The Mess That Was Mt. Gox: Four Years On
Mt. Gox holds its infamous part of Bitcoin’s history as the once biggest cryptocurrency exchange that went under in a cloud of confusion and anger.
February 2014, just over four years ago now, was a worrisome month as the exchange slowly started to capitulate ending in the company filing for bankruptcy. Mt. Gox stated that almost 750,000 of its customers' Bitcoins, as well as 100,000 of its own Bitcoins, had been stolen. The total loss constituted around seven percent of all Bitcoins available, and worth around $473 mln at the time.
Through the entire Mt. Gox saga, many questions and concerns were raised about Bitcoin, and it took the digital currency a few years to recover from this incident, but still, to this day, there is news emanating about those stolen coins.
The genesis of the world’s biggest exchange
Mt Gox was launched in 2010 by US programmer Jed McCaleb (who later went on to found Ripple) but in March 2011 it was purchased by a French developer and Bitcoin enthusiast Mark Karpel?s. The name Mt. Gox stood for “Magic The Gathering Online eXchange.”
Mark Karpel?s was involved in a recent radio interview, on March 6, in which he sums up his and his company’s road to fame and fortune.
“It felt like… when you fall from a building and you see the ground getting closer, and you feel like you are about to die. Mt. Gox went from interesting project to being, and I would say, a daily nightmare of dealing with banks, governments, people I never knew existed.”
At that time, something like seven out of every 10 Bitcoin transactions were handled by the exchange.
“I am very sorry that when I was in charge things happened the way they did.”
The first hack
The 2014 Mt Gox hack is known across the crypto community, and its influence is still being felt, but Mt. Gox was hacked back in 2011. It happened most likely as a result of a compromised computer belonging to an auditor of the company.
At that time, the hackers used their access to the exchange to artificially alter the nominal value of one Bitcoin to one cent and then transfer an estimated 2,000 Bitcoins from customer accounts on the exchange.
80 percent dominant
Despite this early setback, Mt. Gox expanded rapidly and by 2013 was the undisputed largest Bitcoin exchange in the world handling as much as 80 percent of all Bitcoin transactions.
While the company was building a considerable presence in the market, internally not all went well.
In 2013, Coinlab, a former business partner of the exchange, sued the company for $75 mln, claiming breach of contract. The contract stipulated that Coinlab would take over the American customers of Mt. Gox, but it never happened.
Additionally, the Department of Homeland Security received claims that a subsidiary of Mt. Gox operating in the US was not licensed and was, therefore, operating as an unregistered money transmitter.
As a result of the investigation, more than $5 mln was seized by the Department from the company’s bank accounts.
The infamous hack
The so-called hack that led to the collapse of Mt. Gox is still to this day shrouded in mystery as the month of February 2014 saw a confusing procession of events.
Feb. 7, 2014: Mt. Gox halted all Bitcoin withdrawals due to transaction malleability. “A bug in the Bitcoin software makes it possible for someone to use the Bitcoin network to alter transaction details to make it seem like a sending of Bitcoins to a Bitcoin wallet did not occur when in fact it did occur,” a statement read.
Feb. 17, 2014: Withdrawals were still halted as the company laid out the steps it was taking to address security issues.
Feb. 23, 2014: Mark Karpel?s resigned from the board of the Bitcoin Foundation. The same day, all posts on its Twitter account were removed.
Feb. 24, 2014: All trading was suspended and then the website went totally offline. A leaked internal document claimed that the company was insolvent, after having lost 744,408 Bitcoins in a theft which went undetected for years.
Feb. 25, 2014: Mt. Gox reported on its website that a "decision was taken to close all transactions for the time being," citing "recent news reports and the potential repercussions on Mt Gox's operations."
Feb. 28, 2014: Mt. Gox filed for bankruptcy protection in Tokyo, then on March 9, filed for bankruptcy protection in the US.
The month of February shook the Bitcoin world as Mt. Gox went down in a heap, leaving thousands of people out of pocket, confused and angry. From February to the end of March, the value of Bitcoin declined by 36 percent.
Image source: Bitcoincharts
The repercussions from the hack affected not only Mt. Gox and its customers, but also Karpel?s.
The CEO of Mt. Gox was re-arrested in Japan in August 2015, after being brought in earlier that year, and accused in fraud and embezzlement, charges not related directly to the theft. He was imprisoned until July 2016, when he was released on bail.
Before his arrest, Karpeles admitted that he had ‘found’ 200,000 of the missing Bitcoins in cold storage on his own accord. This drew suspicion and Karpel?s reputation in the community started to dive as more allegations emerged; for example, that he spent the embezzled Bitcoin money on prostitutes.
In the middle of 2017, Karpel?s was brought before a Tokyo court to answer charges of embezzlement and data manipulation. During the trial, Karpel?s admitted to be operating a so-called ‘Willy Bot’ (obligation exchange).
At the same time as Karpel?s was in Tokyo, a strange connection was made: another exchange operator was arrested in connection with the stolen Bitcoin from Mt. Gox.
In July 2017, a Russian national named Alexander Vinnik was arrested by US authorities in Greece and charged with playing a key role in the laundering of Bitcoins stolen from Mt. Gox.
BTC-e was raided by the FBI, causing the site to go down. That was the first time a US authority had seized a foreign exchange on foreign soil.
Investigations by Wizsec, a group of Bitcoin security specialists, had identified Vinnik as the owner of the wallets where the stolen Bitcoins had been transferred, many of which were sold on BTC-e.
Still in the news
With the investigation still ongoing, it is not surprising Karpel?s, and Mt. Gox, have still been frequenting the news up until now.
Thus, in November 2017, Karpel?s suggested conducting an ICO to raise $245 mln to “revive” Mt. Gox.
This week, unofficial investigations alleged that a UK “shell” company was involved in laundering 650,000 BTC from Mt. Gox. The Always Efficient LLP company was said to have participated in processing the funds hacked from the Tokyo exchange.
Furthermore, experts suggested that the recent price drop of Bitcoin to around $6,000 in February 2018 was down to a Mt.Gox trustee “panicking” and selling $400 mln worth of Bitcoin.
Nobuaki Kobayashi has sold over 35,000 BTC and 34,000 BCH (Bitcoin Cash) in order to pay the defunct exchange’s creditors.
A lot has happened in the lifespan of Bitcoin, but probably something of the magnitude of Mt. Gox would never happen again. Exchanges are more closely scrutinized and the distribution of transactions are much wider.
But, the echoing effects of this major hack continue to be felt, and probably will continue, for some time. It could serve as an important case for the community, and a stern warning, that the crypto ecosystem needs to be looked after.