(Source: AP)
"We have to let it go. And then we'll buy more." says a Japanese investor after losing a tenth of his Bitcoins

It's been a stunning fall from grace for French developer turned business magnate, Mark "Magical Tux" Karpelès.  The CEO of Mt. Gox shocked the world of cryptocurrencies -- an unregulated secure digital payment system -- when his exchange announced this week that it would be closing for good.

I. Mt. Gox == Bankrupt

Seldom seen not wearing a T-shirt, a somber Karpelès spoke to the press in Japanese at a news conference at the Tokyo District Court.  Before he started he bowed deeply, a gesture sometimes used as a symbol of formal apology in Japan.  However, he even as he bowed the CEO had a hint a grin, leading doing little to settle his critics.

In his brief comments, he stated:

First of all, I'm very sorry.  The bitcoin industry is healthy and it is growing. It will continue, and reducing the impact [of Mt. Gox's collapse] is the most important point.

Mt. Gox bows
Mark Karpelès bows to the press in apology. [Image Source: Reuters]

He then went on to paint a stunning picture of Mt. Gox's destruction which not only confirmed in some cases, the outlandish numbers that had leaked in recent weeks, but in some cases exceeded them.

Mark Karpeles
Mark Karpelès, CEO and owner of bankrupt Bitcoin exchange, Mt. Gox [Image Source: Reuters]

He claims that in total, over the last few years, a thief or thieves used a series of anonymous transactions to exploit a "weakness in [the Mt. Gox] system" known as transaction malleability.  That ongoing attack stole more than 99.9 percent of the Bitcoins Mt. Gox held -- including the Bitcoins it "owned" thanks to customer fees, and Bitcoins its customers had entrusted to it.

In total 7 percent of all Bitcoins in circulation are estimated to be stolen.  Users lost 750,000 Bitcoins (approximately $434M USD at current exchange rates).

Mt. Gox
[Image Source: Reuters]

Under the bankruptcy the Japanese court regards Bitcoin holders as investors-turned-creditors, indicating that they view Bitcoins as an investment, not a true currency.  That means if Mt. Gox had anything left, they could collect.  In total it estimates there to be 127,000 creditors (aka active accounts on Mt. Gox with money/Bitcoins in them), with an average value of $3,500 USD, or roughly 6 Bitcoins.  About 1,000 of the creditors were Japanese.

Karpeles in court 3 of 3
Mark Karpelès (second to left) address press at the Japanese bankruptcy court.
[Image Source: Reuters]

Mt. Gox and Karpelès claim that they also lost 100,000 of their own bitcoins, or roughly $57.85M USD at current exchange rates.  They also acknowledge a 2.8B ($27.4M USD) discrepancy at its accounts held with Baker & MacKenzie LLP.  It has yet to be seen whether that discrepancy is due to errors on Mt. Gox's side or the bank's side.

II. Will Investors Get Their Money Back?

One of the top questions is whether the supposedly stolen coins will be recovered.

Some have suggested that it could be an inside job -- that an employee at the exchange's Japanese offices with administrative rights or even Karpelès himself could have stolen the money.  If that is the case Karpelès kept a good poker face in court, sticking to his baffling claim that no one at the company noticed the deficit until almost all its Bitcoins were gone.

Bitcoin weathered
[Image Source: TechVibes]

Mt. Gox appears to have destroyed much of its digital data.  In a statement Karpelès told the press:

I am still in Japan, and working very hard with the support of different parties to find a solution to our recent issues.  Furthermore I would like to kindly ask that people refrain from asking questions to our staff: they have been instructed not to give any response or information.

Previously leaked documents have indicated that he is shopping around Mt. Gox, looking for buyers to revive the exchange.  While it's questionable that Bitcoin enthusiasts would be willing to trust the site again, signs suggest that Karpelès believes that if the site changes its name (to, if he resigns as CEO, and if the headquarters moves out of Japan that some may return to do business with the refreshed site.

Mark Karpeles
Karpelès is reportedly looking to relaunch Mt. Gox, once its debts are wiped out.  If he's a scammer that could provide him an opportunity to stal yet more coins. [Image Source: Reuters]

In an email to Reuters he commented:

We should have an official announcement ready soon-ish. We are currently at a turning point for the business. I can’t tell much more for now as this also involves other parties.

If Mt. Gox does score any money, it could use that to partially repay its customers, though it would be somewhat stunning for it to gain the half billion it would need to repay them fully.

Mark Karpeles
Mt. Gox's Tokyo office [Image Source: Reuters]

In U.S. District Court for the Northern District of Illinois -- in Chicago, Ill. -- one creditor, Gregory Greene filed a lawsuit against Mt. Gox on Thursday.  Mr. Greene, who lost $25,000 USD, stated, "[Mt. Gox] failed to provide its users with the level of security protection for which they paid."

If it can be proven in court that Karpelès' Tibanne Comp., Ltd. was actively involved in the business of the subsidiary, Mt. Gox (which it appears definitely have been), it is likely liable for the losses [source].  Those losses could sink the investment firm and Shade 3D Comp., Ltd. -- the 3D glasses firm that Karpelès was looking to start up.

III. Tracking Down the Stolen Coins

On the other hand, Mt. Gox's liability could be eliminated or reduced if some or all of the stolen Bitcoins were tracked down and then regained through traditional means.

Manhattan U.S. Attorney Preet Bharara and the Federal Bureau of Investigation (FBI) are probing Mt. Gox's dealings and its transactions trying to determine whether the law was broken, and if so who did it.  The investigation is being spearheaded by the U.S. District Court for the Southern District of New YorkThe Bitcoin Foundation, the largest trade group for the currency has distanced itself from Mt. Gox and pledged to assist in the investigation.

FBI probe
The FBI is probing the Bitcoin theft. [Image Source: AP]

All Bitcoin transactions are securely logged in a global blockchain, which prevents users from fraudulently claiming to own bitcoins that they don't own.  So presumably logs of the theft from Mt. Gox are in there somewhere. 

To that end the FBI has ordered that Mt. Gox cease any distruction of files or documents in order to allow an open investigation to proceed.

The question is how to distinguish those transactions from legitimate transactions that Mt. Gox was conducting over the last three years.  Even if Mt. Gox were cooperative and authorities could identify the supposedly illegitimate transactions, there is no mechanism to reverse them.  The investigators would be forced to track them step by step until they reached some sort of identifiable endpoint -- e.g. the thieves cashing out their loot for real world millions.

Bitcoin catch me if you can
Authorities may never catch the Bitcoin thieves. [Image Source: DailyDot]

If Karpelès or another Mt. Gox employee indeed stole the coins, they might have damaged the business's digital records, making it virtually impossible to track down and prove which transactions were illegitimate.  Or even if Karpelès is telling the truth, the thieves could live in regions like Africa or Russia where extradition and/or collection were basically impossible.

Moshe Cohen, assistant professor at Columbia Business School in New York, says the investment community will be keenly watching whether the stolen coins can be tracked down.  He states:

This may be telling for the level of traceability of the transactions. Bitcoin has been telling us that it is more traceable than cash. The question is, how much more and is there the potential for real recourse in the case of theft.

Past investigations by Forbes and other publications suggest that one-off transactions using Bitcoin are indeed traceable, even if the user makes efforts to cover their tracks.  But tracking over 1 in every 20 bitcoins in circulation is a Herculean task that may be beyond anyone's capability.  In other words the thieves -- whoever they are -- may get away with it.

IV. "Don't Stop Believin'"

The theft is highlighting fundamental criticisms about Bitcoin.  Notably, some are pointing out that there's no guarantees of repayment like deposits of real currency in banks.  Second, some have even started to scrutinize the underlying concept of Bitcoin, such as its seeding of wealth to a small group of early adopters or the fact that it has built in deflation as there's no rigidly defined mechanism for Bitcoin to grow as the global economy does.  Critics have pointed out that due to the deflation and volatility even business who "accept Bitcoins" generally price their offerings in USD.

But angry as they may be at Mt. Gox, Bitcoin enthusiasts either aren't listening to the criticism on the currency, or are actively denying it.  Their sentiments can be summed up in a phrase by a classic Journey track -- "Don't Stop Believin'"

Bitcoin exchange
Bitcoin fans won't give up on their favorite investment. [Image Source: AP]

Ken Shishido, a Japanese Mt. Gox user who lost a tenth of his holdings, argued against suggestions that Bitcoin be banned or restricted, commenting:

Bitcoin has always been volatile and speculative.  It's too bad that this happened, but we have to let it go. And then we'll buy more.

In the early days of the automobile, there were traffic accidents because you didn't have traffic lights or pedestrian crossings.  But we didn't ban automobiles.

Roger Ver, another investor who lost a lot in the Mt. Gox collapse, echoes:

But the important thing to realize is that Mt. Gox is just one company using bitcoin. The bitcoin technology itself is still absolutely amazing.  Even if one email service provider is having a problem that doesn't mean people are going to stop using email. It's the same with bitcoin.

[You can't discount] all of the positive ways in which bitcoin is going to change the world ... if anything, it is kind of for the better of bitcoin that the irresponsible players are going out of business.

Bitcoins most die-hard users won't give up on the cryptocurrency until they lose their last Bitcoin.  The problem is the rest of the world may not be as accepting of Bitcoins' flaws as they are.

Sources: Reuters [1], [2], MarketWatch, Bloomberg

"I'm an Internet expert too. It's all right to wire the industrial zone only, but there are many problems if other regions of the North are wired." -- North Korean Supreme Commander Kim Jong-il

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