Mt. Gox's bad day threatens to become bitcoin's bad day. But there's a chance bitcoin can emerge from this turmoil with new legitimacy -- that is, if those who create trading platforms for digital currency build their platforms right the first time.
First, the disaster: Trading on bitcoin exchange Mt. Gox ground to a halt earlier today amid allegations that the company suffered a major theft of currency and rumors that it's planning to file for bankruptcy. Users of the service are growing uneasy that any funds still tied up in the system might have evaporated. Mt. Gox CEO Mark Karpeles has resigned from the Bitcoin Foundation's board.
Bad as the news may be, the problem isn't with bitcoin itself. Sure, the jury is still out on whether its real value is as a financial revolution in the making or because its core technology has a broad range of uses. However, the more pressing issue exposed by Mt. Gox's ongoing implosion is whether bitcoin exchanges -- from Mt. Gox on up -- are willing to make themselves into serious trading platforms from the inside out.
Many of the technical problems with Mt. Gox, and perhaps its problems as a whole, stem from its origins. It was never created as a formal trading platform for digital currency, but rather evolved from a site created as a trading post for Magic: The Gathering cards. The fact that the original site was written in PHP and has been a hacking target prompted author Charles Stross (a former senior programmer at e-commerce payment service provider Datacash) to comment on his blog: "You can't do this [stuff] on an amateur basis and not get burned. Handling money makes you a target: the more money, the bigger the bulls-eye: and you can't write secure software on the run or patch up a proof of concept to production quality on a shoestring budget."
But the lack of openness is another issue. Part of what allowed bitcoin to have the uptake it did was its nature as a collection of open source projects: the wallets, the miners, and so on. But the exchanges -- Mt. Gox in particular -- don't seem to have been held to the same standard. If the end-user apps are open source, it stands to reason the exchanges should be built the same way and subjected to even more scrutiny.
A number of other major players in the bitcoin space have apparently come to the same conclusions, and they have issued a joint statement that reads in part, "Acting as a custodian should require a high-bar, including appropriate security safeguards that are independently audited and tested on a regular basis," as well as the same sort of transparency and accountability that ought to exist in the rest of the financial sector.
There are signs that a new wave of professionalism in bitcoin is on the rise. A New York Times article describes how SecondMarket, a company originally known for creating a platform to allow "simplified transactions for private companies and funds," is planning to set up an exchange for virtual currencies, one which could include major worldwide banks. Its "Bitcoin Investment Trust" claims to allow investors to "gain exposure to the price movement of bitcoin without the challenges of buying, storing, and safekeeping bitcoins."
Such a hands-off approach is likely to satisfy those who want to invest in bitcoin at arm's length. But it still doesn't speak directly to how bitcoin exchanges could have accountability and transparency built into their systems. If such a thing is provided -- for instance, via an open source trading and coin storage platform -- it'll be that much easier to build a trustable, professional service around it.
[An earlier version of this article described Charles Stross as a senior programmer at e-commerce payment service provider Datacash. The article has been amended to note that he is a former employee and not a current one.]
This story, "After Mt. Gox debacle, bitcoin exchanges need to go pro," was originally published at InfoWorld.com. Get the first word on what the important tech news really means with the InfoWorld Tech Watch blog. For the latest developments in business technology news, follow InfoWorld.com on Twitter.