In the early days of bitcoin, Mt. Gox is the world’s largest bitcoin (BTC) exchange. The Tokyo-based company was responsible for more than 70% of all bitcoin transactions in 2013. However, in early 2014 it plummeted, leaving investors and traders with losses amounting to hundreds of millions of dollars.
The fall on Mt. Gox in a defining moment in the history of bitcoin and cryptocurrencies in general, with some regulators, market analysts and industry experts continuing to investigate the matter to avoid such cases in the future. In addition, the saga continued to serve as a wake-up call for the cryptocurrency industry, highlighting the risks and potential pitfalls of trading and investing in digital currencies.
Mt. Gox: The Early Years
Jed McCaleb, a programmer and entrepreneur who founded the eDonkey2000 file sharing network launched Mt. Gox in 2010. At the time, bitcoin was still a niche technology largely unknown outside of a small group of enthusiasts and developers. Mt. Gox was one of the first exchanges to allow users to buy and sell bitcoin for fiat currency assets, quickly gaining popularity among early adopters and traders.
In 2011, Mr. McCaleb sold Mt. Gox by Mark Karpeles, a French software developer who has previously worked on various projects, including an online marketplace called “Magic: The Gathering Online Exchange.” Karpeles moved the company’s headquarters to Tokyo and began expanding its operations, opening new markets and adding support for additional cryptocurrencies. So came Mt. Gox was the most important cryptocurrency exchange ecosystem in the early 2010s.
piracy
In February 2014, Mt. Gox abruptly halted all withdrawals from its platform, citing technical issues and security concerns. The company’s website was taken offline and there were rumors that the exchange had been hacked. A few days later, Mr. Karpeles held a press conference in Tokyo, in which he confirmed that the Mt. Gox was indeed hacked, and criminals stole 850,000 bitcoins, which were worth about $450 million at the time.
The hack Mt. Gox was one of the biggest thefts in bitcoin and cryptocurrency history, and it had a significant impact on the wider industry. The price of bitcoin fell sharply in the days following the announcement as many investors and traders lost faith in the security and reliability of digital currency exchanges.
The former hack of Mt. Gox
In the months since the hack of Mt. Gox, there was great uncertainty and confusion regarding what happened to the stolen bitcoins and who was responsible for the theft. Karpeles initially claimed that the BTC was stolen due to a bug in the Mt. Gox, but experts and members of the Bitcoin community have widely criticized this explanation.
In March 2014, Mt. Gox for bankruptcy protection in Japan and the Japanese authorities seized the company’s assets. Karpeles was eventually arrested and charged with embezzlement and fraud for the exchange collapse, but has always maintained his innocence, saying he was just a victim of circumstances beyond his control.
The bankruptcy proceedings of Mt. Gox complex and protracted, with many legal challenges and competing claims from creditors and investors. In 2018, a Japanese court ruled that the assets of Mt. Gox liquidation and distribution among its creditors – a process that is still ongoing.
Where is the refund procedure?
In 2018, after years of legal battles and investigations, a Japanese court approved a compensation plan for victims of the hack of Mt. Gox. This plan, proposed by a court-appointed administrator, called for the creation of a trust to hold the remaining bitcoins and distribute them to creditors. The trustee, Nobuaki Kobayashi, was assigned to oversee the distribution of the remaining funds.
The first step in the plan was to convert the remaining bitcoins into cash. The liquidator sold more than 35,000 BTC and 34,000 Bitcoin Cash (BCH) on various cryptocurrency exchanges, raising over $400 million. This is a significant achievement, as it represented the largest sale of cryptocurrency by a single entity in history.
Lots of delays
In March 2020, the administrator announced that a new system had been implemented to allow creditors to claim the remaining funds. Creditors had to provide evidence of their claim, including documents such as bank statements, transaction records and identification documents. The deadline for submitting a claim was set for October 2020, but was later pushed back to December.
In December 2020, the trustee announced that it had received claims from 99.9% of creditors. The total amount of claims submitted was approximately $16 billion, far exceeding the remaining funds available for distribution. This situation presented a significant challenge to Mr. Kobayashi, who had to decide how to distribute the remaining funds fairly.
In January 2021, the administrator submitted a draft rehabilitation plan to the court. The plan recommended that the remaining funds be distributed in bitcoins rather than cash, as this would avoid having to sell the remaining cryptocurrencies and disrupt the market. The plan also proposed that creditors would have the option of being repaid in bitcoins or cash, with the conversion rate based on the market price at the time of the distribution.
As expected, creditors received mixed reactions to the proposed recovery plan. Some creditors welcomed it, as it offered the possibility of a higher repayment if the price of bitcoin rose. However, others were skeptical, because the value of bitcoin is very volatile and subject to large swings. Some creditors have also expressed concern about the potential tax implications of a bitcoin refund.
Latest developments
During the first week of September 2022, Kobayashi announced that former customers of Mt. Gox to file or transfer a claim. This date was later pushed back to 10 January 2023, with Kobayashi urging creditors to complete the necessary steps before the deadline.
Mr. Kobayashi informed creditors that those who failed to do so would not be able to receive their funds quickly, or would have to provide some documents to the company’s headquarters in Japan. Even then, they could only be paid in yen.
However, the deadline has been pushed back to March 10, due to the progress made by pardon creditors in screening and registration. In fact, in an announcement from March 7, the administrator reiterated an announcement from January reminding creditors who had not registered for repayment that they had until March 10 to do so, i.e. two additional months as part of the rehabilitation plan previously suggested.
Kobayashi did not give a reason for the extension, which would allow people who suffered losses at Mt. Gox to choose a refund method, and register their information in an online pardon application system.
Also, it is worth mentioning that, among all these changes, the Investment Fund chose Mt. Gox – the largest creditor of the unconventional cryptocurrency exchange – prepaid bitcoin rather than wait longer for a more important payment after a legal battle. This advance payment means that creditors will receive approximately 90% of what is owed to them. The bankruptcy liquidator does not need to sell tokens to obtain fiat currency funds for payment, since the creditor has also chosen to pay in BTC.
Recently, the deadline to file claims and distribute assets to creditors of Mt. Gox changed again. According to an official notification, the deadline for filing a claim has been extended by a month, from March 10 to April 6, 2023, allowing creditors to register their claims for an additional period. Asset distribution has also been pushed back per month, with the process starting on 31 October instead of 30 September.
The official statement issued by the administrator of Mt. Gox cited several reasons for extending the deadlines, including the progress that amnesty creditors have made in screening and registration. Creditors have multiple options for receiving payments, including lump sum payment, bank payment, through a transfer service provider or cryptocurrency exchange or custodian.
Lessons learned and way forward
One of the key lessons learned from the fall of Mt. Gox is the value of transparency and accountability. Many critics argued that part of the severity of the hack was due to the opaqueness and secrecy of the exchange’s operations. Today, reputable cryptocurrency exchanges are relatively more transparent, and often issue several audits and reports to reassure customers and investors.
Also read: There are many reasons for the collapse of Silicon Valley Bank, But Cryptocurrency is not one of them
Another lesson from the bankruptcy of Mt. Gox is the need for improved risk management and financial controls. In the early days of bitcoin, many exchanges were run by tech enthusiasts and entrepreneurs, who had little experience in finance or risk management. Exchanges today have more professional and experienced management teams that implement better financial controls and risk management practices.
Finally, the hack revealed Mt. Gox the need for better regulation and oversight of the cryptocurrency industry. Since the fallout, regulators around the world have proposed new rules and regulations to protect investors and traders, including stricter money laundering and customer notification requirements. While some view these regulations as overly restrictive, others believe they are necessary to prevent fraud and protect consumers.
The adventure of Mt. Gox has been a warning about the potential risks and dangers to digital assets, emphasizing the need for more transparency, better accountability and better risk management.
