Gox’s Bitcoin Scandal
Mt. Gox was the largest Bitcoin exchange as of February 2014, handling over seventy percent of all transactions. It was launched on July 2010 and operated out of a humble building in Tokyo, Japan. It began as the brainchild of Jed McCaleb as a means of selling Magic the Gathering Trading Cards in a way that was similar to the way stocks are sold, but after seeing the potential of Bitcoin, he converted it to a Bitcoin exchange. As popularity grew, McCaleb tired of the exchange, and agreed to sell it to Mark Kareples, a Linux software developer, who ran it until it became the most popular exchange by a wide margin. However, in April 2014 the company halted trading suddenly. It was announced that approximately 850,000 bitcoins held on the exchange were likely stolen, explaining the seemingly spontaneous closure. A lack of transparency as to exactly how many bitcoins were removed, and their whereabouts, yielded extreme backlash from the Bitcoin community. The possibility of fraud on the part of the senior officials involved with Mt. Gox, along with the possibility of hackers cracking a faulty security system have been widely discussed.
In February 2014, the company began the Japanese bankruptcy process under the pretext of seeking refuge from potential legal backlash of wronged Mt. Gox creditors. Karpeles has since been subpoenaed by the United States’ Financial Crimes Enforcement Network to provide testimony on May 5th, 2014. He did not appear. On May 21, 2014, an “Announcement of Commencement of Bankruptcy Proceedings” in relation to Mt. Gox was released in Japanese. This document represents the current legal situation of Mt. Gox as of April 24, 2014, as set forth by their trustee and attorney, Nobuaki Kobayashi. The document also specifies Karapeles as the “bankrupt entity” under the Mt. Gox name. It seeks to explain the intentions of the Mt. Gox entity, with especially interesting implications in terms of retrieving bitcoins left on the exchange at the time of its’ crash. The announcement proposes two fundamental points:
- Persons owning debts to the bankrupt entity are not to repay such debts to the bankrupt entity.
- Persons possessing assets of the bankrupt entity are not to deliver such assets to the bankrupt entity.
The document states that all debts owed to the exchange should not be paid to it, neither should held assets be returned at this time. This is likely a legal formality to absolve Mt. Gox from bearing a further burden. Were they to accumulate whatever capital or assets owed to them whilst in such a sensitive situation, it could reflect negatively on their level of responsibility, especially from a legal standpoint.
Debts to the Bankrupt Entity
In development of the former point, a creditor meeting is vaguely mentioned. This is likely intended for those holding mass quantities of Bitcoin on the exchange prior to its crash, or for those who are outspoken about the situation. Information about the meeting will be disclosed at a later date on the Mt. Gox website. Though, it is clearly stated, not every creditor must attend this meeting to receive compensation for their Bitcoin. The most important revelation involves specifics on the process by which people may be re-accredited. The document suggests that a formal application system will be present on the website, including the required criteria for investigation, that will then be used to distribute liquidated assets to qualifying individuals. It asks potentially qualifying creditors to remain patient as this system is built. Though one could file for their assets prematurely, the announcement implores such concerned individuals not to file a lone claim, as such claims “may lack legally required information, or there may arise discrepancies in the interpretations of the descriptions in such documents.” The answer as to where the bitcoins are is still elusive. The 200,000 recovered bitcoins are expected to be involved in this liquidation process, though this is a fraction of those stored on the exchange. Likelihood in terms of every, or perhaps even most, Mt. Gox users to see their funds returned to them seems remote at this time. Mt. Gox is on the defensive legally, with irate users slowly losing their drive and beginning to accept the possibility that their bitcoins may not ever be returned to them. The system being put in place for filing an investigation seems promising, though the specifications as to how such investigations will be undertaken, to what level of meticulousness, and the difficulty in which qualifying for distribution of liquidation of funds is very much questionable. The Bitcoin community will simply need to accept henceforth that no exchange, however large or seemingly reliable, is an infallible system by which to dedicate all trust. Entire document in original Japanese and English