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Bitcoin Future in Doubt

The sudden disappearance of major bitcoin exchange Mt. Gox—which later filed for bankruptcy—has severely damaged the virtual currency and left Mt. Gox depositors with little hope of recovering their losses. Proponents of bitcoins say the loss of Mt. Gox weeds out a bad exchange, but others worry that governments will move quickly to strictly regulate virtual currencies in the wake of the closing.

Major bitcoin exchange Mt. Gox went dark last week sending the bitcoin market into panic and seriously hurting the future of virtual currencies.

Mt. Gox reportedly shut down after suffering a debilitating theft. All posts were deleted from the site’s Twitter account. Mt. Gox then filed for bankruptcy protection in Japan, where the exchange is located.

According to testimony at its initial bankruptcy hearing, the theft was reported to be about 750,000 in user’s bitcoins and 100,000 of the company’s bitcoins. Market prices are fluctuating, but that translates into about $425 million as of late last week.

According to reports, Mt. Gox’s troubles had led to widespread rumors and anger in the bitcoin community even before the site shut down. The site has been dealing with “technical issues” and halted withdrawals last month.

The shutdown also follows a report of a theft of $2.7 million in bitcoins form the Silk Road 2 exchange in January, according to a report from the BBC.

Meanwhile, Mt. Gox CEO Mark Karpeles says he remains in Japan and the company is trying to solve its security issues.

“As there is a lot of speculation regarding Mt. Gox and its future, I would like to use this opportunity to reassure everyone that I am still in Japan, and working very hard with the support of different parties to find a solution to our recent issues,” Karpeles said in a statement.

The statement was released before Mt. Gox sought bankruptcy protection.

At the bankruptcy hearing, Karpeles told the court “I am sorry for the troubles I have caused all the people.”

Mt. Gox’s debts were listed at about $65 million at the hearing—more than the company’s total assets.

Karpeles has also resigned his seat on the board of the Bitcoin Foundation, an advocacy group for the virtual currency. Then came reports that the foundation has been aiding a federal probe of Mt. Gox by U.S. regulators

It’s all created a mass of confusion among bitcoins users and bitcoin values have been falling rapidly, but then stabilized at about $550 on some exchanges as of late last week..

Reuters reports that due to the nature of the virtual currency—which is unregulated by any country or banking exchange—depositors at Mt. Gox may have little hope of recovering any losses.

Bitcoins depend on a network of computers to verify and record every transaction. Investors deposit their bitcoins in digital “wallets” at various exchanges.  Mt. Gox had been the largest exchange up to February 7, when it and other exchanges were forced to halt withdrawals following several cyber-attacks, Reuters reports.

Still one effort to recoup losses in already underway. Law firm Edelson PC filed lawsuit in a federal court in Illinois seeking class action status that represents people in the U.S. who had bitcoins held by Mt. Gox, USA Today reports.

The Mt. Gox failure could also prompt more governments to begin regulating virtual currencies.

USA Today reports that Vietnam has now banned the currency.

Japan’s finance minister told reporters after the bankruptcy hearing that bitcoin’s troubles were inevitable.

“No one recognizes them as a real currency,” Japan’s Finance Minister Taro Aso said. “I expected such a thing to collapse.”

The only U.S. regulatory agency with specific oversight of Mt. Gox is the U.S. Treasury Department’s anti-money laundering unit, the Financial Crimes Enforcement Network, or FinCEN, after the exchange agreed to register as a money services business last summer, Reuters reports.

New York State’s top banking regulator is exploring licensing requirements for bitcoin exchanges, while the Commodity Futures Trading Commission has considered whether to set rules for the virtual currency.

And federal prosecutors in New York have issued subpoenas to Mt. Gox and other exchanges seeking information on how they had handled recent cyber-attacks, a source told Reuters.

Meanwhile, proponents of bitcoins remain optimistic and the virtual currency has gotten some good news in the wake of the Mt. Gox collapse.

SecondMarket, a New York company, plans to launch a regulated exchange to facilitate trading in bitcoins, USA Today reports.

SecondMarket has a reputation for working with regulators to create markets for securities that were previously untradeable.