Vircurex has frozen most of its digital currency withdrawals effective immediately. Vicurex is claiming it no longer has the reserves to cover customer requests. According to our information, this will affect all Bitcoin, Litecoin, Feathercoin and Terracoin withdrawals. According to a message from Vircurex that is posted on their website, they claim this move was necessary and that it “will create a new balance type called ‘Frozen Funds’ “covering all balances in the affected currencies. The company maintains it won’t be shutting down, saying it intends to “gradually pay back the losses”.

The fact that Vircurex had a reserve shortfall has been known for some time; however the exact amount was never mentioned. It froze BTC/LTC withdrawals in January 2013 after reporting that wallets had been compromised, but still allowed deposits in those currencies to continue.

Vircurex reassured their clients that they would cover the losses from its own income and had been doing so until yesterday, when “large fund withdrawals in the last weeks” completely depleted its cold wallet reserves.

A short company history of Vircurex.

in October 2011 Vircurex opened for business and traded between BTC, USD or EUR. It also offered trading up to 18 other cryptocurrencies against each other while eliminating some less popular coins and adding new ones over time.

Some users on Bitcointalk first started noticing bugs interfering with trading and withdrawals. Suddenly, Vircurex stopped any-to-any currency trades late last week before announcing the freeze.

According to the site announcement “The losses will be paid back according to a ‘top-down/bottom-up’ distribution logic and all users will eventually receive their funds, though the timeframe depends on the monthly volume available”. That means 50% of available funds will be used to pay the largest balance holders and the other 50% the smallest, meeting somewhere in between.

Comparing Vircurex and Mt Gox.

Vircurex’s volumes and deposits were nowhere near Mt. Gox’s levels, the comparison has some significant similarities. Both exchanges claim that hackers supposedly stole thousands of Bitcoins from their exchanges. Then the afflicted exchanges try to plug the leak and do some “damage control”. The best way to do that is to invoke a withdrawal freeze.

It is nothing new under the sun and this practice has been around for ages. However in the real world most banks have enough hard cash/ or gold in store to keep them afloat for a long while. This is not the case of the crypto exchanges nowadays. This can be viewed as an Achilles heel of the whole system and some screwed bank or even a dev can exploit that weak point.

It can also be a scam. The devs from Vircurex want to cash in on their success and just claim the same “problems” as Mt Gox did. This is just some speculation but you have to wonder and have the courage to also ask the hard questions and not just ignore them.

Preventing the “ low on cash” excuse: Proof of reserves.

There are some voices that are asking the online exchanges to prove their reserves somehow. One way of doing that can be using a cryptographically secure proof of inclusion and proof of reserves system such like the hash tree.

Korbit announced recently it would be the first major exchange to offer such a service with its opt-in ‘BitTrust’ system. 57 of Korbit’s users have signed up to participate, covering a total balance of over 580 BTC. It has kept BitTrust opt-in only for now due to trade-off in transparency versus the balance privacy.

Conclusion.

It is very curious that the same problems occur with these online exchanges. First it was Mt. Gox that claimed “hackers did it”, just like Vircurex. It can be the case but blaming everything on “those pesky hackers” isn’t going to cut it. That is also the opinion of some of the lawyers that are battling Mt Gox.

If you are dealing with money, money transfers you better have a good security system. The real world banks do have excellent security and even they get harassed from time to time. Exchanges need to invest in some better security if they want to avoid disaster and lawsuits. Another huge problem is the liquidity, the cold hard cash and reserves, the exchanges need to build up. These reserves are insufficient with the current online crypto exchanges. Otherwise they aren’t in that pickle now would they. Some transparency is also a good idea. That way people can check how high the fees are, where the reserves are at, etc.

Of course this could also be potentially a scam, but the fact that they are operational for over 2 years now can be an indicator that it is “legit”. However the jury is still out on that verdict.

To be continued…..