Last updated on January 2nd, 2018 at 12:00 am
A report– titled, The Willy Report— that was published online on May 25, 2014 is raising heavy suspicions of fraud on the already highly publicized crash of the Mt. Gox Bitcoin exchange in late 2013. This report analyzes the data from the Mt. Gox records that were made public after its crash and at the start of its dramatic legal battle. The author of The Willy Report noticed strange buying activity from one particular Mt. Gox user with unusual account details and decided to investigate the Gox records further. What the author found was shocking.
The findings of The Willy Report show that two buying bots, named Willy and Markus, regularly bought large quantities of Bitcoin from early 2013 until January of 2014. Overall, the bots spent approximately $112 million, with the majority of this buying taking place in November of 2013. The author notes that it was the activity of these buying bots that drove Bitcoin’s price so high, not the often cited Chinese Bitcoin activity or the general growth in popularity of Bitcoin.
“So if you were wondering how Bitcoin suddenly appreciated in value by a factor of 10 within the span of one month, well, this is why. Not Chinese investors, not the Silkroad (sic) bust – these events may have contributed, but they certainly were not the main reason.”
This activity by itself warrants suspicion and concern from the Bitcoin community; someone was able to set up two buying bots in the– at the time– world’s largest Bitcoin exchange, pump up the price of Bitcoin, and run away with huge profits while everyone else suffered major losses in the Mt. Gox crash. However, the author of the Willy Report made a stunning accusation that makes the sting of this fraud even worse: the author claims that this Bitcoin fraud was not the handiwork of an unknown hacker, but rather the activities of the Markus and Willy bots came from the inside. This massive, fraudulent Bitcoin price pump came from Mt. Gox, maybe even Mark Karpeles himself.
The most damning pieces of evidence that point to an inside job are the facts that
(1) the Willy bot was able to continue its regular trading routines even during network downtime in which no one else could trade on the exchange; and (2) Willy began selling all of its Bitcoin holdings at a very convenient time: when Mt. Gox needed fiat currency to refund all of the Gox users who lost their holdings in the crash.
While these allegations are backed up with evidence, which the author provided in the Willy Report, they are merely speculations that require more extensive investigation. The author of the Report admitted this fact. However, should these allegations prove to be true after further investigation, the already devastating fallout will be intensified for Mark Karpeles. But the important question is not what will happen to Karpeles; the most pressing question is: what do the findings of the Willy Report mean for the future of Bitcoin and Bitcoin exchanges?
Possible Government Intervention?
If the Willy Report makes into mainstream channels, the world’s governments will obviously take a huge interest in its findings. It is likely that the governments will use this new evidence of fraud to regulate the Bitcoin exchanges, thus making it much harder for the exchanges to compete. Such a restriction in competition would not make us safer, however; restricting competition would merely make it more likely for a monopoly to arise, and another Gox-like catastrophe could occur as a result.
Besides, it would be hardly necessary–and would likely be counter-intuitive– for the government to dip its hands into the free market to fix problems that are already being fixed. Long before the Willy Report, when the first allegations of theft and fraud were made against Mt. Gox, the major exchanges began overhauling their operations to make transparency paramount. Many exchanges now audit themselves and make the reports public to assure their users that there is no fraud occurring. Any government intervention aimed at preventing fraud would likely take the form of licensure requirements and other measures that require large amounts of time and money. These types of regulation would necessarily make it more expensive to compete with other, larger exchanges. Therefore, it isn’t a stretch to imagine a government-induced exchange monopoly. If the regulations were to be made uniform across the globe, we could possibly see a global monopoly; one single Mt. Gox could become responsible for the entire world’s Bitcoin exchanging activity.
However, in the long term vision for Bitcoin, it seems unlikely that the exchanges will retain the same amount of power they hold over the Bitcoin economy presently. Bitcoin exchanges are so prevalent right now because Bitcoin is not yet widely accepted as a medium of exchange. Because of this lack of acceptance, jobs that pay in Bitcoin are extremely scarce. Therefore, the only way that most people can get get their foot into the door of the Bitcoin world is through trading fiat for crypto on a Bitcoin exchange. But as more merchants accept Bitcoin as payment, the more jobs will become available where your paycheck can be in Bitcoin rather than in fiat. Once we reach that point, we won’t have such a massive demand for Bitcoin exchanges anymore. Instead of trading our fiat currency for Bitcoin, we will be paid in Bitcoin at our jobs!
The Willy Report reminds all Bitcoin users of some very alarming truths that should remain in the foreground of our minds when trading Bitcoin: you can never be too secure, or too paranoid with your Bitcoin. These allegations of fraud and of a pump and dump scheme remind us to be cautious. This author offers one piece of advice: if you want to keep a substantial portion of your assets in Bitcoin, use a desktop wallet. As we can clearly see from the Willy Report and the Mt. Gox debacle in general, Bitcoin exchanges are very dangerous in terms of Bitcoin security, and we should not treat them as banks.
If you would like to read The Willy Report in its entirety, you can find it here.