Small bitcoin exchange, Vircurex, teeters after large withdrawals

Vircurex had been trying to pay back losses incurred last year

A small bitcoin exchange in Beijing is in trouble again after trying to earn back funds lost in two hacking incidents last year.

The exchange, called Vircurex, said in a statement it would freeze on Monday cryptocurrency accounts held by its customers after large withdrawals apparently nearly drained it of funds.

A tiny player, Vircurex traded just 54 bitcoins in the last 30 days, according to statistics compiled by Bitcoin Charts. By comparison, the largest China-based exchange, BTC-China, transacted more than 202,000 bitcoins in the same period.

But it is the latest exchange to suffer financial problems following the collapse last month of Mt. Gox, the one-time king of the bitcoin trade, which lost an estimated 650,000 bitcoins and US$23 million in cash through poor accounting and security problems.

Vircurex lost "a significant" amount of its holdings in two incidents last year, it said on its website. It claimed to be covering the losses from those incidents through normal trading operations, from which it collects a fee.

The exchange apparently had enough in reserve to allow regular trading of bitcoins and several other cryptocurrencies, including litecoin, feathercoin and terracoin, but not enough if many depositors suddenly wanted to withdraw.

The scenario, termed a "fractional reserve," has long been a worry of bitcoin investors since the finances of virtual currency exchanges, which are mostly unregulated worldwide, are often opaque.

But Vircurex said "large fund withdrawals" in the last few weeks depleted its so-called "cold wallet," which refers to offline, secure storage for cryptocurrencies such as bitcoin.

"We are now facing the option of either closing the site with significant unrecoverable losses for all or to work out a solution that allows the exchange to continue to operate and gradually pay back the losses," the company said.

It outlined a plan that involved distributing its remaining cryptocurrency balances to depositors. Depositors' accounts will be labeled with the term "frozen balance."

"Funds in this balance type cannot be used to trade or withdraw," Vircurex said. "Those are the balances that the exchange will gradually pay back and hence transfer back to the available balance over time."

Send news tips and comments to jeremy_kirk@idg.com. Follow me on Twitter: @jeremy_kirk

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