Bankrupt bitcoin king in line for windfall
Creditors of the collapsed Japanese bitcoin exchange Mt Gox are on course to miss out on the recent surge in bitcoin prices. Instead, it is the exchange’s former chief executive, now on trial for embezzlement, who could turn a handsome profit.
That is because the claims by people who deposited bitcoin at Mt Gox are calculated based on the yen value of the cryptocurrency at the beginning of Mt Gox liquidation proceedings in April 2014.
Meanwhile, Mt Gox, which is mostly owned by a company controlled by former chief Mark Karpeles, is sitting on more than 200,000 bitcoins worth 17 times as much today as they were then.
Bankruptcy-court filings suggest Mt Gox will have hundreds of millions of dollars left over after paying creditors — money that Mt Gox’s bankruptcy trustee has indicated would belong to the collapsed exchange’s shareholders, with Mr Karpeles’s company being the biggest.
“When it’s all sorted out, Karpeles would pretty much get (the) vast majority” of the extra value, said Kolin Burges, a creditor who held 311 bitcoins at Mt Gox that would be worth about $US2.3 million ($3m) today. “So that seems incredibly unfair.”
Mr Karpeles has denied all wrongdoing in the criminal case. In an email, he said he believed it unlikely he would end up with any money. He said finding bitcoin buyers would be difficult and it was common for bankruptcy assets to be sold at a fraction of their book value. “(I) n the case these are sold, I do not believe it would realistically fetch any kind of value high enough to make this an actual issue,” he said.
Bitcoin prices traded at more than ¥824,000 yesterday in Tokyo, compared with ¥50,058 at the beginning of the liquidation proceedings in April 2014.
Some lawyers say the Mt Gox bankruptcy is an example of how existing laws aren’t yet fully adapted to issues involving virtual currencies. When a bank fails, governments and courts have well-established procedures for refunding depositors and apportioning losses if the bank’s assets fall short. But they have little experience when a bitcoin exchange fails, with both assets and liabilities largely in the volatile virtual currency
For anyone who deposited bitcoins at Mt Gox, “it’s a relatively straightforward reaction to ask for your bitcoins back if any are left”, said Tetsuo Morishita, a professor at Tokyo-based Sophia University Law School. But under Japanese statutes, “you can’t establish ownership well for non-physical stuff”.
Mt Gox was once the world’s largest bitcoin exchange. It filed for chapter 11-style bankruptcy protection in February 2014 after finding many of its bitcoins missing. It subsequently said it discovered roughly a quarter of what it had lost, but it was unable to draw up a recovery plan. In April 2014, a court ordered the company to be liquidated. Nearly 25,000 people around the world filed claims.
In 2015, Mr Karpeles was arrested and charged with embezzlement and creation of unauthorised records at Mt Gox. He was released pending trial. At the trial’s opening session in Tokyo District Court in July this year, prosecutors said Mr Karpeles wrongfully spent ¥340m of customers’ money for his personal use and altered the company’s books to inflate the amount of dollars and bitcoins held by customers.
At the trial, Mr Karpeles said he was innocent and repeated his contention that the exchange’s collapse was caused by hackers. He said he regretted he was unable to prevent customers’ losses. Mr Karpeles’s company, Tibanne, owns about 88 per cent of Mt Gox.
Several conditions have to be met before hundreds of millions of dollars actually make their way to Mr Karpeles, according to lawyers.
The customary period in which creditors may dispute the trustee’s decisions on claims has ended. Still, some frustrated creditors are talking about ways to get more money — quickly, if possible. “It’s just never-ending,” said Mr Burges, who flew from London to protest outside Mt Gox’s Tokyo offices in the weeks leading up to the exchange’s collapse.
“We are in a worse position than we were 3½ years ago.”