What Bitcoin Must Do To Survive

That is the consensus emerging in the Bitcoin community in the wake of the apparent demise of MtGox, the once dominant Bitcoin trading site.

It is still not entirely clear what has happened to what was once the world's largest Bitcoin exchange, which went offline over night. The company said in a statement on its site that it had halted trading "in light of recent news reports and the potential repercussions on MtGox's operations and the market."

But as we've detailed, MtGox has for nearly a year been regarded as something of a basket case in the Bitcoin community, with complaints from customers about lengthy delays in taking money and Bitcoin out of their wallets, and a general lack of responsiveness.

As SecondMarket's Barry Silbert told us this morning, "The sooner that MtGox goes away, the better."

Erik Voorhees, who earlier published his state of mind upon realizing his $285,000 in Bitcoin were likely gone forever, told us in a follow-up interview that while he is not thrilled about his financial losses, he looks forward to the Bitcoin community putting what he called the "cancer" of MtGox drama behind it.

"The reason that many people stored coins on MtGox is not that they all were active traders, but because MtGox was a convenient 'wallet' or 'deposit box' for them," Oleg Andreev, a software designer and digital security expert, told us by email. "Unfortunately, we don't yet have very safe and easy to use wallets to store your Bitcoins on your personal computers."

Andreev envisions a three-key back-up plan where one key would be owned by you, one by the custodian and one by a separate service that holds the key in "cold storage," or in physical form. This would avoid most of the problems Gox users suffered.

"You will be able to withdraw your coins instantly. If the server is compromised, company does not lose even their "hot wallet" funds. And if you forget your password, technical support will take their encrypted "cold" key and help you move your coins where you want."

The moment may prove most profound for Bitcoin regulation. Jeremy Liew, a leading Bitcoin investor at Lightspeed Venture Partners, had previously gone on record at last month's New York Bitcoin hearings as opposing rigorous regulation. But in the wake of MtGox, he now thinks it's necessary for mainstream adoption. Here's what he Tweeted earlier:

He elaborated on this point to Bitcoin activist Ryan Selkis, who first unearthed the document alleging the massive theft at Gox. We confirmed the authenticity of the quote by email with Liew.

"I think a regulatory solution would do more to increase ordinary consumer confidence in Bitcoin and its institutions than one that is purely market driven or industry led. I am well aware of all the challenges that regulatory solutions have, but if Bitcoin is to become a mass market product, then it will require measures to lift confidence from those who will not understand a technology solution that their BTC is safe.I advocated against new BTC specific regulation at Lawsky's hearings last month, but I now think that some sort of regulation covering customer funds security may make sense if there is going to be a BitLicence."

New York Department of Financial Services Superintendent Ben Lawsky agreed regulations are needed to shephered Bitcoin into the mainstream. Earlier, he released a statement saying in part, "These developments underscore that smart, tailored regulation could play an important role in protecting consumers and the security of the money that they entrust to virtual currency firms."

For now, Voorhees says, the market reaction is overdone, since few of the largest and most important businesses had funds stored on MtGox. While did not rule out another Gox announcement could yet complicate the Bitcoin landscape, he pointed out that few major Bitcoin businesses had their funds stored there.