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The Fight Over Mt. Gox’s Bitcoin Stash

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(Bloomberg Businessweek) -- Mark Karpelès learned in June that he’s probably not going to become a Bitcoin billionaire. He calls that good news. If it had happened, he says, he would have been “one of the most hated people on Earth.” And Karpelès already has plenty of people who are angry with him.

He presided over the collapse of Japan-based Mt. Gox—once the world’s largest cryptocurrency exchange—and he’s now on trial in Tokyo for embezzlement and manipulation of records. But in a weird twist, it had seemed that Japan’s bankruptcy rules also put Karpelès, who is French, in line to receive a huge windfall.

Mt. Gox shocked the world when it went bust in 2014 after falling victim to a yearslong hack. About 850,000 Bitcoins had gone missing. Mt. Gox later found about 200,000 of the digital tokens in storage. Bitcoin was worth less than $500 at the time of the bankruptcy, but it’s worth about $6,300 today. Some of those found coins—and some Bitcoin Cash, another cryptocurrency that split off from Bitcoin—have already been sold by the bankruptcy trustee for about $387 million, while the value of what’s left is around $1.2 billion. There’s more than enough to pay off the thousands of people who’d lost their Bitcoins at Mt. Gox—based on the price their Bitcoins were worth in 2014, that is. In a bankruptcy, the surplus of more than $1 billion would have gone to Mt. Gox shareholders. Karpelès, through a company he controls, owns 88 percent of Mt. Gox.

People were up in arms. Karpelès himself opposed the idea. He’d already received some “very specific” death threats, he says. Some creditors petitioned the Tokyo District Court to change from bankruptcy to a process called civil rehabilitation, which may allow them to be reimbursed in Bitcoin. Although they’d get back fewer Bitcoins than they’d lost, with the currency’s appreciation they could still end up making money in dollar terms. On June 22, the court approved the switch. “I was quite happy about this,” Karpelès says.

Still, the 33-year-old, once dubbed the Baron of Bitcoin, has other things on his mind. He’s not accused of being behind the hack but of spending company and customer money and of fiddling with trading records on his exchange. If found guilty, he could face years in prison. He already spent almost a year in detention in Japan before he was released on bail. The food was so bad he lost 77 pounds in four months, after putting on weight around the time of Mt. Gox’s collapse. He can’t leave Japan, he’s divorced from his wife, and he can’t see his young son.

“I am innocent of all charges,” Karpelès said in a plea to the Japanese court on July 11, 2017. “I never once improperly used any funds during my work at Mt. Gox.” Karpelès said the money he’s accused of embezzling was borrowed, and was recorded as such in the books. As for the charge of manipulating records, he said he wasn’t doing anything nefarious or enriching himself—he was simply managing the company’s debts.

As Karpelès tells it, Mt. Gox was having trouble as early as 2011. He says it had lost 80,000 of its customers’ Bitcoins around the time he acquired the exchange from its founder, Jed McCaleb, that year. McCaleb says that happened after the deal. As the price of the cryptocurrency rose, so did the value of the missing Bitcoins Mt. Gox owed its customers. Being upfront about the missing Bitcoins wasn’t an option, Karpelès says, because if he told people, there could have been a run on the exchange.

Karpelès argued in his plea that he was trying to save Mt. Gox with what he dubbed an “obligation exchange.” Here is how that appears to have worked, according to Kim Nilsson, a software developer who had about a dozen Bitcoins in Mt. Gox when it went bankrupt and took it upon himself to investigate Mt. Gox’s troubles: Karpelès credited a Mt. Gox account with money that didn’t exist and used it to buy Bitcoins on the exchange. Therefore, Mt. Gox was no longer missing those Bitcoins. It had, however, credited dollars it didn’t have to whomever it bought the Bitcoins from. That might have been trouble if too many customers had tried to cash out dollars at the same time but potentially less trouble than having to come up with ever-more-expensive Bitcoin.

“How he handled things initially was pretty awful,” says Kolin Burges, a creditor who flew to Tokyo from the U.K. in 2014 to protest and try to get back his Bitcoins. “That’s, of course, a massive breach of trust to the users of the exchange.” Karpelès insists he had no choice. “With today’s knowledge and the way things are done today, well, of course everything would be done differently,” he says. “But at the time, I did with whatever information I had available to me and whatever advice I had available.”

Karpelès overestimated his ability to get out of the situation, according to Nilsson. He calls it a unique combination of arrogance and naiveté. “At every point he seems to have made the choice that ‘I must keep this secret for the greater good, because otherwise I would upset the community and that would crash Bitcoin’s price, and that would be even worse for Bitcoin holders,’ ” Nilsson says. “I personally believe that you should just tell the truth.”

Three judges will decide Karpelès’s fate. He doesn’t expect a verdict until next year. He has little reason for optimism: In Japan, prosecutors win 99 percent of the time. Creditors, meanwhile, have until October to file claims in the new process. Mt. Gox must submit a proposed rehabilitation plan by February. Making one that works for everyone won’t be easy. “I guess the celebrations will be when the distributions finally happen and creditors see something coming their way,” Karpelès says. 

To contact the editor responsible for this story: Eric Gelman at egelman3@bloomberg.net, Pat Regnier

©2018 Bloomberg L.P.

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