Mt. Gox CEO Mark Karpeles and chief marketing officer Gonzague Gay-Bouchery at their Tokyo office.

Things keep looking worse for Mt. Gox, by far the largest company in the nearly four-year-old economy that has sprung up around the virtual currency Bitcoin. Back in May, federal agents seized $2.1 million from the company's account with payments processor Dwolla. According to court documents uncovered by the Bitcoin-focused blog The Genesis Block, that wasn't all. The government took an additional $2.9 million at the same time from Mt. Gox's Wells Fargo account, including $50,000 from CEO Mark Karpeles's personal account. That brings the known total of frozen funds to more than $5 million.

The government seized the money after a judge found probable cause to suspect that Mt. Gox was engaged in money transmitting without a license. The seizure sets a clear precedent for Bitcoin businesses that want to operate in the US; just because the money is virtual doesn't mean it's above the law.

Just because the money is virtual doesn't mean it's above the law

In June, Mt. Gox stopped letting users withdraw funds in US dollars, saying it had to deploy some technical changes that would speed up transactions. It now seems more likely that the company was just tapped out after the government raid and wanted to stall customers. Withdrawals from Mt. Gox are still reportedly slow, suggesting that the company is still recovering from the hit. Representatives from Mt. Gox did not immediately respond to a request for comment.

Mt. Gox rose to dominate the Bitcoin exchange business, trading the virtual currency for more than a dozen real-world currencies. At one time, it handled 76 percent of global trading, pulling in around $6 million in trades per day. In April, the company told The Verge it was applying for licenses in order to be compliant in the US. It also partnered with Seattle-based CoinLab, which was already establishing banking relationships in order to facilitate compliance with US finance law. That partnership quickly went sour, however, and CoinLab sued Mt. Gox for $75 million.

Other venture capital-backed exchanges such as Buttercoin are moving in

As Mt. Gox grapples with its legal troubles, other venture capital-backed exchanges such as Buttercoin are moving in. Many in the Bitcoin community say that's a good thing for the virtual currency, which is still establishing itself as a secure, legal, and convenient way to do business over the internet without the need for a central authority. Some advocates see Mt. Gox's unreliability coupled with its complete dominance of the market as an impediment to Bitcoin's progress.

In the past, Mt. Gox was one of the most upstanding members of the Bitcoin business community. It was one of the first businesses to reveal the names and faces of its owners, at a time when most Bitcoiners were militantly anonymous. When the exchange was hacked, it announced the breach right away, accepted culpability, and refunded its users at its own expense. The company's commitment to transparency seems to have waned since then, though; it did not inform users of the lawsuit with CoinLab nor the government seizure of its funds.

Mt. Gox deserves credit. It's a scrappy, 18-person company based in Japan that enabled liquidity in the new virtual currency and blazed the trail for many Bitcoin businesses to come. The financial regulatory structure in the US is also fractured and confusing, with laws to navigate at the federal and state levels and expensive paperwork to file. Mt. Gox may yet rebound. But as the Bitcoin economy grows more sophisticated, it seems to be outgrowing some of the first generation players.