Another Bitcoin Exchange Closure

Not another one!

Here is the story describing that Flexcoin is now closed, after a theft of almost 900 Bitcoins (wiping out their customer’s holdings in the process). How can exchanges be in existence for so long and not have a check/balance to track the Asset Holdings and Liabilities?  How is this not a 1-1 relationship?

I assume no one is “loaning” Bitcoins – even the exchange that advertises itself as using “leverage” keeps a margin in excess of the actual position “loaned”. Which is the equivalent of, if you give me $1000 then I will loan you $10. Not the same at all.

On Massive Rainfall I’ve had to wrestle with this as well. Not for the initial trade (which costs little to nothing) but for the continued Mark-to-Market that occurs at 1pm each day (which I cannot confirm actually works). At some point, some trader who goes beyond his “margin” or “deposit” is going to require a “margin call” – similar to a bank calling you saying “Hey! You have no money to pay us, and we’re not allowed to lose money, so pay up or we’ll take your house.” In this case, a “house” is really assets or profitable positions but still.

No, what I have concerns about is that these magic coins aren’t being managed. It wasn’t until the value shot up to hundreds of dollars that anyone started to look. Not cool.

Be a bank first, a technology second.

Sign Up Issues

FYI – there was an incorrect reCAPTCHA key used (and an issue using SSL) that has been corrected. You can now sign up using just an email address and password. Facebook login works too.

Japanese Regulators to Poke Around

The proverbial tulip prices remain strong in the wake of the asset bubble popping. Today Japanese regulators are trying to distance themselves from trying to oversee the currency, but there are growing calls to create a legal framework. I don’t see why just Japan should try to regulate it – the crypto currency of course has nothing to do with Japan. No, my only suggestion is to regulate the exchanges via the Know-Your-Client (KYC) principle and by country.

  • Anyone on the exchange must be identified using 2 pieces of ID and whatever tax forms are applicable to that country.
  • The exchange should limit individuals to only their own residents or citizens. Invalid tax form = account to be closed.
  • Tax Withholding on the capital gain at the maximum rate (as per tax treaties etc) should be calculated (but not withheld) as if the crypto currency was a security in that country. Reporting of those tax amounts should be passed onto the local tax authority for the individuals or corporations to file at tax time

I’m not a tax expert, and there’s probably loads of issues with what I recommend. Such a system would benefit corporations (who can have multiple subsidiaries in different countries) and who can arbitrage across different exchanges, or individuals who can exchange Bitcoins in black-market “Non-participating Foreign Financial Institution” exchanges that do not enforce KYC or tax reporting.

Similar to their FATCA equivalents, the other Bitcoin exchange participants can withhold gross proceeds starting in 2017 to those exchanges.

Purists (and anarchists) would suggest the entire point of a crypto-currency is to avoid identifying yourself for transactions. And I firmly object because it will encourage the exchange of illegal goods and money laundering on an international scale where policing is difficult or impossible. So does cash. But illegal cash transactions are more able to be policed by local law enforcement – my two cents.

Elvis has left the building

Unfortunately, the MtGox Bitcoin Exchange has stopped or collapsed – and as a result Massive Rainfall has:

  • halted (or frozen) any Securities that are derived from that exchange.
  • halted (or ‘frozen’) any outstanding Orders that will also be cancelled eventually.
  • Open trades will be marked to the last closing price and will expire immediately.

Doing this was relatively straight forward – though I should automate this for ease-of-use.

Massive Rainfall Derivatives Exchange (MRDE) will continue to allow other Bitcoin futures to trade using other underlying Bitcoin Exchanges (search on CAD or USD for a list of Bitcoin Futures currently available).