MtGox is not Bitcoin

Many people may be looking at the Mt Gox implosion and wondering if this is the end for Bitcoin or even cryptocurrency in general.

I don't want to speculate either way.

Any currency - cryptocurrency included - largely depends on the confidence of its users and the quality of the systems they put in place.

If Mt Gox is insolvent, then it is not really any better - or worse - than the fate of Barings Bank (made famous by Nick Leeson) or the Enron employee pension fund.

While I won't speculate on whether people should or should not use Bitcoin, banks themselves have explored these counterparty risk issues many times. One of the solutions they have implemented is called delivery-vs-payment, implemented very widely by Continusously Linked Settlement (CLS Group). This type of solution is likely to be no more or less reliable for crypto-currency as it is for traditional cross-border FX settlement.

In practice, one method of implementing this solution involves each counterparty breaking a trade down into smaller units (each being 1% of the full amount, for example) and then making 100 small exchanges instead of one lump sum payment. In this example, neither party can lose more than 1% of the trade value. In comparison, MtGox users may have been speculating with 100% of their cash each time they trade and that is why they have come unstuck.