What next for Mt. Gox? Investors, regulators want to know what happened

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The woeful situation for Bitcoin exchange Mt. Gox, which went offline Tuesday, is seemingly no close to getting better. A pair of reports suggest that the company is now being investigated by prosecutors in the U.S. as well as Japan, while another suggests that it could have indeed lost over 744,000 Bitcoins in a theft several years ago.

Citing an unnamed source, The Wall Street Journal says federal prosecutors subpoenaed Mt. Gox sometime this month, asking it to preserve documents. One of those could include details of the company’s “crisis strategy,” an unverified document that leaked out earlier this week cataloging the supposed theft.

700 000 identifiants de connexion, et $220 000 en monnaie virtuelle ont été volé par le botnet Pony

In an IRC chat log obtained by Fox Business, Mt. Gox CEO Mark Karpeles now says that document is “more or less” legitimate, though he steered clear from saying it was actually produced by the company. Additionally, the company caught the attention of authorities in Japan, who now plan on looking into the closure, reports Reuters.

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In an online chat conversation published by Fox Business, Karpeles told consultant Jon Fisher that he is not giving up on Mt. Gox.

When asked by Fisher if documents purporting the exchange’s insolvency are true, Karpeles replied:

“As the name suggests it’s a draft, and it’s a bunch of proposals to deal with the issue at hand, not things that are actually planned and/or done.”

Karpeles also revealed his company was not the author of the document, titled ‘Crisis Strategy Draft’, saying:

“This document was not produced by MtGox”

The news comes as the ripple effects of Mt. Gox’s abrupt closure continue to be felt in the industry in the actions of business partners and the movements of the overall market.

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In a statement obtained by CNBC’s Becky Quick, Marc Andreessen — one of Bitcoin’s biggest supporters, having invested some $50 million in firms dealing in the digital currency — compared MtGox’s troubles to MF Global. Which is to say, tragic for customers but not systemic to the overall Bitcoin ecosystem.

ANDREESSEN: MtGox Is Like MF Global And Not An Existential Threat

MF Global is the former brokerage run by former New Jersey Gov. Jon Corzine that in 2011 filed for bankruptcy after experiencing a massive cash shortfall.

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Business Insider has unsuccessfully tried to reach out to Karpeles, although the Mt. Gox CEO did respond to Reuters via email.

“We should have an official announcement ready soon-ish,” he wrote, without providing more details or revealing his location. “We are currently at a turning point for the business. I can’t tell much more for now as this also involves other parties.”

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The Bitcoin community seems pretty set on not returning to any company that follows a guide like this in times of crisis.

Also, a loss of $300,000,000 over the course of over a year implies a massive coverup.  It also implies that Mt. Gox never self audited their books, or they might have noticed thousands of BTC disappearing every day.

Mt. Gox has to have known about the slow leak of funds out since at least the account verification requirement for Bitcoin withdrawals was announced.

It’s hard to pinpoint exactly when this was, since Mt. Gox’s twitter feed is a blank slate (they’d like you to think of it as a tabula rusa but don’t fall for the trap).  Sometime in SUMMER OF 2013, according to /r/Bitcoin history, Mt. Gox started requiring verification on certain accounts for Bitcoin withdrawals.  The blanket requirement of verification for Bitcoin withdrawals didn’t come until later in 2013.  It is possible that between the summer of 2013 and the blanket requirement that Mt. Gox was still unaware of how their money was disappearing.

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Andreas Antonopoulos, a leading bitcoin developer and current chief security officer at hosted wallet Blockchain.info has released a statement regarding the ongoing issues at once-leading bitcoin exchange Mt. Gox.

The announcement comes less than a day after Mt. Gox halted transactions, and amid growing reports that the once high-profile company may soon close for good.

Wrote Antonopoulos in his official response:

“I fear the worst. Everything I see makes me believe that Gox will never recover and that the funds are most likely lost.

I am devastated by the impact this will have on customers of Gox and I am angry at the irresponsible behavior of Mt. Gox and especially [CEO] Mark Karpeles that will damage the lives of many people.”

The remarks echo the increasing frustration of bitcoin supporters, who have been highly critical of Karpeles and his handling of problems at the exchange for much of the last month, and are notable as Antonopoulos, despite his critical stance to the company, had moved to ease concerns in recent weeks.

Gox’s incompetence

Antonopoulos offered a blow-by-blow account of the issues that have affect Mt. Gox in the past two weeks on his personal blog. He points out the transaction malleability issue Mt. Gox was supposedly experiencing has been a known issue since 2011:

“I publicly excoriated Gox’s incompetent and clownish management and disputed their claim that their problems were due to a ‘bug in bitcoin’.”

During this time, many exchanges were attacked via DDoS, according to Antonopoulos. The goal, he says, was to uncover other bitcoin exchanges that might be vulnerable:

“In response, some exchanges temporarily suspended withdrawals to investigate their implementations and confirm they were robust.”

Gox did develop a fix for the problem on its platform, and Antonopoulos later expressed optimism that the Japan-based exchange might be able to resume normal operations:

“As we started seeing Gox transactions posted on the public blockchain ledger, as reported on reddit and other sites, it appeared to me as if Gox might recover from their latest mess.”

The outage

The statement from Antonopoulos makes clear that he did not know in advance Mt. Gox was headed for massive failure:

“Yesterday afternoon at approximately 3pm PST, Monday February 24th, I heard unconfirmed reports that Gox was in crisis mode and their funds were mostly, if not entirely, gone. This was the first hint I had of any solvency issues.”

It appears that the writing was on the wall for Mt. Gox for some time. But Antonopoulos stated he did not believe that there was any intent of fraud by Mt. Gox CEO, Mark Karpeles.

“I stated that while I had serious misgivings about the competence of Mt.Gox executives and especially Karpeles, I had not seen any indication of bad faith or fraud in the past two years.”

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  • Brett Combs

    Great post Tom. The has all the makings of a great documentary. Theft or fraud very well might be at the core of Gox’s final meltdown. One thing we don’t hear much discussion on is the exchanges keeping customers funds segregated. Commingling funds or aggregating deposits or balances is simply a bad business practice. Banks and investment brokerages keep customer balances segregated along with commodity exchanges. The rumor of the high number of Bitcoins lost to theft leads me to speculate that funds were not segregated,