Mt. Gox Allegedly Loses $350 Million in Bitcoin (744,400 BTC), Rumoured to be Insolvent
Published on February 25, 2014 at 07:21 BST
UPDATE (25th February, 17:30 GMT): Mt. Gox has released a statement on its website concerning its decision to halt trading.
UPDATE (25th February, 13:47 GMT): Domain investor Andy Booth has confirmed the sale of www.gox.com to Mark Karpeles.
UPDATE (25th February, 09:28 GMT): The source code on Mt. Gox's website now reads "put announce for mtgox acq here" leading some to speculate on the motives behind the document leak:
— Jeff Garzik (@jgarzik) February 25, 2014
A document has surfaced suggesting that troubled Japan-based bitcoin exchange Mt. Gox will close for one month as part of a four-step rebranding plan, and that CEO and former Bitcoin Foundation board member Mark Karpeles will step down from his executive position as part of the process.
Entitled “Crisis Strategy Draft,” the document suggests the company’s increasingly dire financials are greatly impacting the decision. By Mt. Gox’s own estimates, it has only 2,000 BTC and approximately $22.4m in fiat currencies in its possession.
"Several sources familiar with the situation confirmed the legitimacy of the loss claims and the authenticity of the 'Crisis Strategy' document."
The document is branded with the current Mt. Gox logo and a redesigned version, and claims to have detailed inside knowledge of Mt. Gox and its financial affairs, but appears to be written by a team external to Mt. Gox’s current management.
The document is publicly available for viewing here and embedded below this article.
According to the leak, Mt. Gox has lost close to 744,408 BTC or $350m at current prices, and faces an unconfirmed additional $55m in fiat liabilities. The company suggests that theft related to transaction malleability has been ongoing for several years, but was not reported by the company.
We can assume now that withdrawals will not recommence, at least not in the foreseeable future. Customers with Mt. Gox accounts will not be receiving their bitcoins or possibly even other currencies in what is effectively an insolvency, though no-one in an official position is using that word.
At Japan time on the eve of the statements, Japan’s finance and banking regulator the Financial Services Agency (FSA) said it would not be intervening in the issue as it did not view supervision of digital currency exchanges as part of its obligations.
Seeking capital injection
Rumors of the proposal first began circulating on 24th February, when the document was posted on the popular digital currency blog The Two-Bit Idiot. Sources close to the company suggest the document is real, and that it is part of a plan by Mt. Gox to raise investor capital.
The document paints a vivid picture of potential investors who are seeking to raise the necessary capital to continue operations, or at least use whatever remains of Mt. Gox’s brand value to begin a new venture.
While admitting Mt. Gox’s image is “broken”, it notes that throughout the recent bad press customers have continued to deposit funds and trade on the exchange.
The document also evokes sweeping rhetoric aimed to tie Mt. Gox’s fate to that of the broader bitcoin community: “The likely consequences will be larger than this localized financial damage, and we believe that the benefits of keeping MtGox stable and running outweigh the risks. This isn’t about saving MtGox anymore.”
It suggested the demise of its brand could set bitcoin back “five to 10 years”, and that governments should and would react “swiftly and harshly”. “At the risk of appearing hyperbolic, this could be the end of Bitcoin, at least for most of the public,” the document reads.
Mt. Gox, through intermediary sources, declined to comment on the validity of the reports at press time.
Coinapult founder and bitcoin entrepreneur Erik Voorhees posted a lengthy and emotional commiseration on Reddit, claiming he had 550 BTC stored with Mt. Gox himself and “will never get any of that back”. He wrote:
“I should have known better, of course. I take responsibility for leaving those funds with an entity that had proven incompetence repeatedly. I chose to ignore even my own warnings, for nothing more than the sake of convenience.”
While laying the blame firmly at the feet of Mt. Gox, he affirmed that bitcoin itself was not at fault and security was not impossible, and implored others to continue “building a new financial order.”
“It won’t be the last calamity endured before the win,” he continued.
Several high-profile bitcoin companies, including Coinbase and Blockchain.info, moved swiftly to distance themselves from Mt. Gox and launch into a strident defense of bitcoin itself in a joint statement:
— Blockchain.info (@blockchain) February 25, 2014
The leaked proposal recommends a full rebranding of the company and even a possible relocation to another jurisdiction, like Singapore.
Firstly, it calls for the immediate reduction of liabilities through the injection of new bitcoins and the purchase of coins at depressed prices on its own exchange, in what sources told CoinDesk amounted to a bailout of the embattled exchange.
It paints a wishful picture of brand continuity without promising much to customers, maybe to neutralize any anger bound to arise from a hard shutdown and keep stakeholders’ hopes somewhat alive.
“Customer support will stay operational to deal with people who want to have access to their account/history”, it says, while maintaining that few, if any, staff employed at the current company would remain, particularly CEO Karpeles.
“New branding, means that there are future-forward plans already in the works, and customers will see that MtGox actually has a plan in motion.”
It continues: “The MtGox price is low, making it possible to erase a significant portion of the debt, but it needs to be done quickly.”
The document notes that protecting the image of bitcoin itself is a primary concern, since a failure on Mt. Gox’s scale will be a disaster for digital currency in mainstream eyes.
To reduce this damage, it appears to put out a plea to high profile members of the bitcoin community to inject funds in the order of 200,000 BTC into the exchange, saying “the costs of not doing so are incalculable at this stage.”
“Support from Bitcoin big players and core community - long term, high leverage: Coins for equity, coin donations, and cash injections to buy coins at the cheap MtGox price are some options among many.”
“Bet on future profit to refill the lost coins - Long term, low leverage: Regardless of malleability and regulatory issues, MtGox's main problems are massive robbery and poor bitcoin accounting. However, the business as an exchange is highly profitable and healthy when run properly.”
Mt. Gox becomes Gox
The document suggests stakeholders would eventually see some kind of return, without saying when or indeed what the return might be. Should the company re-open with a new image, the strategy would be to limit withdrawals both in bitcoin and cash to prevent a bank run.
Note the timeframe (italics are for emphasis):
“With the profit, a meticulous analysis will be made over the coming years to clean the bitcoin balance sheet while running the exchange and generating revenue to pay back stakeholders. New offerings such as additional currencies, low trading fees, etc will give customers a reason to stay with MtGox.”
Removing Mt. Gox’s management team seems to be a priority and, ironically, this is an area the Japanese authorities seem willing to regulate: “In Japan, a CEO cannot resign until a new CEO is nominated. In that case customers knows that MtGox is still around and working, but under new management.”
It continues: “Try to reduce the impact and raise stakeholder confidence, and eventually get Mark out.”
One strategy the document puts forward is a “Letter from the CEO”, essentially a mea culpa from Mark Karpeles that admits Mt. Gox’s technology was inadequate to deal with the task of maintaining a bitcoin exchange, both in transaction volumes and response to the the malleability issue.
Though doubts remain among certain high-profile sources, at least two of the company’s four listed strategy points seem to have already been confirmed.
For example, Part Three of the four-part plan called for the company to rebrand as Gox.com, a process that it said would require it to “reset all SNS channels for communication”, which is consistent with Mt. Gox deleting its entire history of Twitter posts just yesterday.
“Basically I got gox.com like any other LLL – didn’t directly target Mt Gox. My brother met domain broker Joe Politzer in Singapore who got excited about gox.com and then I said he could try to sell it if he wanted. He called Karpeles and Gox to find out if they wanted it and immediately they expressed pretty strong interest."
Joe Politzer, the broker in question, added:
"I reached out to Mt Gox and the deal took a few weeks to come together but we made a deal for the domain that included both a fair amount of cash and some bitcoins. It was definitely interesting as our deal was going down the same time as all this news about him and his company is going down. [...] The domain transferred, Escrow Closed, bitcoins delivered, done deal!”
A search of the Internet domain registration database WHOIS seems to confirm Mt. Gox’s intention to rebrand as Gox.com. The resource shows that the domain Gox.com has been purchased by Mt. Gox parent company Tibanne Co Ltd, and is currently owned by Karpeles.
This story was co-authored by Pete Rizzo and Jon Southurst. Hat tip to Ryan Galt (aka Two-Bit Idiot) for breaking the news.
CoinDesk is monitoring this developing story, and will post updates as they become known.
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