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Bitcoin storage service, Instawallet, suffers database attack

Instawallet, which stored a person's bitcoins, said it will refund some lower balances

An online bitcoin storage service, Instawallet, said Wednesday it is accepting claims for stolen bitcoins after the company's database was fraudulently accessed.

Instawallet didn't say in a notice on its website how many bitcoins were stolen. The virtual currency has surged in value in the past couple of months due to rising interest. At one point Wednesday, a bitcoin sold for more than US$140.

Bitcoin is a virtual currency that uses a peer-to-peer system to confirm transactions through public key cryptography. The method for confirming transactions is highly secure, but bitcoins can be stolen if hackers can gain access to the private key for a bitcoin that authorizes a transaction. Secure storage of bitcoins remains a challenge.

Instawallet said its service is "suspended indefinitely" until it can develop an alternative architecture. Instawallet apparently assigned an ostensibly secret URL that allowed users to access their accounts without a login or password.

The company said in the next few days it will begin accepting claims for individual wallets. Wallets containing fewer than 50 bitcoins will be refunded. Fifty bitcoins was worth about US$6,000 on Thursday morning, according to Mt. Gox, the largest bitcoin exchange, based in Japan.

Claims for online wallets holding more than 50 bitcoins "will be processed on a case by case and best efforts basis," Instawallet said.

Other bitcoin exchanges and so-called online wallet services have suffered losses due to hackers. These have included BitFloor, Mt. Gox and Bitcoinica.

Bitcoin transactions -- including those classified as thefts -- are recorded in a ledger that is open to anyone to inspect. The ledger contains the bitcoin "addresses" that are used for transactions.

It's possible to watch stolen coins move to different addresses, but the identities of the people attached to those addresses can't be seen by the public. A bitcoin transaction is irreversible unless the receiver of the bitcoins chooses to transmit some back to the sender.

Send news tips and comments to [email protected] Follow me on Twitter: @jeremy_kirk

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