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Bitcoin hit by denial of service attacks as regulators prepare clampdown

A chain of block erupters used for Bitcoin mining is pictured at the Plug and Play Tech Center in Sunnyvale, California October 28, 2013. RE
A chain of block erupters used for Bitcoin mining is pictured at the Plug and Play Tech Center in Sunnyvale, California October 28, 2013. RE

By Emily Flitter and Douwe Miedema

WASHINGTON/NEW YORK (Reuters) - Bitcoin is being hit by attacks from unknown computer hackers who are sending "mutated" lines of code into the program that runs the virtual currency, a spokeswoman from its main trade organization said in a statement on Tuesday.

The attacks are responsible for problems experienced by two bitcoin exchanges that caused them to temporarily halt withdrawals by customers who stored bitcoins in digital wallets provided by the exchanges, the Bitcoin Foundation said in a statement.

"This is a denial-of-service attack," said the spokeswoman, Jinyoung Lee Englund. "Whoever is doing this is not stealing coins, but is succeeding in preventing some transactions from confirming. It's important to note that DoS attacks do not affect people's bitcoin wallets or funds."

Englund said a team of core software developers who focus on bitcoin were working to fix the problem, but until it was solved some users would not be able to do anything with their bitcoins, and the affected bitcoins would appear to be "tied up" in transactions.

"Only users who make multiple transactions in a short period of time will be affected," she said.

On Tuesday, Slovenia-based Bitstamp became the second major bitcoin exchange to halt customer withdrawals in the past several days, citing "inconsistent results", and blaming a denial-of-service attack.

That was a day after Mt. Gox, the best-known digital marketplace operator, said a halt on withdrawals would continue indefinitely. Traders reacted to the halt by sending the value of bitcoin to its lowest in nearly two months.

The price of bitcoin, which has gained wider acceptance in recent months, varied dramatically from one exchange to another. On Tuesday, it was quoted at $645 per coin on Bitstamp's exchange, down 6 percent on the day.

NEW MOVES BY REGULATORS

Also on Tuesday, Canada said it will toughen rules targeting money laundering and terrorist financing to keep a closer eye on the use of virtual currencies.

Meanwhile, in Washington, Benjamin Lawsky, superintendent of New York's Department of Financial Services, expects to adopt consumer disclosure rules, capital requirements and a framework for permissible investments with consumer money.

"Our objective is to provide appropriate guard rails to protect consumers and root out money laundering without stifling beneficial innovation," Lawsky said in a speech at the New America Foundation in Washington.

Lawsky said last month that his agency plans to issue rules for businesses handling virtual currencies, including a "BitLicense", which could make New York the first U.S. state to regulate virtual currencies such as bitcoins.

Bitcoin proponents like the fact that it and a host of other currencies generated by computer programs are not backed by a government or central bank, and that their value fluctuates only according to demand.

"The really tricky question for regulators is how we structure those types of rules in light of the fact that the funds these firms hold are not denominated in dollars or other forms of traditional fiat currencies," Lawsky said.

Lawsky expected to release the regulations in the spring or the summer of this year, and said the agency would seek public comment once it had published the plan in a so-called notice for proposed rule-making.

His agency is still wrestling with the question of whether to ban or restrict the use of "tumblers", which obscure the record and source of virtual currencies. Tumblers are a concern to law enforcement, but they might also have legitimate uses.

He said most virtual currencies have public ledgers which, when combined with know-your-customer guidelines, could serve as anti-money laundering controls.

The remarks follow two days of hearings in New York on the potential regulation of virtual currencies. Witnesses at the late January hearings included state and federal prosecutors, as well as industry participants such as the investor twins Cameron and Tyler Winklevoss.

(Additional reporting by Karen Freifeld in New York. Editing by Andre Grenon and Ken Wills)

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