By Misa Bretschneider

On Tuesday, Mt. Gox, the world’s leading Bitcoin exchange, abruptly closed down its website amid reports that the company had lost 744,408 Bitcoins—equivalent to about $380 million, or 6% of the total Bitcoins in circulation—in a large-scale theft.  The theft, which apparently went unnoticed for years, involved a transaction malleability glitch that allowed hackers to take advantage of unconfirmed transaction payments and seep funds from Mt. Gox without notice—until now.

The theft further mars Bitcoin’s already shaky reputation, and the latest attacks signal another “setback for efforts to gain legitimacy for the virtual currency.”  However, some optimists view the theft as merely “growing pains” for the cyptocurrency, arguing that the fall of Mt. Gox will only lead to a more stable future for the Bitcoin.  As Anthony Hope, a former British Treasury official and now head of compliance at Hong Kong-based MatrixVision, noted, “It’s good for us as a business, not so good for us as consumers . . . Over the longer term it will be good for Bitcoin because over time the entire ecosystem will be made more robust.” Others are not so optimistic, viewing this most recent incident, the latest in a string of thefts, as writing on the wall that the end of Bitcoin is near.

Either way, both sides agree that the theft has hurt both the confidence and wallets of Bitcoin investors, who understandably are left second guessing their investments and worrying whether they’ll ever see their money again. Bitcoin investors are stuck in a precarious position because when a hacker steals Bitcoins from their digital wallets, the investors lack legal recourse.  In other words, Bitcoins don’t offer the same payment assurances that a government-backed currency does.   Although Bitcoin companies have been trying to secure FDIC-style insurance, as of now, once the money is gone, investors are simply out of luck.  Indeed, Mark Williams, a Boston University banking and risk management specialist, argues that the Bitcoin is not really a currency but a commodity,—“a high-risk commodity, a speculative commodity.”

But if the Bitcoin is a speculative commodity, how should the law protect these investors?  With many comparing the Bitcoin craze to a modern-day tulip mania (i.e., glorified gambling) , would it be fair to afford such risky investors consumer protection measures reserved for more conservative and prudent bank account holding counterparts?  We only need to look back to the 2008 financial crisis to find evidence that the public would probably not warm up to the idea of “bailing out” investors who proactively engaged in arguably speculative transactions.

This legal issue also seems reminiscent of the consumer protection debate over crowdfunding.  While ordinary consumers are allowed to invest in, e.g., risky startups, they’re still afforded legal protection.  Most argue that such protection is necessary to encourage crowd-funding and thus promote business and financial growth.  However, if, as many analysts predict, the Bitcoin becomes a “major means of payment for e-commerce and may emerge as a serious competitor to traditional money-transfer providers,” then perhaps we protect this “currency of the future”?