MtGox theft and how Peercoin is safer

General
1

There is an apparently leaked document on the internet that says “744,408 BTC are missing”

www.scribd.com/doc/209050732/MtGox-Situation-Crisis-Strategy-Draft

Peercoin’s design has a central checkpointing feature which can stop an attack on its network by the creator of Peercoin (Sunny King)

I think if a major theft of this nature would have occurred with Peercoin, any unspent coins that were traced from a major theft could have been returned to MtGox with the consensus of the community and Sunny King’s coded solution.

A major theft reversal policy by coin developers should be designed for this kind of scenario though. According to the leaked document, MtGox plans to re-brand itself as just GOX.com, so we may see a repetition of this problem with them in the future.

I am happy that MtGox did not trade Peercoin / PPC, which leaves our reputation untarnished.

I have always felt safe with Peercoin and Sunny King’s foresight in his design and I think Peercoin is proving to remain safe and stable in the long term.

2

If the document is proven to be authentic, it indicates that this has gone on for years. In that case, those stolen coins would have been filtered out in the system, gradually, so would check pointing really be able to do anything? It seems to me that trying to fix (revert) this situation would unintentionally affect people who bought those coins legitimately, either in an exchange or through a purchase of products for bitcoins.

I agree that check pointing is useful, in some cases, like the theft of coins from a hack, but is it really advantageous for Peercoin if people begin to repeat this “benefit”? If it’s something that we can defend, coherently, then by all means, let’s run with it. It seems like a risky tact, even without the pre-existing criticisms (regardless of their validity) of checkpoints.

3

One way I could see it being done, is if a significant amount of the community some how used their proof-of-stake to vote on whether or not a transaction was reversed.

For instance, say 50,000 coin was stolen, and 51% of all proof-of-stake holders voted some how, at a cost of destroying coin-age, or at a cost of 0.01 transaction to a particular wallet address (which was then subsequently destroyed after the vote).

Some way, that the community in its majority could vote, etc, I don’t know. Something to think about.

4

This might be off topic, but do you honestly think a company is so incompetent they wouldn’t notice that there was a 744,408, or $372M discrepancy in their accounting over the course of TWO years? Keeping track of your money in, money out, and money on hand has to be one of the easiest things to implement and most common sense things you would do with any system using money.

5

I think the big issue with GOX was that they relied on automatic Bitcoin withdrawals and had no audits of their own internal figures (this is something that exchange regulation could help on).

As they were reliant on their own internal balances being correct and withdrawals being tied to the transaction ID then when someone withdrew their coins, changes the transaction ID and then opened a ticket to say that they hadn’t received their coins; GOX had no way of knowing if the withdrawal had happened… They can see the transaction in their logs but not on the blockchain (as the ID was changed) therefore they “refund” the user and basically change the BTC balance in the GOX wallet with more BTC that never existed in the first place (they only existed within the GOX system).

The user then withdraws these new coins and leaves the transaction ID alone (I assume they can only do this one for the same withdrawal before getting noticed but who knows!). This is why the cold storage Bitcoins are no use, they created so many “ghost coins” (where they only exist within the GOX system) that they had to use their reserves to meet the withdrawals.

I suspect this is why they noticed it and suspended withdrawals because someone clocked that they didn’t have anywhere near enough coins in cold storage compared to what they thought they should have.

That might not be the most succinct explanation as I’m in a rush, but if you are going to track deposited coins “off-chain” and then essentially have no record of withdrawals this could happen to any crypto-currency. There are other process oversights which could lead to the same situation not just the transaction manipulable bug (which I think was a symptom rather than the cause). The cause of the GOX issues was bad internal auditing and process.

It is worth bearing in mind that this happens in banks and other financial institutions as well, the problem with it being Bitcoin is that a lot of people were overexposed to Bitcoin and will have financial stresses now.

6

It’s my personal belief that they noticed this issue at the time that they froze USD withdrawals (late-summer, 2013), but figured they could “deal” with it and make themselves whole by using the price differential to arbitrage their own customer’s coins. Unfortunately, they made it worse.

While it appears that the transaction malleability issue has been affecting them for a long time, I also can’t help but wonder if it was an inside job. Mt.Gox leadership may not have known it was going on, but someone internal was feeding information out to external parties, who were taking advantage of the situation. This internal person, or persons, was also running interference and obfuscating the fact that their balances didn’t reconcile and they were dumping cold storage funds directly into the hands of those people gaming the system.

Edit: Grammar and spelling

7

nox-, your statement really spawns a lot of new thought!

Watching cryptocurrency develop is like analyzing our current financial industry as a public exercise. We get to experience things that are normally kept quiet and private under lock and key… Since all Bitcoins sit on a public block chain, we all get to watch the where they go, and what happens to them.

I love this cryptocurrency. This is whole idea good for the world, even in good times as well as bad.

The only difference here now the public can unite together to create market conditions to allow virtual currency to flourish. What an interesting exercise. I can’t wait to see what happens next.

Peercoin is on the scene now, let’s see what we can do to help.

8

Excellent comments every single comment. Very thought provoking and informative.

9

It’s strange how the market has responded in the past 24h. I compare it to cutting a cancerous tumor off a leg; it hurts immediately, and then you realize that you’re a lot healthier without it. The market must have already priced in the negative expectations of Gox’s collapse over the past couple weeks.

10

Just read this on bitcointalk, posted by “CoinCube”:

Failure to understand Bitcoin will indeed cost investors Billions. 744,408 BTC stolen (nearly 7% of total mined coins to date) and some people seem to be cheering like this is a good thing because they don’t like (long despised) MtGox. This is far far from over. Where did those stolen coins go? Well check your wallet because they were likely fed back to the markets. If you have been buying bitcoins on any exchange chances are you have some of the stolen loot yourself. These stolen coins can be traced back to their true owner in a direct chain of title thanks to the block chain. If you don’t think this matters you don’t understand the legal system and the principle of Nemo dat quod non habet

Under both American and English law the original owner of stolen property can demand ownership be returned to him if he can prove a chain of title (something the blockchain conveniently provides). The only recourse for an innocent buyer of stolen goods (and only in some jurisdictions) is to argue the exchange it was bought from had an implied warranty and he can try to sue the exchange after returning the coins to the true owner. MtGox is insolvent good luck there. BTC-e is run by anonymous folks think they will stick around in the face of massive lawsuits?

But cheer up there is still a chance most MtGox victims will get their coins back. The threat of massive unending lawsuits targeting innocent bitcoin buyers is an existential one for bitcoin. The 10-15 early adopters stand (by far) to lose the most if bitcoin goes down in flames. They might actually decide to buy out MtGox for the 744,408 bitcoins (an amount grossly exceeding the worth of the company) not because they are altruistic people, but because the chain of lawsuits that would follow if they don’t act may hurt their holdings more than the loss of 744,408 bitcoins. It’s a lot of money, however, so its likely a difficult call for them. Regardless expect all future exchanges to require both rigorous identity checks prior to buying and selling as well as fine print stating that anyone who supplies coins to a market is ultimately responsible in the event those coins are determined to be “black” or stolen goods in the future.

11

Fascinating read, RobertLloyd. Do you happen to have a link back to the original BitcoinTalk article? I’m interesting in reading the comment in context and any follow-up discussion that comes from it.

12

Here we go:
https://bitcointalk.org/index.php?topic=486872.0

Best to start on page 5

13

Yes, it is well presented RobertLloyd.

Jon Matonis of the Bitcoin Foundation and a columnist for Forbes also wrote on this subject of Nemo dat quod non habet.

Edit: here is the Jon Matonis blog on the subject including a couple of other informative articles on the subject linked within:

Jon cited case law that was the opposite of Nemo dat quod non habet regarding money so that someone receiving money in good faith not knowing it had been stolen did not have to return money to a person earlier robbed of it.

Nemo dat quod non habet applies to distinctly identifiable things like the art works stolen by the Nazis during WWII, or any identifiable artwork for that matter, but less identifiable items like common jewelry and diamonds naturally fade into exclusion with their increasing inability to be distinctly identified.

I think case law is undecided on this matter in re Bitcoin because it has not been decided exactly what Bitcoin is. It probably will make new law. But the public ledger traceability does not augur or bode well in bitcoin’s favor as RobertLloyd indicates.

Cryptocurrencies may have to adopt an anonymizing feature in the future such as for example the zerocoin protocol. One step at a time.

Bitcoin not only has the 744K mtgox problem, but there is also the 96K stolen recently and the 450K or so that the FBI knows went thru Silk Road but the FBI doesn’t have the keys to so they can’t immediately seize the coin. Surely, they have software tracing these coins by now. And what about when coins are divided and recombined some part tainted and some part not? And tumblers? And coinslinger?

The good news is so far as I know Peercoin has pretty much been free from piracy, theft and known illegal dealing but it is highly important that security be beefed up as much as possible because as Peercoin value rises the desire to steal it will rise also. I think malware will become dramatically more sophisticated and intrusive over the immediate coming years because of the stealable nature of cryptocurrencies.

The blockchain protocols have so far been remarkably secure but the end points, i.e. user’s machines, are weak. I believe this is where we need to really work on improving security.

14
Nemo dat quod non habet

I suspect this works well in cases of tangible property, like a work of fine art, a sports car, a house, a television, etc, etc.

But it doesn’t work as easily with cash for instance.

Let’s say a thug robs an elderly person on the street and gets $10. They then go to a nearby store and buy a pack of cigarettes.

You come in as in innocent person and buy something, hand $20 the clerk, and get that stolen $10 in change.

You go and eat at a restaurant, and leave that $10 in a tip for the waitress who innocently gets it.

Some lawyer runs in the room screaming " Nemo dat quod non habet ", can prove he can trace that $10 through 3 different people to be the same $10 that was stolen from the elderly person and the case begins.

I would expect that " Nemo dat quod non habet " only would apply where every person in the chain was fully aware of it’s original origin, or at the very minimal, had first hand knowledge that they were getting something in a suspicious way.

I am not a lawyer. What I’ve stated is my opinion only.

15

[quote=“ppcman, post:14, topic:1702”]Let’s say a thug robs an elderly person on the street and gets $10. They then go to a nearby store and buy a pack of cigarettes.

You come in as in innocent person and buy something, hand $20 the clerk, and get that stolen $10 in change.

You go and eat at a restaurant, and leave that $10 in a tip for the waitress who innocently gets it.

Some lawyer runs in the room screaming " Nemo dat quod non habet ", can prove he can trace that $10 through 3 different people to be the same $10 that was stolen from the elderly person and the case begins.[/quote]

@ppcman, yes I think your example is an excellent one illustrating why this principle has not been applied to cash money.

I note on the bitcointalk link many who lost their coin are indignantly demanding that their coin be returned to them, no matter what, without realizing people who might hold it now may have paid good honest money, effort or goods to obtain it. Surely, everyone sympathizes with people’s loss, but what about people who had their coin in mtgox before the collapse and they traded good honest money, effort or goods to get their coin, but what they deem as rightfully theirs was actually stolen two or three or more trades back before them? Would they be willing to give up their coin to someone robbed before them? I don’t think so.

16

I suppose there is also the point that these might not even be viewed as “stolen” - If MT.Gox approved the double withdrawals then they were legitimately released by GOX (incorrectly) but the user didn’t perpetrate any theft.

This all boils down to incompetence and poor auditing/processes at GOX rather than a ‘heist’ where the Bitcoins were taken from GOX.

On a very basic level you could liken it to the sub-prime mortgage crisis, banks had lent out money they didn’t have and couldn’t service which led to people losing thousands of pounds/dollars as well as their houses. The main difference is that people knew (or should have known) that their money is at risk in an investment like Bitcoin and even more at risk if they leave it on an exchange; while with the houses everyone told them it would be a safe investment!

17

It’s easy argue that it was Mt.Gox’s responsibility to catch those double withdrawals, but requesting a second withdrawal, after modifying the transaction so that it wouldn’t show up for the support agent who was investigating the issue, is – at least to me – a pretty straight-forward example of fraud.

In the rare case that it was a legitimate double-withdrawal, due to an issue on Mt.Gox’s side, and not instigated by the customer, then I agree it wasn’t theft. However, there’s no indication that the scenario actually occurred.

18

I have to say I really don’t like this idea personally. If somebody lost coins, or they gets stolen etc, he shouldn’t have any way to recover it trough peercoin network.

“path to hell is paved with good intentions”

19

It’s easy argue that it was Mt.Gox’s responsibility to catch those double withdrawals, but requesting a second withdrawal, after modifying the transaction so that it wouldn’t show up for the support agent who was investigating the issue, is – at least to me – a pretty straight-forward example of fraud.

In the rare case that it was a legitimate double-withdrawal, due to an issue on Mt.Gox’s side, and not instigated by the customer, then I agree it wasn’t theft. However, there’s no indication that the scenario actually occurred.[/quote]

I completely agree that the user would have committed fraud by taking advantage of the transaction malleability bug; but given that it looks like GOX had no auditing procedures then it’s going to be very hard to prove that a user did this rather than it being a legitimate double-withdrawal that’s more the point I was driving at so it’s going to be very hard to prove that any coins were ‘stolen’ coins rather than legitimate withdrawals.

I doubt GOX has records of deposits/withdrawals that could be tied up with the blockchain to see who had two withdrawals leave their GOX account but only one deposit on the Blockchain.

20

It would be sad if anybody who didn’t use Gox got caught up in things. I lost a lot in Gox and I would turn down recovery that involved winding back transactions.
Luckily I don’t think there is any practical way to do this.