Four men have sued Bitcoinica, one of the larger Bitcoin currency exchanges before it shut down in May, alleging that the exchange owes them $460,457.70 in lost deposits plus damages. It's a story that will sound familiar to anyone who has been following the saga of the fledgling currency and its nascent economy, a digital Wild West where bad actors routinely take advantage of inexperienced buyers and sellers in the absence of a sheriff.
Bitcoinica was launched by Zhou Tong, who claimed to be a 17-year-old based in Singapore and communicated primarily through blog and forum posts. People trusted him with their money despite his lack of experience, in part because of Bitcoinica's clever feature that allowed speculators to short, or bet against, the digital currency.
Unfortunately, Bitcoinica announced in March that hackers had stolen 43,554 Bitcoins. Soon after, Tong announced that he had sold Bitcoinica to UK-based Bitcoin exchange Intersango (Jesse Powell, one of the plaintiffs, said in an email that that sale may not have taken place. "It's unclear whether any of these transfers of ownership/assets/control of the company were ever completed or legal in the first place," he wrote in an email.). Just 18 days after the acquisition went through, Bitcoinica was hacked again — this time, hackers made off with 18,547 Bitcoins, which were worth about $90,000 at the time. Bitcoinica announced that the site would be taken offline "until such time as a new platform can be built and tested with security best-practices built-in from scratch" and that users would be refunded 50 percent of their deposits.
Bitcoinica's users were outraged and some even suspected foul play. Tong has been accused of hacking Bitcoinica himself. A call for a class action lawsuit failed to get off the ground, but four determined Bitcoiners got a lawyer and filed a complaint on August 6th in San Francisco. The suit accuses Bitcoinica of breach of contract, negligence, and three other counts, claiming that "each of Defendants knowingly and willfully conspired and agreed upon themselves to hinder, delay and deprive Plaintiffs of their rights with respect to the monies at issue."
"Bitcoinica is an entity of unknown form and origin."
The plaintiffs may face some challenges. The question of jurisdiction is not addressed, and although some of the plaintiffs live in San Francisco, Bitcoinica is now based in the UK. The suit also hopes to pull in up to 100 defendants. "Bitcoinica is an entity of unknown form and origin," says the complaint, which names three defendants and "Does 1 through 100." A representative for Intersango declined to comment. The lawyer for the plaintiffs declined to comment because his lead client could not immediately be reached.
Despite the frequency of thefts in the Bitcoin community and the not-insignificant amounts of money involved, this is only the second Bitcoin-related lawsuit filed in the US. (The first was filed by the now-defunct Bitcoin exchange Tradehill, which sued e-payments provider Dwolla for $2 million in March. That case is proceeding to arbitration out of court.)
The Bitcoin community has an uneasy relationship with government. The crux of the Bitcoin proposition is that the currency regulates itself without the need for a central authority or intermediary banks, so that all transactions can be direct from peer to peer. Bitcoin itself could potentially be illegal, as it competes with the US dollar. The digital currency sustains an estimated $35 million underground economy that is unregulated and tax-free. Bitcoin is the currency of choice on Silk Road, the online bazaar for illegal drugs. The currency has been the target of crusading politicians and the subject of scrutiny by the FBI and the CIA. Bitcoin users tend to skew libertarian, and many in the community that has sprung up around the currency would prefer to deal with the government as little as possible.
It's somewhat ironic to see Bitcoiners turn to the law to bail them out, but victims have no other choice
It's therefore somewhat ironic to see Bitcoiners turn to the law to bail them out, but victims have no other choice. There is a group of Bitcoiners who monitor and investigate suspicious activity, but it has little power to act. Members of the Bitcoin community are coming to the realization that it may not be possible to build a sustainable economy around Bitcoin without some kind of government involvement. Jeff Garzik, one of Bitcoin's official developers, told CBS, "We are working with the government to make sure indeed the long arm of the government can reach Bitcoin." The official Bitcoin Project guide to public relations cautions against anti-government rhetoric. Intersango's Amir Taaki and Donald Norman, who happen to be two of the defendants named in last week's lawsuit, have also spoken out strongly in favor of government regulation in the past.
Security is one of the biggest challenges facing the young ecurrency. Last summer, a series of high-profile hacks sent the price spiraling down from its all-time high of $31.91 to below $2 in November. The price for a Bitcoin is up over $11 today, however, suggesting that the currency is rebounding. Depending on the outcome of the two pending Bitcoin lawsuits, we may see more efforts to get law enforcement involved in policing the decentralized Bitcoin economy.
Update: An earlier version of this post said that Zhou Tong had promised users a full refund after the first Bitcoinica hack; that could not be verified and the post has been corrected.