Hong Kong, detected the breach on May 13th.
If you put your money in the bank, those deposits are protected by Federal law in the case of fraudulent transactions and protected by FDIC deposit insurance in case the bank fails.
In the case of digital currency of any kind – there is nothing special about Bitcoin – you are on your own. There are no laws to protect you. No government backed insurance to bail the depositors out.
In this case, the Hong Kong based company says they are trying to raise additional capital to cover the losses.
Curiously, Gatecoin’s web site homepage says that they are a regulated and secure financial institution for blockchain assets. Apparently not quite so secure.
On the bottom of the homepage, it says: High Risk Warning: Trading digital assets such as bitcoin and other cryptocurrencies carries a high level of risk, and may not be suitable for all investors. If it is secure, why is it high risk.
Regarding being regulated, it says: Gatecoin Ltd. is a licensed Money Service Operator (MSO) subject to regulation by the Hong Kong Customs and Excise Department. The MSO licence covers Gatecoin’s fiat currency activities. Fiat currency, of course, refers to currency issued by a government – which means it excluded Bitcoin deposits.
In my opinion, while the first statement about being regulated may be technically correct, it is, at the very least, very misleading.
As it also says this in the small print at the bottom of the homepage: The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest using funds that you cannot afford to lose. That is not a statement likely to inspire confidence, which is why it is in tiny print at the very bottom of the page.
My guess is that this is not the last time we will see this. After all, it is based on software and we all know that writing secure, bug free software is easy.
So, while digital currencies are interesting, I don’t think they will replace government issued currencies any time soon.
Information for this post came from SC Magazine.