How Mt. Gox cryptocurrency customers could lose again

Twice burned

TOKYO, Nov 16, (RTRS): When Mt. Gox, the world’s largest bitcoin trading exchange, collapsed in early 2014, more than 24,000 customers around the world lost access to hundreds of millions of dollars’ worth of cryptocurrency and cash.

More than three years later, with the price of bitcoin skyrocketing to more than $7,000, not a single customer has recouped a single cent, crypto or otherwise. It’s not clear when they will. The failed exchange has become stuck in a morass of litigation — a Russian doll of bankruptcies in Japan and New Zealand, four in all, plus lawsuits in the United States and competing claims from creditors.

And although the Mt. Gox bankruptcy trustee recovered digital currency now worth more than $1.6 billion, under Japanese law the exchange’s customers likely will recover only a fraction of that.

Kim Nilsson, a Swedish software developer who had more than a dozen bitcoins at Mt. Gox, isn’t optimistic of a payout soon. “It’s a legal twilight zone,” he says. “I wouldn’t be surprised if it took several years more.”

The court-appointed trustee in Mt. Gox’s bankruptcy, Nobuaki Kobayashi, did not respond to questions from Reuters about the payout process.

There are few better examples of the dangers of investing in cryptocurrencies than Mt. Gox. As Reuters reported in September, cryptocurrency exchanges — where digital coins are bought, sold and stored — are largely unregulated and have become magnets for fraud and deception. At least 10 of them have closed, often after thefts, leaving customers without their funds.

In all, more than 980,000 bitcoins have been stolen from exchanges since 2011 — two-thirds of those from Mt. Gox. Today, all of the stolen coins would be worth more than $6 billion, Reuters has calculated.

Mt. Gox is one of the few collapsed exchanges that ended up in bankruptcy court; some just vanished. But the problem for Mt. Gox’s thousands of creditors is that under Japanese bankruptcy law, their claims were valued at the market price of bitcoin in April 2014 just before the Tokyo District Court ordered the exchange be liquidated. At that time, one bitcoin was worth $483. On the basis of the April 2014 value, the claims ultimately approved were fixed at 45.6 billion Japanese yen, currently about $400 million.

Repay

Based on the current price of bitcoin, Mt. Gox’s bankruptcy trustee is sitting on enough cash to repay creditors whose claims have been approved more than three times that amount, according to Reuters’ calculation.

But that likely won’t happen, according to two Japanese bankruptcy attorneys. In Japan, by law any funds left over in a bankrupt company’s estate after creditors have been paid go to shareholders. Mt. Gox is 88 percent owned by a Japanese company called Tibanne. And Mark Karpeles, a 32-year-old French software engineer and Mt. Gox’s former chief executive, owns 100 percent of Tibanne.

Karpeles is currently on trial in Tokyo, accused of embezzling money from Mt. Gox and manipulating its data, as well as breach of trust. He has pleaded not guilty to the charges, some of which carry sentences of up to 10 years. He served nearly a year in jail following his arrest in August 2015.

Many creditors are livid at the prospect of a payout for Karpeles, whom they blame for Mt. Gox’s failure. “If the government just took all of it, that would be less offensive than if they just gave it to Mark,” said Aaron Gutman, a software developer who had about 464 bitcoins at Mt. Gox, which are now worth about $3 million.

Added Henry Dienn, a 61-yearold entrepreneur in Japan who had 175 bitcoins at Mt. Gox: “Some of the people say, ‘I’d rather see the money burned.’”

In a three-hour interview, Karpeles told Reuters he doesn’t want the money. The main reason: He expects he would be inundated with lawsuits. He says he already is facing about a half dozen.

“I don’t want to be the beneficiary of this,” he said. “I don’t really need money. I work, I get by.”

Karpeles also told Reuters he has been exploring a way to resurrect Mt. Gox under new management and ownership — at an estimated cost of $245 million.

Among the factors complicating the liquidation process is a US tech company called CoinLab. It agreed to partner with Mt. Gox in 2012, and is pursuing claims in a Japanese court totaling about $170 million against both Mt. Gox and Tibanne.

Through a spokesperson, Peter Vessenes, CoinLab’s former CEO who had signed the agreement with Mt. Gox, declined to answer any questions, including whether CoinLab is still in business.

CoinLab has been struck off the corporate registry in Washington state. In Delaware, state records and interviews show its registration status is “void” and it owes more than $400,000 in unpaid taxes.

Karpeles, who is required to attend various bankruptcy hearings and is forbidden from leaving Japan, said Mt. Gox’s claimants will be lucky to be paid anything before 2020 — the year Tokyo is set to host the summer Olympics.

Gain

On paper, Karpeles, who himself is in personal bankruptcy, stands to gain most of the surplus. But he would not get it all. Some of the excess would be allocated to Tibanne, and another part would likely go to the owner of a 12 percent stake in Mt. Gox. Who that is remains in question.

The Mt. Gox exchange was first launched by Jed McCaleb, an American software engineer, in 2010. The domain previously had been used to trade cards in an online game.

McCaleb told Reuters in an interview that he decided he wanted to work on other projects, and transferred the exchange to Karpeles in February 2011 for free. The only conditions were that Karpeles had to share the exchange’s revenues with McCaleb for six months, not hold him legally responsible for any problems and give him a 12 percent stake. Mt. Gox became part of Tibanne, which Karpeles had formed in 2009 as a web hosting and development business. He named the company after his cat.

Karpeles said when he took over Mt. Gox, it had about 3,000 customers. As bitcoin grew in popularity among tech aficionados and investors, the exchange prospered. By 2013, it had nearly 1.1 million active accounts from 239 countries and handled upwards of 90 percent of global bitcoin trading. It generated about $40 million in fees in its last year, Karpeles said.

About 30 percent of its customers were from America, he said. Karpeles feared he was going to run into regulatory trouble there because Mt. Gox wasn’t licensed to transmit money. In November 2012, Karpeles signed an exclusive agreement with CoinLab, a Seattle-based bitcoin project incubator, to service the exchange’s US and Canadian customers.

The partnership quickly soured. In a federal lawsuit filed in Washington state in May 2013, CoinLab argued that Mt. Gox and Tibanne had breached the contract by continuing to serve North American customers directly and failing to transfer their accounts to CoinLab. It demanded damages of at least $75 million.

In counterclaims filed later that year, Mt. Gox and Tibanne argued that Mt. Gox had not provided access to customer accounts because they alleged CoinLab was not properly registered or licensed to do business. They also alleged that CoinLab had not returned $5.3 million in Mt. Gox customer deposits. CoinLab said in a court filing it had complied with all relevant laws and had registered to provide bitcoin exchange services with the US Treasury Department’s FinCEN bureau. The case is on hold as a result of a petition filed by the trustee in Mt. Gox’s bankruptcy, Kobayashi.