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Bitcoin Exchange BitFloor Loses $250K to Hackers, Stops Trading

The past year and a half have not been kind to Bitcoin (BTC) electronic cash exchanges.
/ Source: SecurityNewsDaily

The past year and a half have not been kind to Bitcoin (BTC) electronic cash exchanges.

Mt. Gox, the main Bitcoin exchange, fell victim to hackers who drove the crypto-currency's value below a penny in June 2011. Then in February, Canadian e-payment company Paxum was forced to stop trading Bitcoins because their more established banking partners considered the digital currency to be "high-risk." That move significantly hurt BitInstant and Tradehill, two other emerging Bitcoin exchanges.

Now the New York City-based BitFloor is bearing the brunt of bad  Bitcoin news.

Last night (Sept. 4), the trading platform announced that several servers had been compromised, resulting in the loss of 24,000 Bitcoins — the equivalent of a quarter of a million dollars at current exchange rates.

Bitcoin is electronic cash that uses public-key cryptography to enable trading partners to make, verify and accept instant, sometimes anonymous, online payments. Bitcoin addresses, or "keys," stored in an electronic wallet on a network or computer, have corresponding public and private keys used to authorize transactions between wallets. Today, a Bitcoin is worth $10.43.

As explained by BitFloor founder Roman Shtylman in an open letter  on a popular Bitcoin forum, the $250,000 heist occurred when hackers breached BitFloor's servers and accessed an unencrypted backup of Bitcoin wallet keys.

"Using these keys they were able to transfer the coins. This attack took the vast majority of the coins BitFloor was holding on hand," Shtylman wrote.

The theft has left BitFloor's future uncertain. At the moment, the exchange nets about $2,000 each month in trading fees — a meager sum compared with what was stolen. At the moment, BitFloor doesn't have the capital on hand to pay back all the losses, but it is exploring its options for paying back customers.

In response to a thread comment that asked about potential investors who may be willing to cover the funding gap, Shtylman said it was a move he'd definitely consider.

"I have paused all exchange operations," Shtylman said.

He added that while only a "small majority of the coins are ever in use at any time," he decided it was "inappropriate" to continue to operate without having the funds to cover Bitcoin account balances.

For now, BitFloor has put a stop to all trading and is totally offline except for a notice that asks customers not to deposit anything else into their accounts.

Will BitFloor rise again? That's Shtylman's hope.

"One of the last things I want to happen is for BitFloor to shut down," he said, describing a permanent closure as a "last resort."

If a shutdown does occur, Shtylman said BitFloor will make every effort to make its customers' accounts whole.

In the event of a complete dismantling, BitFloor will use its cash on hand to begin making account repayments.

Shtylman was sure to mention that no data was lost in the attack.

"I still have all of the logs for accounts, trades, transfers. I know exactly how much each user currently has in their account for both USD and BTC," he said.

BitFloor, which also holds accounts in U.S. currency, said no traditional currency was compromised.

Bitcoin has traditionally been used by those who like to lurk in the darker corners of the Internet. Because of its anonymous qualities, the online currency has been used as a way for groups on the wrong side of the law, such as LulzSec and WikiLeaks, to accept donations.

It's also the only way to buy or sell items on Silk Road, an online, open illicit drug bazaar.