Bitcoin, the virtual currency embraced by venture capitalists and drug dealers alike, is drawing government scrutiny.
The Department of Homeland Security appears to be cracking down on Mt. Gox, the largest Bitcoin exchange.
Dwolla, a firm that handles transactions from Mt. Gox, has revealed that the agency has ordered it to stop dealing with Mt. Gox and to freeze the exchange’s account.
It is unclear how much money from US customers is at risk, but sources said traders would have a hard time getting US dollars out of Japan-based Mt. Gox.
The action cast new doubts on the Bitcoin economy, with sources suggested that government scrutiny could reach other corners of the mysterious market.
Bitcoins are a digital currency created by an algorithm that caps the amount of units that can ever be created at 22 million.
Users can digitally mine them on computers or buy them through exchanges like Mt. Gox. Transaction companies like Dwolla convert bitcoins to US dollars.
Traders store real money in Mt. Gox accounts and other exchanges. Mt. Gox handled up to between 60 and 80 percent of all bitcoin trades.
The coins were worth about $120 yesterday before the market dropped at least $10 in a mini-panic.
Bitcoins are an untraceable currency, which is why gamblers and drug dealers have used them to conduct business online. It could also the reason interest from the Department of Homeland Security.
Still, a number of venture capitalists and tech startups are investing in bitcoin infrastructure, seeing value in a currency without borders.
Tens if not hundreds of millions if dollars are being invested in bitcoin-related businesses in hopes of the currency going mainstream.
Sources said if Japan’s Mt. Gox is taken down an opportunity would arise for a major exchange to flourish in the US.
gsloane@nypost.com