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Originally published February 26, 2014 at 5:34 PM | Page modified February 26, 2014 at 6:58 PM

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Feds said to probe collapse of big bitcoin exchange Mt. Gox

Manhattan U.S. Attorney Preet Bharara and the FBI are probing possible criminal violations tied to the shutdown of bitcoin exchange Mt. Gox, sources say. For defenders of bitcoin, that’s a good thing.

Bloomberg News and Los Angeles Times

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Manhattan U.S. Attorney Preet Bharara and the FBI are probing possible criminal violations tied to the shutdown of Tokyo-based Mt. Gox, once the world’s largest exchange for digital currency transactions, two people familiar with the matter said.

Mt. Gox’s closure comes after months in which the currency’s price soared and bitcoins attracted increased attention from investors and customers, as well as scrutiny from U.S. regulators over possible money-laundering and fraud.

Bharara’s office has requested documents from businesses that provide bitcoin services, said the people, who requested anonymity because the matter isn’t public. One of the people said the matter is in its preliminary stages and isn’t yet a formal investigation.

Reports that hackers may have pilfered more than $390 million in bitcoin from Mt. Gox prompted companies from San Francisco to London as well as their industry group, the Bitcoin Foundation, to assure bitcoin users their funds won’t disappear due to theft or mismanagement.

Jennifer Queliz, a spokeswoman for Bharara, would neither confirm nor deny the existence of an investigation.

The collapse of Mt. Gox might seem like bad news to some. But many in the bitcoin sector see it as a welcome development. And the blow it’s caused to bitcoin’s credibility seems to have supporters rallying together.

Part of the reason is Mt. Gox, while one of the first bitcoin exchanges, had seen its reputation decline in the past year as it suffered glitches and other issues. In that vein, many bitcoin enthusiasts say: Good riddance.

“There have been red flags around Mt. Gox for some time, which in part led to it losing its role as the dominant bitcoin exchange,” said Jeremy Liew of Lightspeed Venture Partners. “Hopefully now there will be an opportunity for a U.S.-based, regulatory-compliant exchange to build meaningful liquidity.”

Others argued the bad publicity would be a short-term issue. Indeed, they noted that after declining for a couple of weeks, the price of bitcoins has begun to rise.

“Bitcoin is already very volatile, and the negative PR from the experience is definitely a setback for the ecosystem,” said Adam Draper, who founded the Boost startup accelerator.

“But the community is rallying behind bitcoin very heavily in response, and I think it will have limited impact on the trust of the protocol/currency overall.”

Some noted other bitcoin-related businesses remained sound despite the Mt. Gox situation.

“Bitcoin is not going away — it is a game-changing technological innovation,” said Brian Klein, a partner at Baker Marquart who has written and spoken about bitcoin. “Every day, established and respected entrepreneurs are setting out to build great Bitcoin businesses and will do so.”

Barry Randall, portfolio manager for Covestor, also argued the issue may be more about Mt. Gox than bitcoin as a whole. Security seemed to be a problem for Mt. Gox, he said.

The real question is whether other bitcoin exchanges learn from that and have stronger security in place, he said.

“So the problem here is with Mt. Gox, and not, it seems, with the security or permanence of bitcoin or the encryption mechanism on which bitcoin relies,” he said.

“That said, it’s not clear if any other bitcoin exchanges, like Coinbase or Bitstamp, have security measures in place that are any more sound than those of Mt. Gox.

Fred Wilson, a partner at Union Square Ventures, which has invested in Coinbase, said on his blog he actually went out and bought some bitcoins because he feels “good buying when there is blood in the streets in any market. It is my favorite time to buy.”

In the post, Wilson said such events such as the Mt. Gox collapse are just part of the natural order of things when it comes to revolutionary technologies.

“We are witnessing the maturation of a sector and part of that will inevitably be failures, crashes and other messes,” he wrote. “Almost every technology that I’ve watched come into a mass adoption has gone through these sorts of growing pains.

“One big difference is that in addition to technology, we are also talking about people’s money when we talk about bitcoin. To me, that doesn’t change the discussion and the implications, but it sure does amplify the emotions around it.”

One of the most vocal defenders of bitcoin on Tuesday was Marc Andreessen, whose venture firm Andreessen Horowitz has invested a little less than $50 million in Bitcoin startups.

In a series of tweets, Andreessen said, “This is exactly what one would predict for a normally functioning financial market without systemic risk.”

He added, “Every important new technology has birthing pains. PC did, Web did, bitcoin does. Our enthusiasm and commitment unchanged.”

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