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Owner claims 99.7 percent of his Bitcoins were stolen before he noticed

Bitcoin enthusiasts are reeling from the collapse of Mt. Gox, once the largest Bitcoin-centric money exchange.  The exchange announced today that it would be shut down, via a short post to its website.  The shutdown leaves many more questions than answers, the biggest of which is simple -- can the cryptocurrency Mt. Gox helped make a global sensation, survive its fall?

I. The Start -- From Napster to Mt. Gox

When Bitcoin -- a cryptography backed "currency" that can be viewed as a digital payment service or a tradeable commodity of sorts -- was conceived back in 2008 a programmer or group of programmers using the pseudonym Satoshi Nakamoto, it was just a novel idea.  Few would have imagined it would explode into the global phenomena it is today.

But over the last half decade Bitcoin slowly grew into a widely used, seemingly credible and secure global digital payment network.  While other cryptocurrencies have since emerged, Bitcoin remains the most prominent with a market value of over $8B USD (as .  Blockchain estimates Bitcoin has roughly 1.2 million users, working out to an average wallet value of around $10,000 USD.

Bitcoin w/ USD
Bitcoins are the world's most popular cryptocurrency, used by over a million people worldwide
[Image Source: Bit-Square]

Bitcoin may have caught on eventually, but few would deny that Mt. Gox was a key force in driving early Bitcoin adoption.

Mt. Gox originally had nothing to do with digital currency.  Its name was an acronym for "Magic: The Gathering Online Exchange" and it was founded by a Jed McCaleb, a man who had already played a pivotal role in one digital revolution.

Magic the Gathering
Mt. Gox started as a trading post for MAGIC: The Gathering collectible cards.
[Image Source: Latino Review]

Born in Little Rock, Arkansas Mr. McCaleb had spent several years living on the west coast as a surfer, having dropped out of the University of Calif., Berkley.  Following in the path of perhaps the most famous Berkeley dropout -- Apple, Inc. (AAPL) co-founder Steve Wozniak -- Mr. McCaleb taught himself to program and in 2001 (at age 26) co-founded MetaMachine, Inc. in New York City's lower Manhattan district. 

Jed McCaleb
Jed McCaleb [Image Source: Ariel Zambelich]

The company would go on to produce the very popular e-Donkey client, which by 2005 was home to 30 to 40 million users, of which on average approximately two to three million of them were online and sharing 500 million to two billion files via 100 to 200 servers at any given time.  And Mr. McCaleb was the lead developer of that awesome effort, earning it a place in the elite rank of peer-to-peer filesharing services, that only a handful of networks/clients, e.g. Limewire, Kazaa, and of course the original -- Napster -- had reached.

For a time MetaMachine was making a substantial sum off adware revenue bundled with its widely used clients -- enough to pay a small team of programmers salaries of around $70,000 USD and up.  But the party would end in 2006 when e-Donkey's developer was felled by a combination of poisoning with fake files via music industry troll Overpeer, Inc. and a separate legal campaign against it spearheaded by the Recording Industry Association of America (RIAA). 

eDonkey 2000
eDonkey was a hot commodity via its large userbase and ad monetization until the RIAA killed it. [Image Source: Mathias Rousseau]

MetaMachine would wind up paying a $30M USD settlement in 2006 and agreeing to abandon development of e-Donkey, which continued to live on in diminshed form for some time via third parties.

MetaMachine's other cofounder -- President Sam Yagan -- would land on his feet, becoming CEO of TheSpark.com, Inc., maker of SparkNotes, and most recently co-founding and serving as CEO of OkayCupid.

Mr. McCaleb packed up and moved to Tokyo, where he looked to launch the small card-trading portal in 2009.  Unemployed, he never had time to develop that site, but he still owned the domain name.

II. Under New Ownership

When Bitcoin came onto his radar in 2010, he took the stale domain and reimagined it, quickly coding a Bitcoin trading hub, which would trade U.S. currency for digital Bitcoins, charging a small fee (~5 percent) on transactions.

Mark Karpeles
Mark "Magical Tux" Karpelès bought Mt. Gox in early 2011.

His early success and the growing buzz arround Bitcoin attracted the interest of  Mark "Magical Tux" Karpelès, a French developer who had worked Fotovista and was currently working in Japan at NEXWAY Comp., Ltd. (an IT firm owned by the INTEC Group, aka IT Holdings Corp. (TYO:3626)).  He blogged in March 2009:

The deal is pretty simple, the company I work for (Nexway) has agreed on taking me in Japan instead of France. This will greatly help for some projects I’m working on within the company, both in terms of access to documentation/skilled people and in terms of motivation.

Mr. Karpelès had just started his own company "Tibanne Comp., Ltd." according to his resume on LinkedIn Corp.'s (LNKD) Japanese portal.  In his LinkedIn profile he writes:

Going to make this young company grow into something big. I will need everyone's support for this!

In a Dec. 2009 blog he writes that he quit his job at NEXWAY to focus on the new hosting firm, writing:

2009: finally, while in Japan, creation of K.K. Tibanne. I believe past experience have taught me many things including (but not limited to):

Working fulltime at the same time is a bad idea, unless there is a point in time where “things must work no matter what”. I resigned from my current work, and still have a few weeks there. I’m a bit sleep deprivated lately (mainly because I’m handling two works at the same time) but things are progressing at a good pace.

Having external investors is a pain, and can become a risk when they start to have their own ideas about how the company should be run while they were silent for the mast months and have no idea of how webhosting works...

Tibanne's first big buy was Mt. Gox, which Mr. McCaleb allegedly parted with for a few hundred thousand dollars. 

MtGox
Mt. Gox, circa 2012

Mt. Gox quickly rocketed to the top, dominating roughly three-quarters of Bitcoin transactions, by late 2011.  But it also suffered a major breach when in June 2011 a hacker used SQL injection to dump Mt. Gox's login database and then proceeded to crack the unsalted "weak" MD5 hashed passwords


Bitcoin drop
The 2011 hack of Mt. Gox triggered a plummet in trading prices. [Image Source: LeanBack.eu]


At the time of the hack Mt. Gox handled nearly 90 percent of the $130M+ USD of existing Bitcoins (in exchange rates of the time).  After the hack Mt. Gox lost some customers, but others stuck with it after it pledged to adopt better security measures.  Between 2012 and 2013 it became a trusted brand, handling Bitcoin accounts cumulatively worth literally hundreds of millions of dollars.

III. Signs of Trouble

But Mr. Karpelès own journal is telling.  In it he writes:

I never finish anyth…
In fact, sometimes, I happen to finish something, but “finishing something” is just too boring. I always do a new version at some point, so nothing is really “finished”. Just tag it with a version number and continue it (already got this thinkgeek tshirt).

Indeed, after ascending from everyday developer into CEO of a digital currency corporation worth millions, the floor began to fall out.

Mark Karpeles
After accumulating a quarter-billion dollar fortune, Mt. Gox CEO has reportedly vanished from the digital doman. [Image Source: Reuters]


In 2013 Mt. Gox began to shut down periodically for "cool off" periods, always claiming some glitch or another.  More troublingly, when customers asked to withdraw their holdings, it would take weeks, months even to repay them.  Some reportedly were never paid at all.  Mt. Gox again blamed computer glitches, and offered a controversial "expedited" withdrawal scheme, if customers would pay it additional processing fees.

Meanwhile Mt. Gox was also facing serious real-world costs.  In May 2013 startup CoinLab filed a $75M USD lawsuit against it in the U.S. for breaching a contract to not compete with CoinLab's licensed Mt. Gox trading portal for the U.S. market.  Later that month the U.S. Department of the Treasury seized an estimated $5M USD in accounts belonging to Mt. Gox's owners.

Mt. Gox card
Mt. Gox was running up a bill it couldn't pay off. [Image Source: CoinDesk]

Some of these funds were reportedly returned by the Financial Crimes Enforcement Network (FinCEN) -- the enforcement arm of the Treasury -- after Mt. Gox registered in June 2013 as a money exchange, agreeing to file paperwork and finally crack down on overt money laundering.

A release to customers at the in December 2013 noted the company had only a million current customers -- less than an eighth of the accounts that were registered with it in 2011.

IV. Mt. Gox and "Malleability"

Despite all those warning signs many continued to trade on the portal, which in January accounted for roughly 19 percent of total Bitcoin traffic, behind only BitStamp and btc-e.  And Mr. Karpelès had a prestigious spot on the Bitcoin Foundation's board, one of only three elected industry members.

On Feb. 7 Mt. Gox halted trading. We were the first major outlet to report this halt for what it was -- a digital bank run.  Mt. Gox was clearly unable to pay its customers, but it wasn't until early this month that it came up with a perhaps plausible explanation of where the money had gone -- malleable transactions.

Bank Run
A bank run in Berlin in 1931 draws a panicked crowd. [Image Source: Biln]

The Bitcoin Foundation Chief Scientist Gavin Andresen discussed this earlier this month, stating:

The issues that Mt. Gox has been experiencing are due to an unfortunate interaction between Mt. Gox’s implementation of their highly customized wallet software, their customer support procedures and their unpreparedness for transaction malleability, a technical detail that allows changes to the way transactions are identified.

This had been first hinted at in August 2013 when Mt. Gox admitted it was in serious financial trouble, saying it had seen "significant losses" from unfulfilled transactions.  Now the details of these issues were growing.

V.  The Empire Falls

This week the bottom of the rotting boat finally fell out.  Mr. Karpelès resigned from the Bitcoin Foundation board post (becoming only the second member of the three person board to do so in the last month).  And Mt. Gox shut down.

Mt. Gox

Ryan Selkis on Monday posted a document leaked from Mt. Gox which seemed to imply that the site lost -- roughly 6 percent of Bitcoins in existence -- nearly 750,000 Bitcoins over the past few years after being victimized by "theft" from users exploiting the transaction malleability.

The document reads:

For several weeks MtGox customers have been affected by bitcoin withdrawal issues that compounded on themselves. Publicly, MtGox declared that “transaction malleability” caused the system to be subject to theft, and that something needed to be done by the core devs to fix it. Gox’s own workaround solution was criticized, and eventually a fix was provided by Blockchain.info. The truth, it turns out, is that the damage had already been done.

At this point 744,408 BTC are missing due to malleability-related theft which went unnoticed for several years.

The cold storage has been wiped out due to a leak in the hot wallet. The reality is that MtGox can go bankrupt at any moment, and certainly deserves to as a company. However, with Bitcoin/crypto just recently gaining acceptance in the public eye, the likely damage in public perception to this class of technology could put it back 5~10 years, and cause governments to react swiftly and harshly. At the risk of appearing hyperbolic, this could be the end of Bitcoin, at least for most of the public.

The document indicates that Mt. Gox has only $22.34M USD in the bank and 2,000 bitcoins in a hot wallet to try to cover the 624,408 Bitcoins (BTC) customers have deposited.  At current exchange rates that indicates a $335M USD worth pool of user coins could be lost -- or at least rendered unusable for a long time, at least -- due to the theft of roughly $400M USD worth of Bitcoins.

MtGox Situation: Crisis Strategy Draft by twobitidiot



The losses allegedly occurred as Mt. Gox wasn't keeping up with changes to the Bitcoin protocol and somehow failed to notice as it slowly lost lost 99.7 percent of its Bitcoins -- virtually all of its digital currency pile.

Amazingly, the document appears to be authentic.

But if Bitcoin investors are hoping for a bailout they're not likely to get one.  Japan's Financial Services Agency (FSA) -- the nation's financial regulatory body -- said this week that it will likely not intervene on Mt. Gox's behalf, as it would for a normal bank.

VI. Mark Karpelès -- a Thief, or Just Reckless and Foolish?

The leaked document has not been confirmed authentic, as Mt. Gox has refused to publicly comment on the issue.  But multiple major outlets have suggested it appears to be the real deal.

As for Mt. Gox, Mr. Karpelès reportedly is preparing to publicly bow out, via some form of mea culpa, such a "Letter from the CEO" ("Hey, about your money... we won't be getting it to you.  Sorry!")  The site is reportedly going to be branded Gox.com -- a URL Mr. Karpelès' Tibanne recently bought.  It will possibly move to another country like Singapore, firing most of its current staff in Japan.  Yet despite all of these superficial changes mentioned in the plan, there's no indication that Mr. Karpelès' Tibanne will relinquish control of the firm.

Mt. Gox
Did Mt. Gox CEO Mark Karpelès
steal peoples Bitcoins?  And why hasn't he offered to put his own money on the line to repay his customers? [Image Source: Reuters]

A post to the site's code, commented:

<!-- put announce for mtgox acq here -->

...but no announcement has yet been posted, raising questions of whether Mt. Gox is simply playing the press.  Even if Mt. Gox is "acquired", it's possible this could simply be some elaborate ploy on Mr. Karpelès' part to retain control via shell companies.

The real question I think everyone should be asking is whether Mr. Karpelès simply exploited the vulnerability he observed to steal all this money himself, leaving his company bankrupt.  Either this savvy coder -- who helped to maintain public PHP tools -- was stunningly stupid when it came to avoid exploitation, or he was the exploiter

Mt. Gox Burning

In October Mr. Karpelès became "CEO" of Shade 3D a startup that is looking to make 3D glasses.  According to Twitter:
Did Mr. Karpelès stealing hundreds of millions from unscrupulous Bitcoin fans?  Or was he too a victim, losing his grasp on a business bigger than he would ever have dreamed of owning?

We may never find out.  But even if Mr. Karpelès did NOT steal customers' Bitcoins, he has yet to put any of his own fortune -- via his Tibanne holdings and his new Shade 3D business -- on the line to try to repay customers.  Even if Mt. Gox was the victim, at best it is reckless and selfish in leaving customers on their own to deal with the losses.

In recent weeks the embattled CEO has been heckled by protesters outside his office in Tokyo.

Mt. Gox protester
[Image Source: Reuters]

 
Mt. Gox protester
Protester confronts Mark Karpelès on his way in to the office. [Image Source: YouTube]



Since then he has reportedly disappeared -- not coming in to work at normal hours.

VII. As Bitcoin Circle Wagons, Mt. Gox's Original Creator Celebrates Rising Star

Somewhere Mr. McCaleb must be taking in the latest development in the rollercoaster of emotions that must have struck ever since he decided to sell Mt. Gox.  After all, he reportedly didn't make that much off the sale and for a time it looked like he missed out on his ticket to fame grandeur.

But with $3M+ USD in venture capital in hand from angel investors, he now has a digital payment system of his own -- Ripple.  Today Ripple is worth $1.7B USD -- more than any other digitial cryptocurrency aside from Bitcoin, with investments from -- among others -- Google Ventures, the venture capital wing of Google Inc. (GOOG). 

And Mr. McCaleb, who has recently gone on to other ventures, is among three-cofounders to hold 1/5th of Ripples (XRP) in existence -- 20B XRP.  That's roughly $270M USD at present.  So Mt. Gox's original founder certainly isn't hurting for cash, and unlike his fallen creation, his reputation is intact.

In a sense Ripple, while encryption protected, isn't a traditional cryptocurrency.  Where as most cryptocurrencies operate on proof of work or proof of stake, Ripple is described as a consensus ledger of trust.  The nature of the implementation makes it harder to place fraudulent transactions than with Bitcoin.

That statement will likely be put to the test, as will the survival ability of the world's largest cryptocurrency -- Bitcoin.

Losing $300M USD?  That's enough to sour even the most die-hard Bitcoin fans to the currency.  Unsurprisingly, the top exchanges have huddled together trying to promise that the currency is reliable and safe.

Bitcoin tragic violation of trust

Sure.  It's easy to say that now. But wait until the next exchange collapses leaving customers guessing whether it was a Ponzi scheme, or simply apallingly reckless. 

Bitcoin fans wanted an unregulated currency free from government intervention?  Well that's what they got.

Sources: The Bitcoin Foundation [1], [2], Mt. Gox, CoinBase



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This article is over a month old, voting and posting comments is disabled

RE: Accurate description
By EricMartello on 3/3/2014 4:11:00 PM , Rating: 2
The idea of a 'cryptocurrency' as a replacement for physical coins, bills and credit cards is fine - so long as said currency is backed by an entity with both globally recognized authority and an economic foundation that can support the quantity of currency in circulation.

What bitcoin and its copycats attempt to do is create a currency for the sake of creating a currency. It is literally the same as a poker chip - zero value outside of the casino that issued it.

I really feel no sympathy for the gullible idiots that spent real money to by sh1tcoins and now got scammed out of it. They were warned, they chose to cling to beliefs instead of fact so they deserve all they get.


"When an individual makes a copy of a song for himself, I suppose we can say he stole a song." -- Sony BMG attorney Jennifer Pariser














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