16 Comments

Summary:

The embattled exchange appears to be done for, leaving around $63.6 million in debts. Meanwhile, regulators around the world are still scratching their heads as to how to handle Bitcoin.

The pioneering yet much-reviled Bitcoin exchange MtGox has officially filed for bankruptcy protection. According to a report in the Wall Street Journal, a company lawyer told Japanese journalists on Friday that the outfit had outstanding debts of roughly $63.6 million against assets of little over half that.

This is no surprise — Tokyo-based MtGox suffered a huge theft of Bitcoins sometime in recent years (no, it didn’t conduct any audits) and had major liquidity problems, meaning many of its customers are unlikely to get their money back. On Friday the company said it had lost 750,000 of its customers’ bitcoins and 100,000 of its own bitcoins. That’s pretty much everything MtGox had in its virtual vaults.

The theft appears to have been largely MtGox’s fault for handling the Bitcoin protocol badly, but there also seems to be a wider weakness as other outfits have fallen victim to similar attacks.

“We have lost Bitcoins due to weaknesses in the system,” Bitcoin CEO Mark Karpeles told a press conference in Japanese, according to AFP. “We are really sorry for causing trouble to all the people concerned.” (If your Japanese is up to scratch, the video is embedded below.)

Earlier this week, it emerged that American and Japanese regulators are looking into the MtGox collapse, and it also seems that no one was willing to throw Karpeles’s ailing outfit a lifeline.

Bitcoin users do not have any regulatory backup if things go wrong – if their funds are stolen from their virtual wallet, there’s no bank to replace the funds, and if the exchanges fail, there’s no central bank to prop them up. They’re on their own.

On Thursday, U.S. Federal Reserve Chair Janet Yellen told a congressional committee that the Fed has no authority to regulate Bitcoin as it is a global, decentralized initiative. Japan’s vice finance minister said on the same day that regulating the cryptocurrency would require international collaboration, for the same reason.

MtGox used to handle the majority of Bitcoin trades, and many feared its sliding fortunes would have a major knock-on effect on the currency as a whole. It’s certainly been a factor in Bitcoin’s recent cooling-down, which has been significant, but Bitcoin hasn’t entirely crashed as such. Indeed, the ecosystem now appears to be broad enough to withstand a major shock like the MtGox debacle – sure, it was trading above $1,000 late last year, but it’s now around where it was in early January, at around $550.

Incidentally, for schadenfreude fans, the blogger who recently leaked MtGox’s hopeful turnaround plan has now leaked what purports to be a Europe-specific plan that describes the company’s plans for rolling out point-of-sale and other e-commerce systems, based around Bitcoin and Litecoin. Perhaps someone else can make that happen now.

This article was updated at 2:45am PT to reflect the certainty of the bankruptcy proceedings, as initial reports became more detailed, and again at 6am PT to include details of Mark Karpeles’s statement.

You’re subscribed! If you like, you can update your settings

  1. Reblogged this on Foiled For Freshness and commented:
    How does one simply lose 750,000 of its customers’ bitcoins and 100,000 of its own bitcoins?

    1. it’s pretty easy to lose something that never actually existed in the first place.

      1. How does one lose something that does not exist?

        1. take a philosophy course

  2. John Underwood Friday, February 28, 2014

    Why isn’t the media embarrassed that they grossly exaggerated the amount of the loss.

  3. What can we say? We warned those fools about investing in BTC, did we not?

    1. It’s not Bitcoin, it’s Mt. Gox. If the developers of Mt. Gox were smarter, this wouldn’t happen. What exactly did you guys warn those fools about again?

    2. Esteban Ibáñez larry Friday, February 28, 2014

      I never used MtGox, in no way I would use something that has prices obviously outside of the rest of the market value, that always stink. One thing is a minimal difference, sometimes over sometimes under, but Gox always was sensibly higher than the rest, that is never normal.

  4. The coins were lost in cold storage. Lose the private key, you lose your bitcoins.

    Just like if you lose a $100 bill, it’s gone.

  5. Call me an idiot, but how does it only have outstanding debts of 63.6 million, if it has lost 750,000 BTC. Or are they saying in the filing that the true market value of BTC is significantly lower than prices traded on some exchanges? I think there is a sound argument for a liquidity discount but would be interested to know what the basis of this is.

    1. That’s a very interesting question, and I’m sure the bankruptcy court will be asking it too.

  6. I think the $63 Mil is the amount of real cash that they owed people. As in from transactions that were already in place but not paid out when they halted withdrawls and closed down. Also money they owe for office rent and ulitities, salaries, real wold stuff as well.
    The $400 Mil worth of lost bitcoins from cold storage don’t count because until someone has agreed to buy them, and the exchange is taking place, they are in the eyes of the law valueless.
    Therefore, they have effectively lost a grand total of over $450 Million and no one, is going to get any money back. Essentially, he either going to jail for massive climinal negligence or end up hung drawn and quatered down a dark alley.

    1. It all get’s highly theoretical at this point, since there is a strong argument that Bitcoin are essentially valueless outside their usefulness as a method of exchange (which is negligible if you allow for confirmation times).

      Since MtGox did not act as a clearer and was purely an exchange, in the eyes of the law what constitutes someone being owed money.

      Hypothetical example, if I decide to use MtGox to buy Bitcoin back when the price was say $1 and I then sell that BTC at $500. That BTC then stays in a wallet on MtGox. MtGox then goes bankrupt.

      Legally have I lost $1, 1 BTC or $500?

      All of this lacks legal definition and the only convincing legal argument is that I have actually lost $1. Since not everyone’s BTC can be worth the prevailing market price as there is no liquidity.

      Also what constitutes a contract and offer/acceptance in the real world. is this confirmation on the blockchain? This would appear to be the only record that an exchange has ever taken place, but an exchange of what exactly. Since there is no real way of proving legal ownership over a bitcoin address in the eyes of the law, it is a quagmire to say the least.

  7. Can’t believe this!

  8. Sigh. Developers these days are so stupid they can’t even secure perfectly securable data. I’m a developer myself and I regularly facepalm at the people I regrettably need to call my fellow programmers.

    People should stop dragging Bitcoin through the mud based on the stupidity of one business that used it. Bitcoin is perfect, companies like Gox are run by morons.

Comments have been disabled for this post