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Bitcoin Exchange Transparency

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bitcoin-exchangeIn the aftermath of the Mt. Gox debacle, it seems possible at least that the company was trading illegally on one or more levels, including, but not limited to, trading while insolvent, trading as a bank, operating a fractional reserve banking system without proper authority, running a borderline ponzi scheme, even possible fraud.

While Mt. Gox and Mark Karpeles will no doubt be fully investigated by at least the Japanese and US authorities, and charges brought where necessary, the focus must now be on preventing a repeat. 

Our first thoughts go out to the many innocent victims of Mt. Gox and Mark Karpeles who have collectively lost hundreds of millions of dollars in Bitcoin and cash. Nothing can be said to diminish the pain of all concerned and our thoughts and sympathy can only go out to them.

The silver lining, to the extent there is one, is that there are numerous lessons to be learned by both the Bitcoin community and Bitcoin businesses, which, if acted upon, will enable Bitcoin to move forward stronger than ever and in the mainstream. In previous articles we looked closely at the lessons that can be learned in the wake of Mt. Gox, of which there are many, especially for Bitcoin users.

It is clear however that while the long term future of centralised exchanges looks doubtful as already reported in previous articles, as peer to peer distributed systems and possibly ATM's take over, for now it is a matter of the utmost urgency to restore confidence in Bitcoin exchanges and indeed Bitcoin as a whole. Although Mt. Gox were almost certainly a rogue organisation, whether intentionally or not, and largely responsible for much of the price volatility, we must also accept the fact that Mt. Gox could not have gotten away with it for so long without the full cooperation of its users, albeit unwittingly. 

Mt. Gox were only able to get away with it for so long due to a total lack of transparency and oversight. Users of exchanges have every right to be in full possession of all the facts relayed to their financial exposure to exchanges, the solvency of exchanges and the ability of exchanges to match and fulfil orders from the current inventory of Bitcoin and cash on hand, as opposed to some fractional reserve approach which in any case would be illegal.

Bitcoin is, by design a fully open, open source, distributed peer to peer system, with an open, publicly viewable ledger, which by its very nature depends on complete end to end transparency as opposed to centralised and private organisations taking Bitcoin out of the system completely where it is hidden from view and publicly unaccounted for, which is after al how Mt. Gox were able to get away with it for so long.

A Bitcoin exchange should not at any time actually take ownership of either Bitcoin or cash, but should rather be a platform for matching buy and sell orders, executing and processing the orders, and distributing cash or Bitcoin. The order book for such a system would be fully open and viewable online in the interests of complete transparency, with exchanges taking a commission for processing an order.

The order book would also publicly include total Bitcoin and cash inventories in the interests of complete transparency so that the customer can be assured that the exchange is simply making a market and not operating some sort of off-exchange fractional system, or holding significant reserves of customer funds.

While this is not fully peer to peer, it is peer to peer through the medium of an exchange acting in the capacity of an open book market maker until such time as true peer to peer exchange arrives, and much more true to the inherent public, peer to peer open ledger system of Bitcoin itself.  

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