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Lost in translation: the tangled tale of Mt. Gox's missing millions

Tim Hornyak and Jeremy Kirk | March 10, 2014
Japanese authorities are trying to unravel what happened at Mt. Gox, the popular Bitcoin exchange that collapsed last week, and recent revelations are only serving to thicken the plot, not clarify it.

Karpeles could not be reached for comment. In a statement related to Mt. Gox's bankruptcy filing, the company described problems with the bug in the bitcoin system, saying, "We believe that there is a high probability that these bitcoins were stolen as a result of an abuse of this bug and we have asked an expert to look at the possibility of a criminal complaint and undertake proper procedures."

The errors in the Mt. Gox code likely allowed for bitcoins to be slowly siphoned off the exchange over time without anyone noticing, said the source, who added that one possibility is that the site's cold storage, essentially an offline vault used by bitcoin exchanges, either did not exist or was lost.

"Accounts were being hacked left and right," the source said. "But victims would contact support, made to wait two weeks and nothing would happen."

Mt. Gox's approach to money was equally questionable. Its account with Mizuho Bank was not segregated between customer funds and operational funds, the source said.

This week, an audio recording surfaced on the Web that purports to be a conversation held in late January between Karpeles and a Mizuho Bank official, who are speaking in Japanese. After airing his concerns about bitcoin, the official repeats the bank's decision that Mt. Gox's account must be closed.

Instead of becoming alarmed, Karpeles seemed more interested in his pet project to open a Bitcoin Cafe beside the company's headquarters, the source said.

But soon the problems would become too large to ignore.

Poker faces

Neither Karpeles nor his deputy, Gonzague Gay-Bouchery, outwardly showed signs of worry just two weeks before Mt. Gox filed for bankruptcy protection, said Bruce Fenton, board member of The Bitcoin Association.

In emails and phone calls, Fenton approached both men around Feb. 14 to discuss a possible investment in Mt. Gox, an effort aimed at sorting out the company's problems. Of top concern was whether Mt. Gox had its bitcoins.

"We asked them flat out if they had [the bitcoins]," Fenton said in a phone interview Tuesday. "Gonzague said they had them."

The talks failed to progress as Mt. Gox's situation deteriorated, Fenton said.

The document titled "Crisis Strategy Draft," leaked on Feb. 25, suggests that the company had lost 744,408 bitcoins and outlined an implausible plan for recovery. Many people, including Fenton, felt the document was fake.

Fenton then emailed Karpeles asking about the company's bitcoin holdings. Karpeles didn't directly answer, instead saying there would be an announcement on Feb. 28, the day of its bankruptcy filing at Tokyo District Court.

"I just thought it [Mt. Gox] was profoundly poorly managed," Fenton said.


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