Bankrupt bit­coin king in line for wind­fall

The Weekend Australian - - THE WALL STREET JOURNAL - KOSAKU NARIOKA

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.”

Mark Karpe­les

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