A told-you-so moment, and a bad day for the electricity sector

Ben D. Kritz

Ben D. Kritz

If it were not for the distressing fact that thousands, perhaps hundreds of thousands of digital currency investors were financially ruined this week, I would feel a little more self-satisfied about predicting the demise of the once-popular and at one time extremely valuable cryptocurrency Bitcoin just about a month ago (“The Other, Nerdier Currency Crisis,” February 4).

On Tuesday (February 25), the largest bitcoin exchange, the Tokyo-based Mt.Gox abruptly ceased operations, which will potentially—almost certainly, given the direction events seem to be heading now—cost investors about $335 million. Both the Japanese and the US governments have launched investigations into how the once high-flying Mt.Gox—which at its peak in 2011 handled roughly 75 percent of all Bitcoin transactions—was so quickly brought to financial ruin, but an internal “crisis response draft” from Mt.Gox that was leaked this week reveals some alarming details.

In June 2011, the exchange suffered a major hacking exploit, which caused a crash in Bitcoin prices. After promising to adopt stricter security measures Mt.Gox (and consequently, the price of Bitcoins) seemed to recover, but the leaked memo suggests that the security work-around might have failed.

Even more alarmingly, the memo reveals that for some unknown length of time, someone—finding out who, exactly, is a key objective of the multiple investigations that have been started—exploited a “transaction malleability” in the Mt.Gox system, resulting in the disappearance of about 750,000 Bitcoins, nearly all of the exchange’s holdings. According to the memo, Mt.Gox has only $22.34 million in the bank and 2,000 Bitcoins in secure storage to cover liabilities of roughly $55 million and 744,408 Bitcoins, all but 120,000 of the latter representing customer deposits.

Scrutiny has fallen on Mt.Gox’s Chief Executive Officer Mark “Magical Tux” Karpelès, who quickly resigned his seat on the Board of the Bitcoin Foundation (the second member of the three-person board to do so within a month), and has gone into hiding after being confronted by angry investors. While there are no clear indications that Mt.Gox’s losses are the result of embezzlement, many are openly wondering how the other explanation—a long-running skimming operation conducted by hackers outside the company—could have gone unnoticed.

To add insult to injury, a large number of Mt.Gox customers who saw signs of trouble—those who were spooked by the June 2011 hacking attack—redeposited their funds in a US-based exchange called Bitcoinica, which in March and May 2012 suffered similar attacks and was shut down. The case has been bogged down in liquidation proceedings in US courts ever since, but unfortunately, the designated trustee holding Bitcoinica’s remaining assets on behalf of the liquidator was, you guessed it, Mt.Gox.

Writing for the online tech journal DailyTech, Bitcoin analyst Jason Mick perhaps sums it up best: “Bitcoin fans wanted an unregulated currency free from government intervention?  Well that’s what they got.”

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Thursday was a morning of unpleasant surprises for Mindanao electricity consumers and Luzon’s biggest electric distributor. Virtually the entire island of Mindanao suffered a power outage beginning at about 4:00 in the morning for reasons unknown, but reportedly traced to a fault in a transmission line connecting the National Power Corp.’s hydroelectric plants in Bukidnon Province to the island-wide grid. While that sort of event is certainly disruptive, that it happened is probably not a harbinger of bigger problems; electrical systems do, in fact, occasionally break down.
But while the National Grid Corp. of the Philippines (NGCP) was doing exactly what it ought to have done in response—issuing a safely non-specific reassuring statement like, “We are investigating the cause and working as quickly as possible to restore power,” and then actually taking those steps (most of the affected areas had at least partial service by lunchtime)—Energy Secretary Jericho Petilla could not resist the opportunity to make a fool of himself, pointlessly annoying the affected public in the process. After telling reporters that the cause of the widespread outage was unknown, Petilla helpfully added that he had “ruled out sabotage,” and promised that power would be restored “within 24 hours.”

Having already been publicly excoriated by President Benigno Aquino 3rd this week for failing to restore power to areas of Mindanao affected by Typhoon Pablo in 2012, and been given 45 days to correct that shortcoming or else, Petilla would probably be well-advised to keep his head down and his urge to make public comments in check.

All he managed to do with the incident in Mindanao is appear to be hopelessly uninformed about the situation, which is not something that inspires any confidence in his ability to oversee the long-overdue restoration of power in typhoon-ravaged areas, or for that matter, to carry out any other of the responsibilities in his job description.

Meanwhile in the capital, which suffers from an electricity crisis of a different sort, the Manila Electric Co. (Meralco) found itself on the wrong end of scrutiny from the Energy Regulatory Commission (ERC), the Department of Trade and Industry (DTI), and furious customers for including the amount of last December’s obnoxious rate increase—currently held in abeyance by a Supreme Court restraining order—as an “other unpaid bill/s” entry on this month’s customer billing statements. The result of this, apparently, was to confuse some customers into paying the extra charges, which led to accusations by some lawmakers that Meralco was trying to circumvent the Supreme Court order.

According to the ERC, Meralco may be in violation of ERC rules that specify the format of customers’ bills, and could be liable for fines and other penalties. While the DTI was not specific about what problem they had with the questionable billing statements, there are a number of similar administrative rules regarding retail receipts and invoices that are overseen by the agency, which Meralco also may have broken.

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And last but certainly not least, a very happy birthday to my mother, Loraine. Say hello to the manatees for me.



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