Massive Bitcoin Business Partnership Devolves Into $75 Million Lawsuit

Bitcoin, the virtual currency libertarian geeks expect us all to use to pay for pizza in the future, has had a rough few weeks. A series of booms and busts have sent shivers down the spines of Bitcoin enthusiasts. Now, Gawker has learned that a much-hailed partnership between two of the most prominent players in Bitcoin, Mt. Gox and CoinLab, has devolved into a nasty $75 million lawsuit, which appears to be by far the biggest Bitcoin-related lawsuit ever.

The two companies are in the business of Bitcoin exchange, which plays a central role in the Bitcoin economy. For all the hype surrounding Bitcoin's promise as the "future of currency," at present it's not really good for buying much. So all those Bitcoin millionaires must exchange Bitcoins for actual currency if they want to actually get any use out of it. The trades on the exchanges also set the closely-watched price of Bitcoin. (Currently hovering around $100.) Mt. Gox is the world's largest Bitcoin exchange. It handles about $6 million in trades a day, accounting for 76 percent of trades worldwide, according to The Verge. Coinlab is a relative newcomer to the Bitcoin game, but has received notice for attracting $500,000 in venture capital and partnering with Silicon Valley Bank.

This February, Mt. Gox and Coinlab announced they were forming a strategic partnership. Under the contract, Coinlab was to handle all of Mt. Gox's North American services. It seemed like a perfect match: Mt. Gox has years of experience handling hundreds of millions of dollars in transactions, and a massive customer base, but they're based in Japan and so have can't serve American customers efficiently. Coinlab is a small but savvy upstart based in Seattle, looking to expand. The partnership would allow Mt. Gox to access the huge U.S. market handled by a capable partner, and Coinlab could latch onto Mt. Gox's reputation and existing customer base.

Mt. Gox founder Mark Karpeles (pictured, above) was enthusiastic in his press release on February 28th:

"This should be a huge win for everyone — faster deposit and withdrawal times, easier-to-reach customer service, and better access for United States financial markets, market makers and liquidity providers"

It didn't work out that way, according to a Federal lawsuit filed today by Coinlab's attorneys in Washington State. Coinlab alleges that Mt. Gox has breached a contract clause which was supposed to give Coinlab exclusive access to the North American market. "Defendants have breached the exclusivity provisions of the Agreement by directly servicing customers in the United States and Canada since the Agreement took effect," the lawsuit states.

Coinlab also says Mt. Gox hasn't allowed them to transition existing U.S. and Canadian customers from Mt. Gox to Coinlab, as agreed in the contract. "Despite repeated requests to do so, Mt. Gox has failed to deliver all passwords, Yubikeys, administrative logins and any other security information required so that CoinLab may assume operation of the Bitcoin exchange services for customers in the United States and Canada."

Coinlab is demanding $75 million in damages, and even that, it says, "likely underestimates the actual damages."

If it's true that Mt. Gox botched the deal, it's a big setback for the company, which has had a rocky past. An ongoing series of hacks, outages and other weirdness has led many in the Bitcoin community to question whether Mt. Gox is stable enough to be a major Bitcoin broker. Whenever Mt. Gox experiences downtime or a problem, the price of Bitcoin drops noticeably: Not a good look for what's supposed to be a radically decentralized currency

The Coinlab-Mt. Gox juggernaut was supposed to bring a new level of service, along with the legitimacy that came with the Silicon Valley Bank's backing, to Mt. Gox and the economy as a whole. The partnership was considered so important to the growth of Bitcoin that some observers credited it with sparking a massive 40% surge in Bitcoin prices past $250 when it was first announced, during which some big Bitcoin hold probably made millions. (At least until the price crashed back down again.) Now the biggest hope of Bitcoin has devolved into the biggest lawsuit.

Bitcoin might someday be utterly worthless, but it's clear there's big money to be made, and lost, right now.

(Mt. Gox's Mark Karpeles did not immediately respond to a request for comment.)

Update: in an email, Karpeles wrote:

We have not been served nor notified of such a lawsuit (except from your email), so it is difficult for us to comment at this point in time. We will review this within the next hours.

Update II: Coinlab CEO Peter Vessenes gave some details about the lawsuit in a blog post. He wrote: "Today, CoinLab regretfully filed a formal complaint in Federal Court against Mt. Gox."

What tipped us into filing was our complete inability to get Mt. Gox to deliver on the few simple things left that were needed for customers to move over en-masse; we were often left just apologizing to our alpha customers while their own businesses suffered. I'm just not willing to put any of our customers in that position — if we can't do a good job for you, I won't promise that we can.

Here's the lawsuit:

Coinlab v. Mt. Gox

[Image via Getty]