Regulators and Hackers Put Bitcoin to the Test

Bitcoin is facing significant growing pains as it struggles to move beyond a stormy adolescence.

After months of hype and hysteria that have driven up its price at a dizzying pace, Bitcoin recently encountered several hurdles that are likely to determine whether it makes it out of its early speculative phase to become a currency that people actually use, is supplanted by a rival or falls apart altogether.

The most fundamental threat was a bug in some basic software that determines how Bitcoins are moved between digital accounts. That forced several of the largest Bitcoin exchanges to shut down for most of last week and raised questions about the sturdiness of the programming underlying the currency.

At the same time, the system proved vulnerable to a hacking attack, creating doubts about the strength of the network’s security. Regulators also indicated last week that they were moving ahead with new rules for virtual currencies, leading to some fears that burdensome laws could halt Bitcoin in its tracks.

These worries sent the price of Bitcoin swinging between a high of about $700 last Monday and a low of $530 on Friday, with some expecting even bigger declines. The current prices are down from highs of about $1,200 in December.

“We are at this inflection point where the hard questions are being asked and will hopefully soon be answered,” Benjamin M. Lawsky, New York State’s top financial regulator, said in an interview.

Bitcoin has already survived several bouts of volatility that were even wilder than the one last week. But during those crises, nearly everyone involved was a speculator and the currency was much further from real-world success. Now that Silicon Valley and Wall Street have begun to buy in, and everyday uses for Bitcoin are becoming more common, the stakes are much higher.

In the same week that Bitcoin was besieged by hackers, Overstock.com, one of the largest companies to accept Bitcoin as payment, said it was nearing $1 million in purchases made with the currency.

Mr. Lawsky has been leading efforts to write regulations for virtual currencies, in part to improve confidence in the system. At an all-day event last Tuesday at the New America Foundation, a nonprofit public policy institute, Mr. Lawsky said he hoped to “put forward, during the course of 2014, a proposed regulatory framework for virtual currency firms operating in New York.”

The same day, Canada’s finance minister, Jim Flaherty, announced his plan to create national rules for what has been a largely lawless space.

These efforts are more encouraging for Bitcoin’s future than Russia’s recent decision to declare virtual currencies illegal. But the Bitcoin Financial Association started a petition to Mr. Lawsky titled “Please Do Not Regulate Bitcoin,” in which it argued that Bitcoin was too young and vulnerable to be able to survive significant regulations.

Other supporters, however, have recently been pressing for closer cooperation with both regulators and banks.

One of the most contentious efforts by some Bitcoin entrepreneurs has been a proposal to tag the digital coins to make it possible to determine if a particular coin had been used for illegal activities.

Such a system would make banks more comfortable in handling Bitcoin transactions. But the effort has faced intense opposition from early Bitcoin adopters who were drawn to the virtual currency because it allowed them to avoid scrutiny from governments and banks.

This is only one of the disputes dividing the community of Bitcoin supporters. The winners will determine whether the virtual currency will simply be absorbed into the existing financial system or whether it will remain a new tool for people who want to circumvent the government and Wall Street, occasionally for illegal purposes like buying drugs or weapons.

Susan Athey, a professor of economics at Stanford Business School, pointed to several potential outcomes. It is possible, she said, that banks will simply adopt some of the best elements of the Bitcoin program that allow money to be transferred almost instantaneously. Other alternative virtual currencies could also rise up without Bitcoin’s perceived flaws, like the limit on the number of Bitcoins that can ever be created.

Professor Athey is assuming that “some of each of these things happen,” she said.

“Once you look at it,” she added, “you say, ‘How is it we are still using these archaic financial rails?’ ”

But if Bitcoin is to have any chance of success, its digital architecture is going to have to prove its sturdiness under increasingly difficult conditions.

The most recent doubts were raised when a Bitcoin exchange that was once the largest in the world, Mt. Gox, almost shut down completely after discovering that customers could make transactions disappear from its records.

While this initially appeared to be a problem limited solely to Mt. Gox, it spread to several other large exchanges, and the Bitcoin Foundation acknowledged that it was a flaw that developers had long been aware of. With the issue out in the open, hackers began an attack on the main exchanges.

All of this put the developers who work on Bitcoin’s open-source computer code into a frenzy of programming. The chief scientist at the foundation, Gavin Andresen, posted his activity on Twitter on Thursday: “Today was about ignoring people and Deep Coding.”

By Friday, it appeared that the problem was largely under control, and the largest exchange, Bitstamp, reopened. That helped the price of a Bitcoin rise to $660 on Friday evening from $532 in the morning.

Jeff Garzik, one of the currency’s longtime developers, said that the problems exposed last week should not be a long-term issue for the network. But he acknowledged that Bitcoin would still face significant tests.

“We’re still a very young ecosystem,” said Mr. Garzik, who now works for the Bitcoin company Bitpay. “I’m certain that bigger and much more devastating attacks will occur in Bitcoin’s lifetime. That’s the nature of the beast.”

Mr. Garzik expressed his confidence in Bitcoin’s ability to survive attacks because of the collaborative nature of the programmers working on it. At the same time, he said that he was drawn to Bitcoin not because he thought it would take over the world but because it was a “fascinating experiment at several levels.”

The last year, he said, was a year of “increasing visibility.” The next year, he said “will be the year of action.”

A Conversation About Young Wall Streeters

Kevin Roose, a former reporter for DealBook, has been at New York magazine since 2012, writing about the more offbeat aspects of Wall Street’s culture.

He recently returned to DealBook for a conversation about his new book, “Young Money,” which comes out on Tuesday.

Mr. Roose followed eight young Wall Street workers as they navigated the world of spreadsheets and suits. Think of the book as “Liar’s Poker,” updated with iPhones and heightened anxiety about the global economy.

How did the idea for this book come about?

I started in the spring of 2010 and kept reporting for the next three or four years. I had done a book before, so I knew that it was possible, but more and more I thought that this idea deserved a bigger treatment. I graduated from college, and one of the first things I saw was this odd, post-financial crisis sector playing out. I had friends going into banking and ran into them on the street, at the gym and saw what an immense mark the crisis had made on them. And I wondered, who are these people? What happens to this age of Wall Street? Do they become card-carrying capitalists or not? I started asking around.

How did you find and choose the eight people you focused on?

I spent a lot of time in Murray Hill. I think I basically have equity in Brother Jimmy’s at this point. I asked friends and friends of friends, I went to networking events. I spent time in the Financial District, I drew on every connection I could because I wanted to find a diverse cross section. I didn’t want it to all be traders at Bank of America or kids who went to Duke. I wanted the group to be diverse.

There’s been a lot of talk about the gap in incomes and the concern that the rich are getting richer and the poor are getting poorer. You write about how things like student loan debt influenced some of the young Wall Streeters and their career choices. Is the income gap a concern for the young Wall Streeters, too?

It’s a huge factor. I remember talking to one of my sources who was saying that part of the reason she went into banking is because she had tens of thousands of dollars of student loans to pay off. Working on Wall Street was the quickest way to do that. For a lot of people who aren’t from privileged backgrounds, working on Wall Street looks like a good option.

You cite executives like Vikram Pandit and others as up-by-their-bootstraps examples of upward mobility. But recently, there’s been much discussion about whether the chances of moving up the economic ladder are lower today than they used to be. Where does this leave, say, little Pandits, rising up the ranks?

I don’t think it’s a dead idea at all. I think there is a lot more of that in this generation than prior generations. I think that Wall Street is less attached to the idea that it’s a catchall for the elite. There are fewer blue bloods than 10 years ago, and I think that’s a reflection of how professionalized it is. You can’t just walk in having majored in art history. You’re really expected to know you’re stuff, expected to have done an internship.

How has that professionalization affected who is going to Wall Street, though? Is that a good or a bad thing?

I think for a number of decades, there was this very odd recruiting climate where Wall Street and consulting firms became the default option for students at good schools who didn’t know what they wanted to do after graduation. If you knew you were going to be a doctor, but you didn’t feel sure about your options, Wall Street was an incredibly enticing option. It created a generation of accidental bankers, and some of them did the wrong thing. I think now what you’re seeing with the competitiveness is the people who became bankers, they really want to be bankers. And I think that’s a good thing because it’s better for the banks and the rest of the economy to have people who are talented.

Your book reminds us that there was a lot of talk when President Obama was elected in 2008 that young people were inspired by his rise. Has that fizzled? In the wake of the financial crisis, did young Wall Streeters rethink the morality of their jobs?

I don’t think it’s gone back to the precrisis norm. Now, what you’re seeing is Silicon Valley becoming the default option. Going to Google is the new Goldman Sachs. I don’t know if they’re going to Silicon Valley for idealistic reasons. But it’s worth noting that so many Ivy League seniors apply to Teach for America. It shows that you don’t have to pay students a ton of money. You just have to give them something that’s structured and reliable.

Some firms are more known for this than others, but the Kool-Aid factor of working at a shop and on Wall Street over all â€" which of the young workers drinks it? Who doesn’t?

I think the thing about banking is, if you make it through the first two years, you can make a career out of it. Somehow, these people stay in finance or somewhere in the industry. I think most people have a moment where they choose their path in or out of a firm. A lot of people stayed.

Wall Street’s woman problem: You could have done a separate book on that. How did that translate to the young women you reported on for the book?

It’s still a problem. When you look at most incoming analyst classes, they have pretty good gender parity. But when you look up the chain, to the V.P., managing director and partner level, the ranks of women really thin out. There are some reasons for that â€" mentorship culture and the tension between raising a family and working one of these cutthroat jobs. Younger women have to choose whether or not they’re going to be bankers and how they’re going to go about it. It takes more strategic and sharper thinking.

Did you interview any bosses of these young Wall Streeters? There’s no shortage of complaints among older management that some of this generation feels entitled.

I did interview the bosses. I spoke to human resources people and executives at a lot of the major banks, and they did talk about that, these kids as “millennials.” They said they feel a sense of entitlement, and my response was, “Maybe these are bad jobs and that’s why they want to leave.”

Historically, when people are exposed to a downturn early in their professional lives, the sting lasts a while, both in their earning power, but also in how they view themselves as savers and investors. (See the research on the Depression babies.) So what’s going on here for young Wall Street people?

Totally. And I think that’s why these people felt so torn. They were working at investment banks making $120,000 a year while the unemployment rate for someone their age was 25 percent. The people who end up on Wall Street may be risk averse. It’s hard for them to contemplate leaving behind their paychecks and doing something more personally risky. I think the financial crisis and the rise of Silicon Valley gave them another out. They could take some risk without losing the cachet.

One of my favorite parts of the book is when you crashed the Kappa Beta Phi chapter meeting. Do you think these secret societies fade out? To be honest, the way you wrote about it, it reminded of “The Flintstones” and that group that Fred and Barney frequented wearing the funny hats.

It sounds like an outtake from “The Wolf of Wall Street.” It felt like a period piece from the 1980s. It’s really disappointing when you think that the financial crisis would have made people more cautious about how they behave, especially those who came out of it as millionaires or billionaires. I think young people will behave better. When I told them about this, they thought it was hilarious. Maybe that’s the litmus test. In 10 years, if they all want to join, maybe that’s the sign that nothing has changed.

So are you going to follow up with these eight people in 10 years? 20 years? You could do the “40 Up of Finance.”

I would love to do that.

3 Former Barclays Employees Accused in Libor Scandal

LONDON - Regulators in Britain said on Monday that they had begun criminal proceedings against three former Barclays employees suspected in the manipulation of a global benchmark interest rate.

The Serious Fraud Office said that Peter C. Johnson and Jonathan J. Mathew, both former rate submitters at Barclays, and Stylianos Contogoulas, a former trader, will face charges that they conspired to manipulate the London interbank offered rate, or Libor. The three are to appear in Westminster Magistrates’ Court at a later date, possibly this month.

The fraud took place from June 2005 to August 2007, said the agency,  which prosecutes financial crimes in Britain. It did not further detail its case.

Lawyers for Mr. Johnson and Mr. Mathew declined to comment on Monday. The law firm representing Mr. Contogoulas had no immediate comment when reached  by telephone on Monday. Barclays also declined to comment.

The new criminal proceedings are the latest development in a broadening investigation into the manipulation of important interest rates.

Some of the world’s largest banks, including UBS, Barclays and Royal Bank of Scotland, have been caught up in the scandal and have agreed to pay billions of dollars to settle allegations with regulators in Britain, the United States and elsewhere.

Three people were already facing criminal charges in Britain. In December, Tom Hayes, a former derivatives trader at UBS and Citigroup, and two former traders at the brokerage firm RP Martin, Terry J. Farr and James A. Gilmour, pleaded not guilty in London.

The trial of Mr. Hayes, who was the first person to be charged criminally in Britain in the scandal last year, is expected to begin in Britain next year. He also faces criminal charges in the United States.

British prosecutors have previously said they have identified 22 individuals as potential co-conspirators in the matter.

On Monday, the antifraud office said its investigation was continuing and that the agency was collaborating with Britain’s Financial Conduct Authority and the United States Department of Justice, which had their own investigations.

To set Libor and other rates, banks submit the rates at which they would be prepared to lend money to one another, on an unsecured basis, in various currencies and varying maturities. Investigations in the past two years have found evidence that traders at the various banks benefited from falsely reported rates.

In December, antitrust regulators in the European Union agreed to settle with eight financial institutions over alleged collusion to manipulate Libor related to the Japanese yen and the euro interbank offered rate, or Euribor. Six of the institutions, including Deutsche Bank, agreed to pay a combined 1.7 billion euros, or about $2.33 billion.

JPMorgan Chase and Citigroup were the first American banks to be fined in the scandal as part of the European Union settlement.

Five financial institutions, including Barclays, UBS and R.B.S., have paid a combined $3 billion to settle with American and British regulators.

Investors Close to Buying Health Care Services Firm MultiPlan

LONDON â€" A group of investors led by an affiliate of C.V. Starr & Company is close to acquiring the health care cost-management company MultiPlan in a transaction valued at $4.4 billion, according to people familiar with the matter.

The deal could be announced as early as Monday, said the people, who were not authorized to speak publicly.

The transaction represents the next step in efforts by C.V. Starr of New York and its Starr Investment Holdings arm to expand their private equity investment footprint.

Maurice R. Greenberg has led the Starr companies, which also include the insurance unit Starr International Company, since he stepped down as chief executive of American International Group in 2005. The Starr companies focus on an investment time frame of up to 10 years, a longer period than used in most of the private equity industry.

The Swiss investment firm Partners Group is teaming up with the Starr companies on the MultiPlan deal. Partners Group had 30.3 billion euros, or about $41.5 billion, in assets under management in the first half of 2013.

The deal was reported by The Wall Street Journal late on Sunday.

MultiPlan was purchased by the private equity firms BC Partners and Silver Lake Partners in 2010. Founded in 1980, MultiPlan manages the claims process for insurers, corporate self-funded health plans and health maintenance organizations. The company processes about 40 million insurance claims annually.

According to one of the people with knowledge of the deal, the transaction is expected to double the value of the initial investments in MultiPlan by BC Partners, which is based in London, and Silver Lake, a California-based company that focuses on technology investments.