Bitcoin slipped from a record after the $31 million theft of a cryptocurrency peer renewed concern about the security of digital coins.

The company behind tether, a cryptocurrency used by bitcoin exchanges to facilitate trades with fiat currencies, announced the theft on Tuesday. It said in a statement that a “malicious” attacker removed tokens from the Tether Treasury wallet on Nov. 19 and sent them to an unauthorized bitcoin address. The company said it is trying to prevent the stolen coins from being used.

Bitcoin dropped as much as 5.4% to $7,798.73, before paring the decline to 0.7% at 11:32 a.m. in London.

The incident is the latest in a long list of hacks that have dented confidence in the safety of cryptocurrencies. It’s likely to fuel the debate on Wall Street over whether digital coins are secure enough to enter the mainstream of finance. The effect seems short-lived on bitcoin, which after exceeding the $133 billion value of McDonald’s Corp. over the weekend erased most of its loss on Tuesday and was little changed at $8,190.15.

Bloomberg photo of server wires ... used with a cryptocurrency hack story
Crisis of confidence?
“If tether is actually fundamentally compromised, that will be a very big issue for many exchanges,” says Arthur Hayes, chief executive of BitMEX, a cryptocurrency derivatives venue in Hong Kong. Bloomberg News

Tether, with a market capitalization of $675 million, is the world’s 20th most-valuable virtual currency, according to data on Coinmarketcap.com. The tokens are pegged to fiat currencies, allowing users to store and transfer globally and instantly, according to the website. The company behind tether has said that the tokens are 100% backed by fiat currencies.

Tether has become part of the bitcoin ecosystem because it helps exchanges facilitate trades against currencies like the dollar, euro and yen, according to Arthur Hayes, chief executive of BitMEX, a cryptocurrency derivatives venue in Hong Kong. Anti-money-laundering and know-your-customer rules have prevented many bitcoin exchanges from opening bank accounts needed to hold fiat currencies.

The theft has renewed concerns over tether’s viability. Skepticism had already been building after the company behind the tokens said in April that all international wires had been blocked by its Taiwanese banks. That fueled questions about whether the tokens were fully backed back fiat currencies.

“If tether is actually fundamentally compromised, that will be a very big issue for many exchanges,” Hayes said. “The knee-jerk reaction was that fear.”

An email to the support address on tether’s website wasn’t immediately returned.

Tether’s users are unlikely to abandon it as long as it is supported by exchanges and no other credible pegged token appears, according to Zhou Shuoji, a founding partner at FBG Capital, a Singapore-based cryptocurrency investment company. That view may explain why bitcoin recovered some of its initial losses.

“The community will overreact to these incidents,” Zhou said. “The most important thing is more and more people are watching and using virtual currencies.”

Bloomberg News