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bitcoin-wall3Last year, German-owned cryptocurrency exchange Vircurex was hacked, losing a “significant number” of bitcoin, litecoin and other alt-coins from the site’s hot wallets. The exchange reported the loss soon after it happened, and vowed to replace lost funds from their own pockets. Owing to “large fund withdrawals in the last weeks,” however, the exchange announced that it would halt all transactions starting on Monday, March 24.

[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.

In a sense, this situation could be seen as Mt.Gox in miniature. Vircurex is a relatively small exchange with only around 1,200 BTC in monthly trade volume and an estimated user base of less than 50,000. The exchange claims that they were able to keep the exchange itself operating for the last few months thanks to significant cold storage holdings, using profits to replace the lost user funds.

Vircurex’s solution is a strange variation on a complete freeze, with user funds being held in special “Frozen Funds” wallets which can’t be traded or withdrawn, and with those accounts being paid back with the site’s monthly profits. The published method of reimbursement is also somewhat counterintuitive:

50% of the amount will be distributed top down and the other 50% will be distributed bottom up. Top down means: credit the amount from the largest account balance down to the smaller accounts. Bottom up: credit the amount from the smallest account balance to the larger accounts.

Using this method, the most-owed and least-owed users would be paid first, with the median debts waiting until the other accounts have been settled. Given that the exchange made only about 65 BTC in profit last quarter, it could be quite some time before the still-unknown loss is completely wiped from the books.

Given that there’s no incentive to actually trade on a site with thousands of dollars in BTC, it’s difficult to imagine a situation where Vircurex could ever make enough of a profit to actually refund its users.

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