What is Mt Gox?- see more
Mt Gox was among the largest bitcoin exchanges, starting as the sole leader of the crypto currency exchange industry, it has found its service mired in controversy from the law, its customers and its overall role in the bitcoin industry. This is a full coverage piece outlining the publicly available story of Mt Gox.
The Very Early Days
Mt Gox’ roots have an unusual beginning and the origins are embedded front and center in the website’s name. Mt Gox is a partial initialism and partial acronym for “Magic: The Gathering Online eXchange”, an online exchange for cards associated with the complex fantasy based card game Magic: The Gathering dating back to the early 90’s.
The earliest record of mtgox.com functioning is from 2007 where a message describes a beta launch of the Magic card online exchange1. By 2009 the site appears to have morphed into an advocacy page for a new fantasy game called “the Far Wilds” invented by site founder Jed McCaleb.
Who Started Mt Gox?- see more
Mt Gox appears to have been founded as a personal project of Jed McCaleb, at the time a UC Berkley first-year dropout. McCaleb left school to pursue innovative technologies, like creating the early peer-to-peer file sharing system EDonkey2000, and has since created Ripple, a Google backed payment system covering an unlimited number of users’ trusted currencies in a distributed exchange. McCaleb most recently, among donating $500k worth of ripple (xpr) to artificial intelligence research, has announced a secret new project that is in the works.
“- Jed McCaleb
I love the idea of making things that work on people’s behalf—I see programming as the ultimate form of leverage.
Magic Transforms to Bitcoin Exchange
The original Mt Gox exchange via WayBackMachine, Feb 2011McCaleb first learned about bitcoin from what appears to be this slashdot article announcing a release of an early version of bitcoin and providing basic information links.
McCaleb soon after, looking to purchase bitcoin, realized a limited marketplace meant he would have to create a market and ended up purchasing his first bitcoins on Mt Gox itself after doing so.
The new bitcoin exchange still bearing its original name, was listed as controlled and owned by Pongamia Cultivation Institute, SA, and under McCaleb’s lead began to monopolize the unchartered territory of bitcoin trading.
A New Era with a New Operator
Mark Karpeles, also known as MagicalTux2, a then programmer3 operating an app development and hosting company called Tibanne Ltd4, acquired Mt Gox from McCaleb for an undisclosed price. At the time of the sale, early 2011, Mt Gox Bitcoin was trading below $1 yet sustaining a trading volume of 10’s of thousands of bitcoins a day, making it by far the dominate exchange at the time.
McCaleb claims he sold and left Mt Gox because he was never very interested in being an operator5, preferring to be apart of the earlier, more innovative phases of entrepreneurial ventures. Karpeles, now in charge ever since, has led Mt Gox through many hurdles and successes, many of which McCaleb in hindsight seems to have dodged for better or worse.
Bitcoin Takes Center Stage with Mt Gox as the Venue
Karpeles took charge of Mt Gox around the next pivotal paradigm in bitcoin’s evolution. Through 2011 and 2012 bitcoin prices soared and experienced heavy volatility as most innovations do in their early adoption phases. The volatility surrounding the price of bitcoin is something that resonated through all aspects of the bitcoin ecosystem as the new technology experienced a wave of demand without adequate means to support and scale the growth in services along side. This meant the industry had to play catch up and left early adopters plagued with vulnerabilities yet to be discovered and weeded out.
Mt Gox First Major Scandal
Mt Gox, being embedded in the early days of bitcoin trading and housing most of all of bitcoin’s trade volume, became the goto exchange for most new interest in bitcoin. This also made them a target and in June 2011 the exchange’s first public crises took place.
News of a breach surfaced after a few accounts were hacked, compromising hundreds of thousands of coins, resulting in the exchange temporarily shutting down. The stolen coins, comprising around a few percent of the total bitcoin supply, were sold on Mt Gox emptying the order book and driving the price down to 0.1 cent. Days later, however, the trades were rewinded, and the exchange resumed with the price trading near its pre-crises level of around $17.56.
Graph from Mt Gox following price collapse resulting from the hack.
“ – Mark Karpeles
Trust me, if we had a problem in Mt.Gox and it was actively exploited, we’d have way more than a dozen compromised accounts.
Success is Often Difficult to Manage
Surviving its first major incident proved to position Mt Gox well for the next influx of bitcoin adopters. The restart was not immediate, however, and bitcoin traded back down as low as $2 before its ultimate ascent away from single digit values ever since.
The next major leg of bitcoin success, taking off in early 2013, saw an enormous wave of new accounts trying to gain access to Mt Gox’s marketplace. Statements made by Karpeles indicate Mt Gox had about 6,000 accounts when he acquired it, that number grew to around 60,000 by the time the aforementioned shutdown took place7, and hit 1 million people in December of 20138. The latter figure, believe it or not, is likely smaller than would otherwise have been the case had not a number of significant obstacles plagued the process.
“- Mark Karpeles
We get between $5 to $20 million dollars daily incoming transfers
Compliance Proves Difficult
Prominent among these hurdles of widespread interest, the ‘Anti-Money-laundering’ (AML) and ‘Know Your Customer’ (KYC) compliance measures globally for money transmission proved to be very onerous. The extensive documentation customers were required to provide coupled with Mt Gox’s incapacity to scale, saw the queue of users waiting sometimes months to be approved grow to nearly as high as at least 30,000 users in 2013 9. Depositing and withdrawing, even for verified users, was not always easy either. Users and prospective clients commonly paid fees through services like Bitinstant, charging ~11% at times10 to deposit funds near instantly into Mt Gox or waited a few days to weeks to reduce the fees via Paypal like payment services such as Dwolla.
Delays in getting funds onto Mt Gox at the time of a meteoric rise in the price of bitcoin meant many ended up facing a bitcoin price multiple times the value of when they initially began the process of trying to purchase.
The Real Problems Begin
Even these somewhat burdensome, yet relatively good times, of money flow would not last for long. Possibly as a part of an ongoing investigation into the underground drug marketplace the Silk Road11, Mt Gox had funds seized by the Department of Homeland Security (DHS) on two seperate occasions. On May 14 of 2013, Dwolla was issued a seizure warrant by DHS for Mt Gox’s funds held in custody and by June 19th news was out that millions in funds were forfeited – the figure later revealed to be $2.916 million12. The next day US dollar withdrawals were halted by Mt Gox and the withdrawal issues since this incident have not subsided13.
In fact, the blows to Mt Gox were aggravated just a couple weeks later when another seizure notice was issued with an affidavit by Special Agent with the US Secret Service Shaun Bridges14. This time the haul totalled $2.1 million, and came from Wells Fargo on behalf of the corporate account of Mt Gox’s US subsidiary Mutum Sigillum LLC, the same company holding the seized Dwolla account. In addition Mark Karpeles had $50,000 seized from his personal account with Wells Fargo in the same notice for being associated with the original seizure.
“- Shaun Bridges
Mutum Sigillum LLC were involved in transactions and attempted transactions in violation of 18 U.S.C. section 1960
Some Lessons Learned
The overarching justification in the documents ordering money seizures totalling more than $5 million dollars was the company’s lack of a money transmitter license – a necessary component for legal money service businesses. Given the lack of clarity at the time over what the official US government status and treatment of bitcoin was, Mt Gox erred on the less conservative side and attempted to service US clients despite a lack of clear compliance.
After the seizures however, Mt Gox quickly applied for a money service license with FinCEN, the Treasury Department’s Financial Crimes Enforcement Network, which was granted June 28, 201315. Nonetheless, US banks and many international banks have ever since been reluctant to work with Mt Gox or anyone engaging in bitcoin transmission services.
Mt Gox Price Commands a Premium
The events troubling Mt Gox’s cash portion of their balance sheet, following seizures and banking limitations, left the company in a position to offer a higher level of liquidity for bitcoin withdrawals over cash. Users finding it difficult to get funds out of the exchange service’s wallet chose to sell their cash and buy coins rather, driving up the price for a bitcoin on Mt Gox to trade at around a 10% premium over major rival exchanges like BitStamp by late August 2013.
Despite many arbitrage attempts, this premium sustained at about these levels until February 2014, just short of a month before the exchange’s demise16.
Security Problems Prove to Be the Most Disastrous
The beginning of the end of Mt Gox began with a security breach, in which hackers abused a flaw in the exchange wallet accounting system to extract nearly a million bitcoins. At the time the breach was announced, the public at large was not aware of the severity of the magnitude or the consequences and to a large extent this uncertainty remains.
“- MtGox Team
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
Is Bitcoin to Blame for Transaction Malleability?
Mt Gox announced February 7th that bitcoin withdrawals would be temporarily halted. The exchange blamed the incident on a flaw in the bitcoin protocol, more specifically a long known issue of transaction identification malleability.
What is Transaction Malleability?- see more
When users transact with each other in the bitcoin network, transaction IDs are attached to those transactions. Transaction IDs are in some sense meant to be relied on for identifying transactions but in 2011 the bitcoin community became aware that the IDs are unreliable as they are subject to be changed after transactions are confirmed but before being inserted into the blockchain.
The slash by Mt Gox directly at the bitcoin protocol, claiming there is a “bug” in the network, whether or not the language was simply poorly chosen, inspired outrage from those intimately involved in the bitcoin community. Notably, the lead developer of the main bitcoin protocol and head of the Bitcoin Foundation personally responded in defence of bitcoin17.
“- Gavin Andresen
The issues that Mt. Gox has been experiencing are due to an unfortunate interaction between Mt. Gox’s implementation of their highly customized wallet software, their customer support procedures, and their unpreparedness for transaction malleability…
Andresen went on to explain that transaction malleability is old news, and there is no expectation of a short term fix. The situation however, can be mitigated by other methods and did not impact the integrity of Bitcoin-Qt/bitcoind, the reference wallet sponsored by the Bitcoin Foundation.
The disagreement with the Foundation and Mt Gox sparked the major descent in the bitcoin community’s acceptance of the exchange which once was the face of bitcoin and pioneered the bitcoin trading industry.
Problems Begin to Spread
Soon after, what from the perspective of the community at large was an isolated incident caused by a lone bad operator, Mt Gox had some company as major rival exchanges like Bitstamp halted all bitcoin withdrawals similarly citing transaction malleability. During this period the flow of transactions to bitcoin’s largest exchanges went dark and bitcoin’s haters and fair weather fans began to rally the troops and proclaim the end of bitcoin itself.
Not All is Lost as Bitcoin Prevails
Despite the bad press and widespread troubles, not all was lost and turns out operators, not the protocol was at fault. Given the open knowledge of transaction malleability, many custom wallet developers found more reliable identification methods for transaction accounting and went unscathed.
Mt Gox rival exchange Kraken, who often posts more than 1,000 bitcoin a day in transaction volume, touted how their service was unaffected because they had done their research and not relied on transaction IDs18.
Kraken halts nothing! Because planning. Carry on
Other major wallets like blockchain.info similarly explained how they had long ago provisioned for unreliable transactions hashes. The blockchain.info CTO and industry expert spoke out in defense of their solution and also offered much criticism of the competence of Mt Gox’s security management19.
“- Andreas M. Antonopoulos
Blockchain wallet users are unaffected by this known implementation issue.
The Price Premium Reverts
Pre-crises bitcoin prices on Mt Gox were notoriously known as the place to sell and not to buy. This however quickly reverted as initially the trouble was withdrawing cash on Mt Gox, while bitcion inflows and outflows were mostly smooth. Since the ban on bitcoin withdrawals, however, that dynamic was in reverse. This fact reflected deeply in the bitcoin price on Mt Gox which traded at an increasingly large spread below the spot price of alternative exchanges.
Risk Shifting to Secondary Markets
Gox BTC, a derivative product reflecting the value of Mt Gox debt denominated in bitcoin, began to be speculated by the market as having some value, albeit less value than alternative exchanges. The extent which bitcoin held on Mt Gox traded at a discount to par was determined mostly by a floating rate on the secondary exchange bitcoinbuilder.com.
The discounted value of coins at Mt Gox became exacerbated when just days after their closure, major rival Bitstamp reopened its doors having made internal changes to account for transaction malleability20. This left Mt Gox as the lone exchange with closed funding channels, explicitly for bitcoin and implicitly for fiat currencies
Lawsuits Pile Up
A pending, whopping $75 million dollar lawsuit, not on the radar of many, was the first major civil action Mt Gox faced. Back in May 2013, Coinlab Inc., a Seattle based startup run by CEO Peter Vessenes, filed lawsuit against Mt Gox alleging a breach of contract.
According to the suit, Mt Gox had agreed to grant exclusive distribution rights to Coinlabs for the US and Canadian markets. After the agreement was reached, Mt Gox allegedly continued to service the carved out regions and failed to provide Coinlabs the means of integration with Mt Gox’s service. Mt Gox in turn countersued for $5 million dollars in funds allegedly held hostage by Coinlabs21. This suit by Coinlabs, only set to be heard November 22, 201422, is only the beginning of Mt Gox’s developing legal suitors.
The next flood of lawsuits, in light of Mt Gox’s withdrawal issues, came from deposit holders on the site. A class action lawsuit is still building on bitcointalk.org23 with a currently undisclosed number of plaintiffs or details of total funds lost. An untold number of other suits are likely to arise in the coming weeks.
Protesters Try Take Matters Into Their Own Hands
By early February angry Mt Gox account holders started showing up at Mt Gox’s offices at the time, in Shibuya, Japan, waiting to confront Karpeles or other Mt Gox staff. Some were successful in making contact but to no avail to the underlying problems which brought them there.
The communication breakdown with Mt Gox and the public through the crisis was the major impetus that set in motion what seemed to be the inevitable end of Mt Gox. The few statements issued by the company were vague and not comforting to the more than one million account holders, many of which are financially vulnerable.
The Inevitable End of Mt Gox Sets In
Amidst widespread pressure on February 23rd Karpeles stepped down from the Bitcoin Foundation’s board, which Mt Gox was a gold member of and held one of three industry board seats24. The next day Mt Gox deleted all their twitter communication records, and later that same day mtgox.com was taken fully offline. The site page, appearing blank to most, had this line in the source code: “put announce for mtgox acq here.”
Nail in the Coffin for Remaining Hopeful
Immediately the hope was not lost to all as the lack of definitive communication from Mt Gox at least left open the possibility of a revival. Many feared some insolvency but few had an idea of the possible depth of the problem at Mt Gox and whether or not any value remained for even an outside party to try recover.
The final blow came after the release of a crisis management document apparently drafted by Mt Gox revealing a capital deficit in the hundreds of millions. A loss of 744,408 bitcoins were reportedly “missing”, blamed on thefts related to transaction malleability occurring over the years. The document goes on to outline a multi-year strategy for recovering funds through a rebranding under gox.com and limited withdrawal allowance.
Who leaked the document?- see more
A blogger writing under the name Twobitidiot and Ryan Galt, but identified as Ryan Selkis25, is credited with the investigative journalism which revealed Mt Gox’s extensive insovlency. Selkis published the document online after obtaining from an initially undisclosed source. Soon after the source was revealed as a junior employee working for Mandalah, a consulting firm in Tokyo, who had been contracted by Mt Gox to assist with document services26.
Some Hold Out with an Iota of Hope
The story told in the leaked documents for many is hard to believe on the surface. How could such theft go unnoticed for years, many are wondering. The poor quality of the documents also led some to question the authenticity.
The issue soon settled as Karpeles himself gave hints that the document had truth to it, though denied that such words were written by anyone employed by Mt Gox. Fox Business News obtained excerpts of a private IRC conversation with Karpeles and Jon Fisher of wickedfire.com. 27
“we haven’t given up… Giving up is not a part of how I usually do things.”
Despite whatever doubts remained, facts quickly continued to corroborate the leaked document’s contents. Most notably the mentioned rebranding to gox.com seems already underway with the new site name forwarding to mtgox.com after being purchased by Karpeles in mid February from Andy Booth, a domain investor who previously held the domain and confirmed the sale28.
Mt Gox Files for Bankruptcy as Karpeles Takes Deep Bow
Those holding out for hope can seemingly hope no more. The end to this chapter of Mt Gox’s life, a life which proved quite resilient through many a crises, finally saw its infamous CEO throw in the towel.
To add insult to injury, the losses in Bitcoin were even worse than the leaked document initially stated. A total of around 850,000 bitcoin, about 100,000 of which they say belonged to the company were stolen. This amounts to almost 7% of the total bitcoin supply in existence and 3% of the supply that will ever exist. The cash debt said to total ¥6.5 billion yen, is worth over $60 million dollars at current USD/JPY rates.
Possible Acquisition that Never Came to Be
In the midst of the debacle Bruce Fenton, founder of Atlantic Financial, spoke out about his attempts to resolve the issues at Mt Gox in the weeks leading up to their demise. In a reddit thread launched February 2829, Fenton explains that he, Karpeles and Mt Gox marketing director Gonzague Gay-Bouchery discussed Fenton and potentially other partners taking over and reviving the failing exchange.
Who is Gonzague Gay-Bouchery?
The wizard behind the curtain of Mt Gox’s operations may very well be Gonzague Gay-Bouchery whose official title is Marketing Director and Corporate Communications Manager. He recently caught the attention of onlookers when Bitinstant founder and friend of Karpeles, Charlie Shrem, told CoinDesk.com30 that Karpeles role as CEO is in name only, and suggested that Gay-Bouchery is behind the firms operations.
To Fenton’s surprise after realizing the insolvency, neither Karpeles nor Gonzague made note of any lost coins despite disseminating what were deemed financial statements which Fenton referred to as of the quality of a small pizzeria. If he had known, Fenton explains, the possibility of anything but bankruptcy for Mt Gox would have been out of the question given the gravity of the situation.
Fenton raises points which seem to resonate with many close followers of the Mt Gox debacle. The excerpt below summarizes the confusion about as well as can be:
“- Bruce Fenton
Part of me is still optimistically hoping that Mark is just being profoundly bad with PR and trying to under-promise and over-deliver and has at least a good chunk of coins and will try to “fix” things. His behavior and manner and communications were not at all like that of someone who either 1) lost 800,000 coins or 2) was pulling a major con.
I don’t get it. There are many unanswered questions. How exactly can 800,000 coins disappear? What manner of thief could do such a thing? When was this noticed? By what mechanism? What exactly did he say in the press conference? Did he say hack or thief? Did he simply lose the keys and is covering from embarrassment? Could someone have threatened him into giving them up? Could there be some other third party in play here? (When you talk about hundreds of millions of dollars even grand conspiracies of mafia, terrorists or government are not off the table)
Why was he trying to program the transaction issue? Are these Gox wallets people tracked real? So many questions. Hopefully we get answers.
Lawyers and Hackers Scour for Answers
Looking to uncover these matters, legal proceedings are hoping to force a discovery. Selachii LLP31 represents over 200 global clients and they, and many alike, are trying to scour Karpeles personal accounts to trace any assets that can be sought by claimants. Should the funds have been scrambled and funnelled to bitcoin wallets, uncovering the identity of the holder will not be easy, however.
Nonetheless, angry former Mt Gox customers are doing everything they can to uncover the truth. Hackers have pasted portions of Mt Gox’s exchange code32, and more leaks are likely to come as the evidence is combed for clues to what happened. A 20gb mySQL database and a private conversation between Karples and one of Mt Gox’s bank have also been uncovered by the Serbian hacker nanashi____33, the same identity who released the leaked source code.
Code snippet of Mt Gox source code leaked by a hacker
i never use gox… is pile of shit
The conversation between Karpeles and Mizho bank, a Japanese financial institution, discusses the prospects of bitcoin and continuing business with Mt Gox. Through the discussion Karpeles denies owning bitcoin because of a possible conflict and after an overview of the company’s standing is told that they need to close the Mt Gox account for the time being. The conversation took place back in April and while interesting to all concerned, offers little information in the way of serving justice for those out funds.
Call Center Up and Extended Explanation
The latest update34 from Mt Gox offers a call center for customers to interface with:
A call center has been established to respond to all inquiries. The call center is planned to start on March 3, 2014. All inquiries to MtGox Co., Ltd. should be made to the following telephone number:
Telephone number +81 3-4588-3921 (in Japanese)
Telephone number +81 3-4588-3922 (in English)
Working hours Monday to Friday 10am to 5pm (Japan time)
The company goes on to list the net financial situation as a deficit of ¥2,659,253,208 yen or about $26.33 million US dollars at an exchange rate of 0.0099 JPY/USD.
Mt Gox goes on to blame the deficit on a hacking incident from early February which the now bankrupt company claims is being investigated. Meanwhile others are wondering exactly when Mt Gox really knew of this breach, and whether or not Mt Gox continued to promote their services and allowed customers to deposit in the midst of an internal crises.
Impact on Bitcoin is Likely Positive
Despite the disaster many individuals have and will continue to suffer as a result of Mt Gox’s malfeasance, the best outcome for bitcoin is to allow errors to surface and improve upon them. Bitcoin exchange operators are now under increasing scrutiny and practices like publicly released audits are soon to become standard practice it seems with leading operators like Bitstamp announcing just that35.
“- Satoshi Nakimoto
I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party.
The consensus seems to be among bitcoin optimists that the next chapter of entrepreneurs, consumers and investors will be of an increasingly sophisticated nature, and will hopefully eventually not be fragile to the whims of particularly bad actors. A flaw in financial networks that inspired the formation of bitcoin from the get go.
- Historical records of mtgox.com via waybackmachine.com ↩
- Profile of Mark Karpeles aka MagicalTux on bitcointalk.org ↩
- Karpeles github account under his pseudonym MagicalTux ↩
- Mark Karpeles LinkedIn profile ↩
- Ripple interview with McCaleb ↩
- Dailytech investigates the 2011 hack into Mt Gox ↩
- Mark Karpeles offers customer support on bitcointalk.org ↩
- Mt Gox’s facebook announcement ↩
- Reddit thread of users complaining of long queues ↩
- User reports different fees paid to fund his Mt Gox account via bitcointalk.org ↩
- Mt. Gox Seizures Linked to Silk Road via thegenesisblock.com ↩
- Mt Gox Dwolla Warrant transacribed ↩
- Wired article discusses Mt Gox USD Withdrawal Halt ↩
- Application and Affidavit for Seizure Warrant ↩
- FinCEN MSB Selector, Mt Gox Registration #31000029348132 ↩
- Chart of Mt Gox bitcoin to USD vs Bitstamp equivalent ↩
- Contrary to Mt. Gox’s Statement, Bitcoin is not at fault ↩
- Kraken tweet on transaction malleability outbreak ↩
- Blockhain.org CTO defends their wallet’s security ↩
- Bitstamp announces a resumption of withdrawals ↩
- Bitcoin exchange Mt. Gox counter-sues over failed North American expansion via gigaom.com ↩
- Legal data for Coinlabs lawsuit via plainsite.org ↩
- Mt.Gox Multi-plantiff Suit ↩
- Mt. Gox Resigns Bitcoin Foundation Board Seat ↩
- Ryan Selkis linkedin ↩
- Leaked Mt. Gox Document Linked to Consulting Firm Mandalah via coindesk.com ↩
- Excerpts of chat log with Karpeles and Fisher ↩
- Andy Booth confirms sale gox.com to Mark Karpeles ↩
- Reddit thread started by Bruce Fenton detailing possible Mt Gox acquisition ↩
- Charlie Shrem Speaks Out About Mt. Gox via coindesk.com ↩
- Selachii LLP linkedin ↩
- Hacker nanashi____ pastes Mt Gox source code leak ↩
- IRC chat log featuring nanashi____ ↩
- Mtgox.com public statements ↩
- Statement by Bitstamp Regarding Mt Gox Insolvency ↩