(Update: Withdrawals still pending as MtGox blames flaw in bitcoin protocol)

On Friday, MtGox announced that it was temporarily halting all withdrawals, both small and large, to work out their technical issue that they claim is hampering the processing of bitcoin transactions.  Delays in bitcoin denominated withdrawals have been reported by customers since the end of January, while fiat based processing has been a problem since the middle of 2013.  Before the halt, customers who had attempted to initiate bitcoin withdrawals of large sizes (at least greater than one bitcoin), were seeing their requests being stuck.

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Exact reasons for the problems are unknown, but within forums and on Reddit, one of the prevailing theories is due to a technical glitch in MtGox’s custom bitcoin wallet.  Over the weekend, core bitcoin developer, Gregory Maxwell provided his take on Reddit.  According to his opinion, patches that MtGox had created to deal with design flaws in the bitcoin protocol may have led to certain transactions having invalid signatures that weren’t picked up by the bitcoin network (best understood by reading Maxwell’s explanation).  In his opinion, Maxwell didn’t believe that MtGox was insolvent due to “the technical background doesn’t support this conclusion”, but even after fixing its code would be facing an “accounting mess to clean up.”

Beyond the technical glitches, the company appears to also be the target of investigations regarding Bitinstant and Silk Road which are limiting their ability to provide withdrawals to certain customers.  In addition to a formal statement in relation to Bitinstant, MtGox Manager of Business Development, Gonzague Gay-Bouchery, was quoted as saying to a customer who documented his encounter with him at MtGox headquarters that “There are also some ongoing investigations, which we cannot talk about.”  These problems affecting bitcoin transactions are in addition to the well documented issues MtGox has been having with its banking partners in regards to fiat currency transactions.

Coming back to this week, in MtGox’s statement on Friday, the company said that they would provide “provide an update on Monday, February 10, 2014 (JST)”.  However, the exchange never mentioned any guarantee that the transactional problems will be resolved.  In addition, MtGox never stated that stuck withdrawals would be processed, but that the amounts would reappear in their accounts as they said “All bitcoin withdrawal requests will be on pause, and the withdrawals in the system will be returned to your MtGox wallet and can be reinitiated once the issue is resolved.”  As such, customers will need to reinitiate their withdrawal requests which could trigger bottlenecks again for the processing of withdrawals.  Therefore, while MtGox customers and traders at other exchanges are looking towards tomorrow as a deadline, it is possible that the delays may continue for a much longer period as the company needs to implement both a technical and accounting fix.

Competitor opinion

There is a bit of debate on whether the current problems at MtGox are negative or positive for competing firms.  Heads of two bitcoin exchanges that operate regional exchanges have stated to us that they are seeing increased demand.  While their spreads are higher than what is available at larger firms like MtGox or Bitstamp, having a local address can provide additional client trust.  Commenting on the effect of withdrawal problems at MtGox, Eli Bejerano, CEO of Israeli Bit2C stated to DC Magnates that “It has only good effect to Bit2c. We have a good reputation of our internal order book and depend on no one as we are the only platform in Israel that reflects the local price with a real supply and demand in NIS.”  On the other hand, within forums and chat, traders have mentioned that overall exchanges could be impacted negatively by the decline in prices as a result of selling pressure at MtGox.

What will happen tomorrow, let us know in the comments.