Owner of failed Mt. Gox bitcoin exchange, who lost $500m of customers money, in line for over $700m of their funds, due to legal black-hole.
The owner of the bankrupt Mt. Gox bitcoin exchange, who designed its security system, but didn’t notice repeated thefts over three years leading to losses of almost $500m of customer’s money, is due to be awarded over a $700m windfall, thanks to the recent surge in bitcoin price causing an unprecedented legal black-hole. The plans were revealed by the lawyer managing the bankruptcy last month, and the payout will come at the expense of customers, whose bitcoins were stolen and have been told to expect back just 8% of their lost investment.
The exchange, which was based in Tokyo, shut abruptly in February 2014. It later emerged that only 202,000 of the 850,000 customer’s bitcoins remained. A series of thefts were facilitated by poor security. The CEO of Mt. Gox, Mark Karepeles (32, France) is currently on trial for embezzlement and data manipulation relating to the losses. The remaining bitcoins were put in the care of a court-appointed lawyer, Nobuaki Kobayashi-sensei, to manage the bankruptcy. Since that time Mr Kobayashi has been meticulously assessing a vast number of claims from former customers. Currently 23,857 have been approved.
As is traditional with assets in a Japanese bankruptcy, customers had their bitcoin claims valued in yen, at the market rate of the day the exchange closed. On February 24th, 2014, one bitcoin was worth 50,058JPY (~$480)
Since then, the value of bitcoin has increased more than 12 fold, and Mt Gox is technically no longer insolvent. Mr Kobayashi was expected to pay claims at three times their 2014 valuation. However, at a creditors meeting on the 27th of September 2017 he confirmed that he intends to stick to the 2014 valuation, meaning customers will get back just 8% of the current value of their bitcoins. Mr Kobayashi announced that in this unprecedented case, in which the bankrupt company has become technically solvent, the law states that the surplus funds, which could be over $700m, should be returned to the shareholders. The largest shareholder, Tibanne Co. Ltd, is a company wholly owned by Mr Karpeles who ran Mt Gox, and failed to prevent numerous thefts, including one thief that returned hundreds of times a month and leached away the bulk of the exchange’s bitcoins undetected for over three years. The theft was only discovered because the exchange’s bitcoins ran out.
In a further twist, Mr Karpeles warned customers on social media about the windfall, and stated he didn’t want the money to come to him but was legally powerless to reject it due to his personal bankruptcy proceedings. The posts have since been deleted.
The unprecedented rise in bitcoin’s value this year has highlighted the inflexibility of the arcane Japanese bankruptcy statutes, which sit uncomfortably with its progressive legislation on cryptocurrencies such as bitcoin. In March the Japanese government passed laws to recognise bitcoin as a legal method of payment.
Andy Pag (42, United Kingdom) bought bitcoin in 2010 on Mt Gox and was a customer when it shut. Last month he set up MtGoxLegal, a co-operative for Mt Gox customers, and hired legal counsel in a bid to reverse the decision. “We hope we can help the Japanese justice system see beyond the outdated minutiae of the Bankruptcy Act, to the broader principles of justice and honour which the country is famous for.
“By bringing creditors together, it seems more likely the court will listen to us.”
“For many of us, it was a massive shock when the exchange suddenly closed. We’d lost everything. Then, with the price surge this year, we had hope that we could at least recoup something. And now we’re told the court will be asked to give it all to the man who bungled running the exchange. That would be a massively unjust outcome.”
27/October/2017 – for immediate release. v iii
Background and sources
Mtgoxlegal has just under 400 members and is growing. They are early adopters of bitcoin technology having bought bitcoin before 2014. Together their claims represent an estimated 60,000btc, around 7% of all the claims by value. The assets of Mt Gox are enough to honour their creditors claims at a rate of ~23%, but the trustee’s course of action means they are due to only receive 8%, based on current market value.
Mt Gox was run by CEO Mark Karpeles, who is currently on trial in Tokyo for Embezzlement and Data Manipulation.
The Japanese government passed laws in March 2017 to recognise Bitcoin as a legal method of payment, one of the first countries to do so.
Tibanne Co. Ltd. owns 88% of Mt Gox. Mark Karpeles owns 100% of Tibanne.
Kim Nilsson of Wizsec has conducted a forensic study of the Mt Gox thefts. https://www.youtube.com/watch?v=l70iRcSxqzo
Contact Andy Pag, +44 797 494 2796 [email protected]