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Law enforcement officers in Japan recently indicted former Mt. Gox CEO Mark Karpelès. The leader of the now-defunct Bitcoin repository has been in custody since June as investigators consider what might have happened to more than $183 million in lost Bitcoin funds.

Given the scope of the loss, the current charges Karpelès faces seem small time: He allegedly embezzled $2.6 million for some software development rights and a fancy new bed. Of course, the actual charges are often the tip of the iceberg in such cases. To be fair, though, the Karpelès legal team denies any wrongdoing and says the money he spent belongs to his company, not his clients.

Whether you regard Karpelès as a player or a scapegoat, it is clear that some funny things were happening at Mt. Gox. The company, which was handling millions of dollars per year in transactions, didn't even have a software version control system, and according to a story in Wired [1], at the time the systems went offline, they had only recently launched a test environment for systematically testing software changes before going live with them.

Perhaps more alarming, some clandestine bots were running continuously on the internal network, conducting fake or carefully timed transactions. These bots, which have since been given code names like "Willy Bot" [2], appear to have been used to pumped up the Bitcoin price, and investigators are also considering whether the secret processes might have somehow extracted wealth by gaming the system.

The mounting scandal around Mt. Gox has not brought down the Bitcoin system as a whole, and Bitcoin advocates believe the event is simply a rut in the road as the crypto-currency ascends to its inevitable role as the coinage of the new millennium. On the opposite extreme, some economists believe the whole Bitcoin experience is little more than a Ponzi scheme [3]. Regardless of where you might fall in the Bitcoin spectrum of enthusiasm, it seems quite clear that Mt. Gox was not ready to challenge the world's financial system, and a 28-year-old hacker named Mark Karpelès was paddling in water that was way, way over his head.

All this comes down to an issue I have discussed in this column before: the illusion of technical innovation through the simple avoidance of regulatory oversight. Bitcoin "eliminates the middleman," reducing overhead and, therefore, minimizing transaction fees when compared with conventional banking. But, until now, this lean and regulation-free environment has meant you don't really know who is watching the money. In the wake of the Mt. Gox collapse and other Bitcoin scandals, governments are starting to step in to enact rules and frameworks for regulating Bitcoin transactions. New York enacted its BitLicense regulatory framework earlier this year, and California has also passed a bill mandating Bitcoin regulation. The UK and several European countries are considering similar measures.

Although these new regulations are largely welcomed by Bitcoin users, they are not always popular with Bitcoin vendors. One notable Bitcoin startup announced they were leaving New York as soon as the new regulations were announced [4].

When the wheel emerges from the rut and the whole Bitcoin wagon starts down the road again, it is likely the crypto-currency will be safer, more secure, and less prone to embezzlement and manipulation, but also less free-wheeling, less anonymous, and less profitable for companies looking to reduce office overhead and minimize transaction fees. In other words, Bitcoin will start looking more like the conventional banking system.

When that day happens, the old and new currencies will compete as equals. Will Bitcoin survive that transition and become the bank of tomorrow? It all depends on who you ask. But one thing is certain: Millions of credit card numbers are compromised every year, and the conventional banking system is subject to many of the same kinds of shenanigans that brought down Mt. Gox. So either way, we gotta be working on our money.

Joe Casad, Editor in Chief