Mt. Gox kept trading despite knowing of theft

Mt. Gox CEO Mark Karpeles knew 19 days before shutdown of the exchange’s insolvency issues.

The Mt. Gox saga just doesn’t stop. After filing for bankruptcy in Japan, the once popular exchange now did the same in the United States. When taking a closer look at the U.S. filing, it appears Mt. Gox may have collected a large sum in trading fees in the weeks before the website went dark. All of this was done while it was fully aware that a large number of Bitcoins had gone missing.

19 days of lying

A sworn declaration in the filing from Mark Karpeles, CEO of Mt. Gox, shows that the exchange knew in early February that there was a disaster at hand. Even though they had knowledge of this, Mt. Gox decided to paint a brighter picture towards its customers.

On February 7, Mt. Gox decided to disable Bitcoin withdrawals from the exchange. The reason for this drastic measure was an ‘investigation of possible fraud, due to a security issue called transaction malleability’. This was the only explanation given; Mt. Gox didn’t disclose any information regarding the amount of Bitcoins missing or its own solvency. Despite being impossible to withdraw Bitcoins from Mt. Gox, trading was still allowed until February 25. After that date, the website suddenly went dark.

After that day, news regarding Mt. Gox appeared at a rapid pace, with its climax being the filing for bankruptcy protection in Tokyo District Court three days later. The filing stated that 750.000 of its customers’ Bitcoins were missing, along with 100.000 of its own. In the coming weeks, Mt. Gox would file for bankruptcy protection again, this time in the United States.

It appears from this filing that Mt. Gox executives knew the severity of the company’s losses well before the website went dark. Karpeles was aware of all this up to 19 days before its public disclosure, but failed to tell his customers what was really going on. Traders were led to believe the exchange was still solvent, and a solution would not be far away.

In the filing, Karpeles states that the withdrawals were halted Feb. 7 due to “the theft or disappearance of hundreds of thousands of bitcoins owned by Mt. Gox customers as well as Mt. Gox itself.” Why Mt. Gox still allowed its customers to keep trading is unclear.

Class-action lawsuits

There’s still a chance to learn why Mt. Gox acted the  way it did. The exchange will have to answer to the question why it kept on trading Bitcoins that weren’t there at several class-action lawsuits. One of these was filed in Chicago on February 27, another  is planned in the United Kingdom. There’s a big chance more lawsuits will follow.

It’s not hard to find proof. After Feb. 7, Mt. Gox was still processing thousands of trades a day, according to Bitcoincharts.com, which records trading volumes for many Bitcoin markets. An average of 49,912 bitcoins was traded daily on Mt. Gox between Feb. 7 and Feb. 25, at an average weighted price of $380.54 per bitcoin.

The whole Mt. Gox story has been a ‘strange’ series of events, and the more news comes out, the fishier it gets. Karpeles clearly knew what was going on and still refused to warn his customers. He should at least have protected them by shutting down completely when he learned how big the problems were. Nobody knows what will happen next and if or how Mt. Gox will try to compensate its many customers. To be continued…

Last modified: March 13, 2014 15:16 UTC

@cryptomaniacs

Internet addict and virtual currency aficionado living in Belgium. I work in a school, where I am responsible for every computer and the entire network that keeps our students connected to the world. I love cryptocurrencies, mostly because it gives us a chance to take back our freedom. If we do this right, there are exciting times ahead!