Head Of Collapsed Mt.Gox Exchange Arrested With Half A Billion In Bitcoin Still Unaccounted

Tyler Durden's picture

Back in its 2013 heyday, when bitcoin soared from below $100 to over $1000 in the span of a few months (in no small part thanks to the collapse of the Cyprus banking system) there was only one real Bitcoin exchange: Magic: The Gathering Online Exchange, or Mt. Gox as it was better known, which had become the world's largest hub for trading the digital currency. And then, as mysteriously as it had appeared, Mt. Gox went dark, and filed for bankruptcy after nearly half a billion dollars worth of bitcoin "disappeared."

We wrote at the time:

For a case study of a blistering rise and an absolutely epic fall of an exchange that i) was named after Magic: the Gathering and ii) transacted in a digital currency which many have speculated was conceived by the NSA nearly two decades ago and was used as a honeypot to trap the gullible, look no further than Mt.Gox which after halting withdrawals for the second (and final time) has finally done the honorable thing, and filed for bankruptcy. As the WSJ reports, "Bitcoin exchange Mt. Gox said Friday it was filing for bankruptcy protection after losing almost 750,000 of its customers' bitcoins, marking the collapse of a marketplace that once dominated trading in the virtual currency. The company said it also lost around 100,000 of its own bitcoins. Together, the lost bitcoins would be worth approximately $473 million at market prices charted by the CoinDesk bitcoin index, although the price of Mt. Gox bitcoin had fallen well below that index after it stopped bitcoin withdrawals in early February."

 

The punchline: speaking to reporters at Tokyo District Court Friday after the bankruptcy filing, Mt. Gox owner Mark Karpelès said technical issues had opened the way for fraudulent withdrawals, and he apologized to customers.

 

"There was some weakness in the system, and the bitcoins have disappeared. I apologize for causing trouble."

In other words, oops sorry, several hundred million in Bitcoin is unaccounted for but blame the "system weakness." This promptly led to various artistic interpretations on the Mt. Gox logo, such as this one:

Some were confused if Karpeles was going to get away with nothing more than an excuse, even if - as many speculated - he had personally fabricated exchange data entries and embezzled millions of dollars for his own account.

As a reminder, when it filed for bankruptcy in February 2014, Mt. Gox said 750,000 customer bitcoins and another 100,000 belonging to the exchange were stolen due to a software security flaw. The lost funds represented the equivalent of $480 million at the time of the bankruptcy filing. Mt. Gox also said more than $27 million was missing from its Japanese bank accounts. Karpeles, who had blamed hackers for the loss, later said he had recovered 200,000 of the lost bitcoins.

Earlier today we got the answer when nearly 18 months after his infamous apology, Mark Karpeles was arrested in Tokyo. FT reports that Japanese police have arrested Mark Karpelès, the head of the bankrupt Japan-based bitcoin exchange Mt Gox. The arrest charge is that he made an illegal entry to the system in February 2013 and increased the balance of his account by $1 million.

And yet, a year and a half after the exchange insolvency, nobody truly knows what happened:

The alleged crimes involved are hard to pin down, say police sources, because of the absence of a specific laws governing the virtual currency. Police have acknowledged privately that there technical elements of the alleged disappearance of nearly $500m that “are still not properly understood”.

 

Asked by Mt Gox to look into the matter in March Last year, the Tokyo Metropolitan Police were not able to begin their investigation until three months later. Even then, say people close to the investigation, the two police departments in charge — the cyber crime unit and the white-collar crime unit — did not properly share information.

 

The year long investigation, say legal experts, has culminated in an arrest that will allow police to hold Mr Karpelès without charge for 23 days. If he continues to deny any wrongdoing during that time, police may alter the charge, and hold him for another 23 days.

While Karpeles may very well be guilty of embezzlement and massive fraud against his clients, could it be the still undetermined "crimes" relating to a virtual currency will become just the excuse to keep unsavory suspects detained and/or under arrest for an indefinite period of time? Because being held for up to 46 days without any charge seems a little Guantanamoish.

As the FT adds, "the case has exposed both the complexities of crime relating to the bitcoin virtual currency, and the profound difficulties encountered by the Japanese police as they have attempted to investigate the Mt Gox."

Seemingly the complexity was not as big as that encountered by US regulators and police who 7 years after the greatest criminal systemic collapse, and after the statute of limitations has now expired, have yet to arrest anyone for a multi-trillion systemic crime far greater than Karpeles' $500 million embezzlement.

As for the former Mt. Gox head, today's arrest will hardly come as a surprise as it was expected for over two weeks: Japanese journalists had been encamped outside his Tokyo home for several days. Footage of him being led from his home to a police car showed Mr Karpelès wearing a T-shirt and a baseball cap.

Mr Karpelès could, if found guilty, face up to five years in prison or a fine of as much as Y500,000 which at today's exchange rate is just over $4000.

So let's do the math: steal $500 million which only you know where it is, spend 5 years in prison, and be fined $5000. Sounds like a pretty good deal...

Anyone curious for more, there was an AMA this morning with a person representing to be Ashley Barr, the first Mt. Gox employee which gives more insight into Karpeles various pathologies. It can be found here.

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realmoney2015's picture

Forget Bitcoin!!!Start stacking silver!!! Great time to buy! Let them manipulate those prices downward. We all know that free markets eventually win-out. What else can you buy BELOW the cost of production??? Your electronic digits, dollars, stocks, bonds, 401ks, etc. will all be worth zero at some point.

Gold and silver will always have value! I know most ZHers know this already. Here is a great way to get friends and family interested in securing their wealth in real, tangible assets: https://www.etsy.com/shop/ScentSavers?ref=hdr_shop_menu

Hopefully, they will also learn to question more things, especially the Fed!

Ginsengbull's picture

Copper jacketed lead is the best investment.

realmoney2015's picture

Yes, they will hold their value, at least until more advanced weapons are produced. Gold and silver have been money for thousands and thousands of years. Well before the invention of gunpowder!

I would make sure you get stocked up on that as well, at least to protect your stack!

38BWD22's picture

 

 

Karpeles will not like being in a Japanese prison.  They are reputedly unpleasant.

*   *   *

The very nature of Bitcoin likely means that there will be plenty of scandals in the future.

If you jump in, be careful!

The math and encryption behind BTC are very interesting though: two hashing functions and an elliptical curve technique.  Here is a fun little tool to play with that gives you an idea of what hashing functions are like:

http://www.xorbin.com/tools/sha256-hash-calculator

ebworthen's picture

Yes, what a dope for staying in Japan, at the scene of the crime.

The problem with Bitcoin is that it needs computer technology.

Fester's picture

Hanging with the boys.

Soul Glow's picture

The boys being trolls.

Publicus's picture

Still safer than gold, if it's stolen you are never going to find out where it went.

Colonel Klink's picture

Who could have know'd someone would be shystered by a guy with a tribal name!  ._.  my shocked face

38BWD22's picture

 

 

Publicus

It depends...:

www.coinalytics.co/tools/tracker.html

 

EDIT: Col. Klink, I misplaced this reply to (Publicus), but let me take this opportunity to say "Hi" to you again.

Soul Glow's picture

Why is everyone who doesn't own gold so scared of it being stolen?  You don't think I wear all of my silver around my neck do you?

:)

38BWD22's picture

 

 

SG

I've wondered that too.  Sure are a lot of Gold Haterz.  And I doubt they own any, LOL...

Same with silver.

Stay frosty amigo!  :)

PrayingMantis's picture

 

 

... I'm waiting for comments from some of the bitcoin-pushers on this site ... ;)

knukles's picture

So who was it that said that this shit was untouchable safe?  Hmmmmm?
Excuses excuses excuses, yeah but it wasn't this, but was that, etc., etc., etc.,
Buillshit.

invisible touch's picture

bitcoins...tssssss... why not wifi credit card.... ohh wait !

mmanvil74's picture

An important clarification: The Bitcoins in the Mt. Gox case were never "lost" or "missing".  Bitcoins cannot go missing and cannot ever be lost, unless all of the thousands upon thousands of computers that are storing and updating the blockchain decided to delete those files.  

The more correct description is that Mt. Gox (allegedly Mr. Karpeles) "lost control" of other people's Bitcoins.  This is not the same idea.  If you lose control of your Bitcoins, they are no longer yours, but they are never missing or lost, they only changed hands.  

This misrepresentation by the media makes it seem that Bitcoin is less secure than it really is.  Now, fiat money on a digital bank account ledger - those can truly be "lost" or frozen, by the simple push of a button by the ECB as the Greek depositors found out - something that could never possibly happen with Bitcoin. 

knukles's picture

A bar of gold stolen from a safe which was in your name didn't go missing or become lost.  It only changed hands!
Quit dissembling!  This is like the practicing alcoholic who can always stop tomorrow. 

Scooby Dooby Doo's picture

Hey gang let's sing along with Scooby! OK?

Scooby Dooby Doo where are you?
I'm over here transitioning into a Bitsexual.

And Scooby Dooby Doo why did you do that?
I'm all about the crypto!

Hi I'm Caitcoin you want to buy me?

https://www.youtube.com/watch?v=gUdG0RYd6jk

Tom Servo's picture

Hope he shares a cell with that piece of filth COrzine.... oh wait...

 

Implied Violins's picture

How many people bought from Mt. Gox on his recommendation? Guilty by association. Let's string him up.

/NSA sarc tag

Grosvenor Pkwy's picture

The problem with Bitcoin is that it is extremely susceptible to fraud. Much moreso than national currencies, which have some sort of legal procedures to protect against fraud, and more than most stocks, except the most questionable unlisted ones. It's like buying stocks back in the 1850's, where there were almost no safeguards and scams were everywhere.

If you read the specialized Bitcoin discussion boards, you will read story after story of people who have been defrauded, or otherwise lost track of their Bitcoin "investment," and in every case up will pop a Bitcoin fanatic supporter accusing the person of negligence or ignorance of basic computer security procedures, but looking more closely shows that these victims are generally knowledgeable concerning computers and software. They are not totally ignorant fools who deserved to lose their money to these carnival sharks.

The Bitcoin and especially the alt-coin world is filled with get-rich-quick con artists looking for a quick buck stolen from the pockets of those they consider to be "greater fools." The only defense of the Bitcoin sharks is that their victims are usually also in it for a quick buck, since birds of a feather flock together.

Furthermore, Mt. Gox is just the tip of the iceberg as far as fraudulent and bankrupt crypto-exchanges are concerned. Mt. Gox is not an isolated case in a world of honest and conservative financial institutions. It's the Wild Wild West, with banks failing or getting robbed constantly.

If you get involved in "investing in Bitcoin," be prepared to lose it all.

Amish Hacker's picture

It has been rightly said here on ZH---hundreds of times--- that if you don't have it in your possession and under your control, then you might not really own it, whether "it" is bitcoin or PMs. But in the case of bitcoin, what constitutes full possession and control? The uncrackability of its encryption? I just don't feel enough confidence in that to commit my hard-won (and laughably-inadequate) savings to it.

In the case of PMs, it's obvious what "full possession and control" looks like, and it doesn't take a leap of faith to feel confident about it.

commander gruze?'s picture

what constitutes full possession and control?

Full and exclusive possesion of private key(s) to bitcoin account. I.e. Gox was a custodial account, where keys were with Karpeles and not its users. This is precisely the wrong thing to do in bitcoin.

The uncrackability of its encryption?

Mathematics. Bitcoin is mathematically provable, so you don't have to trust it. Just run the proof yourself.

I just don't feel enough confidence in that to commit my hard-won (and laughably-inadequate) savings to it.

So don't put your savings in it. Put some petty cash, say $20.

But first and foremost, money is just the first application of bitcoin network. It is as hard to imagine what comes next as it was in the '91 internet to imagine WWW.

knukles's picture

If it's so fucking safe, how have people had their stuff stolen?
No, I don't want to hear any excuses.  Their money is gone.  Period, disappeared, stolen, unrecoverable, nada, zip, zilch, bye bye.
Safe, my ass.

If it's even peripherally connected to ether-space, it is not "yours" and "yours" alone.  Period, EOC.

free shit plz's picture

edit: @knuks
If it's so fucking safe, how have people had their stuff stolen?
-
Great logic there knuks. I currently own gold and btc. My bitcoin is impossible to steal from me as I have taken security measures available to me that my gold does not offer me, these measures I shall not discuss. My gold, while being very well secured, is not impossible to be stolen. There are 100s of gold robberies for every bitcoin loss, and I have not even mentioned gov gold confiscation, an impossibility when it comes to the decentralized, libertarian minded bitcoin.

So, using your totally unbiased logic knuks, gold must be unsafe yes? (That is a rhetorical question the purpose of which was to evince you of your idiocy) Talk sense or go to fox news with your fearmongering. Yes, the omniscient tylers have consistently lampooned btc, but their ad revenue is predominantly gold sellers, which could explain both why tylers have been bullish on gold @$1900, and bearish on btc since it was $2.

I figure I would requote one of the many esteemed bitcoin critics on zerohedge in the hope that he, or the 95% of you retards still dissuaded from ever analyzing bitcoin for yourself because the $1900 gold pushing tylers of zerohedge have scared you away from what they ignorantly perceive as potential competition, will hopefully realize how you look as stupid as those who call gold a barbarous relic.

So, under an avalanche of people gloating about how unsafe btc is because it could be stolen IF you give it to a third party, we find this gem from soul glow:

-
Why is everyone who doesn't own gold so scared of it being stolen? You don't think I wear all of my silver around my neck do you?
-

That logic tho.

Scooby Dooby Doo's picture

"get-rich-quick con artists looking for a quick buck"

You should not talk about Reggie Middleman like that.
https://www.youtube.com/watch?v=gUdG0RYd6jk

realmoney2015's picture

In my experience the more complex something is, the easier it is to committ fraud. Just look at the ponzi scheme Federal Reserve. There is a reason why the people have not raised up in defiance against it...They do not understand it. They get lost and bored with all the talk of reserves, intererast rates, treasuries talk.

Here is a open and transparent monetary system that works: gold and silver! The way to commit fraud is to make counterfits, but at least that is out in the open for our eyes to see and our hands to touch.

And counterfitting is very hard, if not impossible to do in smaller units of measures (ounce coins)

jaxville's picture

  Actually counterfeiting of bullion coins has reached a crescendo with the current crop of Red Chinese products on the market.  As a dealer counterfeits have been the greatest source of stress in my shop. 

  We have the means the authenticate every item offered to us but counterfeiters are constantly improving their products and seeking ways to deceive the latest testing methods.

 

http://www.alibaba.com/product-detail/America-Regional-Feature-and-Art-C...

  These are very scary and mean that any coins offered must be thoroughly scrutinized. 

   This sort of thing doesn't mean you should avoid gold or silver specie.  It just means you should be careful in your dealings and stick with reputable and knowledgeable dealers.

Montani Semper Liberi's picture

Thanks for that link, it certainly was an eye opener. Can anybody tell how China, who are the masters at conterfeiting and intellectual theft, get away with conterfeiting sovereign coins such as the gold eagle and Kruggerands? Why aren't the Secret Service all over this and prosecuting alibaba and the chinese company producing these fakes? That alibaba listing had a list of all the tests the coins would pass, so it is not selling them as a "novelty", but as a coin that will fool people into thinking they are genuine.

realmoney2015's picture

I guess I should have been more clear. Their fraud is out in the open. Respected coin shops can spot these counterfeits with a few tests. You should buy from a local coin shop that has a good reputation (and been in business for awhile, not a we buy gold place!).

Plus you can buy cash and not have the digital paper trail. 

Montani Semper Liberi's picture

Indeed, when I took out one of my Gold Eagles and compared it to the pictures on the site, the difference in the quality was evident, but the fakes would pass muster with the average person. Again I ask, isn't this a blatant counterfeit of a sovereign coin in violation of international laws? It is no different than conterfeiting a fifty dollar bill.

 As you may be able to tell, I am more than a little pissed about this

buzzkillb's picture

Looks great to put in a safe and hide in obvious holes around the yard. Photoshop some invoices to put next to them. Spray painted airsoft guns to make this safe look like the intruder has struck gold!!!!

Can you link to silver ones too? Don't forget the magic cards to keep this on topic.

RaceToTheBottom's picture

After I adblocked the scum spam on that site, it was very interesting, thanks!

redd_green's picture

Re  "Karpeles will not like being in a Japanese prison.  They are reputedly unpleasant."    OK then, I vote for a firing squad. Or, the electric chair.

Gold...Bitches's picture

Just wait until the phased plasma rifle in the 40 watt range gets here!

https://www.youtube.com/watch?v=BIPCn-aYMoM

 

realmoney2015's picture

Exactly...If you can't hold it, you don't own it. The REAL value of a digit in an electronic system is ZERO!

CheapBastard's picture

Another example, as you say, "If you don't hold it..."

 

Incredible how difficult it is for some to learn that simple rule. Very thick skulls.

realmoney2015's picture

We will soon call those who fail to understand that rule looters, beggers, and corpses.

aphlaque_duck's picture

Good thing bitcoin isn't fiat in any way.

Normalcy Bias's picture

...aaaand it gone!

No wonder there's so much financial crime. The risk/reward ratio is off-the-charts in the thieves' favor.

BlueStreet's picture

They could check his refrigerator to see if he hid it there but clearly that's already stocked. 

agent default's picture

Notice how the Bitcoin fanboys are noticeably quiet on this one.

itchy166's picture

Mt Gox's failure wasn't a failure of Bitcoin - it was the failure of an exchange.  Think MF Global.

Bindar Dundat's picture

Itchy bitchy

Right on. When a bank gets robbed no one blames the money!  Come to think of it -- what he did is the same as the banksters do, except --  the bankers are more patient.

itchy166's picture

A bunch of idiots chasing the price of Bitcoin thinking it was a get-rich quick scheme give all their BTC to an exchange that was designed to trade trading cards.  I bet that half of those who had their BTC stolen still don't even understand what a BTC is, what it is good for, or how their own stupidity led to their loss...

The bankruptcy of Mt Gox was one of the best things that could have happened to BTC - it shook out the get rich quick retards, and has led to BTC being much less volitile - and useful..

 

TV Dinner by the Pool's picture

get rich quick retarded? except many did get rich quick, didn't they? i sense some kind of warped morality by people who refer to people as get rich quick schemers. they saw the potential and rightfully attained gains. but apparently they are idiots? because ... they made money contrary to your system of controlled risk mitigation through a slow regular process? you don't have to worry your system works just fine for your purpose. you have no reason to be insecure

itchy166's picture

I will rephrase it for you.

 

Giving money to an exchange that was designed to service a video game = retarded. 

Buying a product/currency/commodity without understanding what it is, how it works, how to store it securely, etc.. = idiotic

Blamming the product/currency/commodity for the defect after YOU GAVE IT TO A CROOK = childish

Losing money because you jumped on a bandwagon that you didn't understand, and lost everything = oops

Getting rich quickly because you identified a bubble, understood the risks, timed the market = all the power to you

I don't have a problem with people getting rich quickly by taking risks.  If you make a fortune by surfing bubbles - good for you.  If you lose money by always being the one holding the bag, your opinion doesn't mean much to me - stop blaming a technology that you (still) don't understand...

 

 

 

buzzkillb's picture

Magic the Gathering is a card game, where they traded cards on that site. Not sure if I am helping out the street cred for MTGoX. Though the govt. selling bitcoins might have helped.