Bitcoin value drops sharply after tech issues continue

Bitcoin wallet on screen Problems with transactions are why MtGox say it has suspended withdrawals

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Bitcoin's value has dropped sharply after one of the largest trading exchanges said there was a flaw in the virtual currency's underlying software.

MtGox said it had halted transfers to external Bitcoin addresses on Friday after detecting "unusual activity".

It said an investigation had revealed it was possible for thieves to fool the transaction process so that double the correct amount of bitcoins would be sent.

Bitcoins fell from $700 (£427) to $540.

The Tokyo-based firm said it was now working with the Bitcoin core development team to "mitigate this issue", which it said was not limited to its own Bitcoin-wallet system.

A Bitcoin wallet is the place where Bitcoin addresses - the virtual post-boxes where each bitcoin is stored - are kept.

It added that cash withdrawals and transfers of bitcoins to - rather than from - Bitcoin Wallets were unaffected.

MtGox said in a statement: "A bug in the bitcoin software makes it possible for someone to use the Bitcoin network to alter transaction details to make it seem like a sending of bitcoins to a Bitcoin wallet did not occur when in fact it did occur.

"Since the transaction appears as if it has not proceeded correctly, the bitcoins may be resent."

How Bitcoin works

Bitcoin is often referred to as a new kind of currency.

But it may be best to think of its units being virtual tokens rather than physical coins or notes.

However, like all currencies its value is determined by how much people are willing to exchange it for.

To process Bitcoin transactions, a procedure called "mining" must take place, which involves a computer solving a difficult mathematical problem with a 64-digit solution.

For each problem solved, one block of bitcoins is processed. In addition the miner is rewarded with new bitcoins.

This provides an incentive for people to provide computer processing power to solve the problems.

To compensate for the growing power of computer chips, the difficulty of the puzzles is adjusted to ensure a steady stream of about 3,600 new bitcoins a day.

There are currently about 11 million bitcoins in existence.

To receive a bitcoin a user must have a Bitcoin address - a string of 27-34 letters and numbers - which acts as a kind of virtual post-box to and from which the bitcoins are sent.

Since there is no registry of these addresses, people can use them to protect their anonymity when making a transaction.

These addresses are in turn stored in Bitcoin wallets which are used to manage savings.

They operate like privately run bank accounts - with the proviso that if the data is lost, so are the bitcoins owned.

Gavin Andresen, chief scientist at the Bitcoin Foundation - which oversees and develops the Bitcoin software - denied the problem was its fault.

"The issues that MtGox has been experiencing are due to an unfortunate interaction between MtGox's highly customised wallet software, their customer support procedures, and an obscure (but long-known) quirk in the way transactions are identified and not due to a flaw in the Bitcoin protocol," he told the BBC.

Garrick Hileman, from the London School of Economics, who researches alternative currencies, said it was too early to tell how serious this was for Bitcoin users.

"It's a reason to be concerned, but it's a little early to say that there's something fundamentally flawed with Bitcoin software. Previous problems have been corrected," he said.

"It reflects the immaturity of the software. Bitcoin is still a technology in the process of being developed," he added.

In an apparent clampdown on the use of Bitcoin in Russia, the Russian prosecutor general's office said it was tightening up regulations surrounding the use of virtual currencies as they could be used for money laundering or financing terrorism.

It said that the rouble was the only official currency in Russia and introducing others was illegal.

"Systems for anonymous payments and cyber-currencies that have gained considerable circulation - including the most well-known, Bitcoin - are money substitutes and cannot be used by individuals or legal entities," it said in a statement to Reuters.

Improperly used

The use of Bitcoin for alleged money laundering led to the arrests of two men in the US last week.

The Miami-Dade State Attorney Katherine Fernandez Rundle told Bloomberg in a statement that the "arrests may be the first state prosecutions involving the use of Bitcoins in money laundering operations."

"Bitcoins are neither good nor bad. Buying bitcoins allows money to be anonymously moved around the world with a click of a computer mouse. Improperly used, Bitcoins are often seen as a perfect means of laundering dirty money or for buying and selling illegal goods, such as drugs or stolen credit card information," she added.

Federal charges have already been brought against the operators of two exchanges for money laundering in the US.

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