Summary:

Bankrupt bitcoin exchange MtGox will enter liquidation, even as its lawyers hold out hope that it can recover $5 million in cash seized by Homeland Security.

Give up hope all ye who enter MtGox, or whatever is left of the bankrupt bitcoin exchange that is “missing” hundreds of millions of dollars worth of customer deposits.

According to reports on Wednesday, MtGox asked a Tokyo bankruptcy court to convert the proceedings from a restructuring process to an outright liquidation, which further lessens the chance that its 127,000 creditors will obtain any meaningful recovery.

Meanwhile, filings in Texas bankruptcy court cite an exchange between the judge and MtGox lawyers, who say they are trying to recover a seized $5 million from the Department of Homeland Security — but are not optimistic:

Mt. Gox Counsel: [...] there was money that was seized by Department of Homeland Security a while back.

The Court: Five million?

Mt Gox Counsel: Five million or so, yes.

THE COURT: Fiat cash?

Mt. Gox Counsel: Fiat cash, right [...] And so the company referred to it as a deposit. I don’t think, technically, we would refer to it as a deposit. I think we have a claim — and we’re trying to get the money back from Homeland Security, but I don’t really view that as a deposit like a bank deposit. It’s not clear we’re going to — you know, that’s a matter that’s under discussion with the Department of Homeland Security as to whether we get it back. [My emphasis]

The chances of Homeland Security handing the $5 million back to MtGox seem remote, especially given that the agency is reportedly investigating ties between MtGox CEO Mark Karpeles and members of Silk Road, the notorious online marketplace shut down last year.

A Wednesday report in the Wall Street Journal, consistent with what Gigaom reported last week, cites sources saying that lawyers fear Karpeles will be detained if he steps foot in the U.S.

Meanwhile, as MtGox enters liquidation, other court filings suggests creditors are turning their attention from MtGox to Karpeles himself, whose personal assets are not shielded by the bankruptcy process. Collecting anything from Karpeles could be difficult, however, given the complexity of enforcing foreign judgments against someone like Karpeles who is a French national living in Japan.

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