Largest bitcoin exchange files for bankrupcy protection

CEO bows in apology to Japanese customers; possible theft of 850,000 units

Feb 28, 2014 @ 12:20 pm

Mt. Gox, once the world's largest bitcoin exchange, filed for bankruptcy in Japan, and said that 850,000 bitcoins belonging to its customers and the firm were missing.

“The company believes there is a high possibility that the bitcoins were stolen,” Mt. Gox said in a statement. “It is considering filing a criminal complaint.”

The filing follows three weeks of speculation about the fate of the Tokyo-based exchange, which suspended withdrawals on Feb. 7. The turmoil left investors and entrepreneurs asking how the insolvency could happen, and how the fledgling bitcoin industry can bounce back.

“Mt. Gox is the only exchange that wasn't backed by venture funds or institutional investors,” said Mickey Malka, the founder of Ribbit Capital and a bitcoin investor. “It will take time for the rest of the bitcoin ecosystem to prove that this is a bad apple and not a problem of the entire ecosystem.”

(See also: Bitcoin: The future of money)

The price of Bitcoin was down almost 3% to $560.89 Friday morning in New York, according to the CoinDesk Bitcoin Price Index.

Mt. Gox, which had revenue of 135 million yen ($1.33 million) in the past 12 months, applied in Tokyo District Court Friday for bankruptcy protection with debt exceeding assets by 2.7 billion yen, the exchange said in a statement. Mt. Gox lost 750,000 bitcoins belonging to its customers and 100,000 of its own, it said.

(Consider these 5 reasons to care about bitcoin)

“We are in a situation close to what you would call Chapter 11 in the U.S.,” Mt. Gox chief executive Mark Karpeles wrote in an e-mail.

Mr. Karpeles said his company lost the bitcoins because of weaknesses in its computer systems' security measures, according to remarks broadcast on NHK Friday. The firm had 6.5 billion yen in debt.

Andreas Antonopoulos, the chief security officer for Blockchain.info, a company that hosts online digital wallets for Bitcoin storage, said Mt. Gox probably failed to properly manage its offline bitcoins.

Standard security procedures involve putting the bulk of a company's bitcoins in on a computer or hard drive that is not connected to the Internet, an arrangement known as “cold storage.” To draw on them, a company would have to remove data from the computer without bringing it online — using a flash drive, for example — and combine it with the online, or “hot” wallets.

“Cold storage is a combination of technology and operational process,” Mr. Antonopoulos wrote in an e-mail. “They got some part of that wrong.”

2008 INTRODUCTION

Bitcoin was introduced in 2008 by a programmer or group of programmers under the name Satoshi Nakamoto and has since gained traction with merchants around the world. The digital currency has no central issuing authority, and uses a public ledger to verify transactions.

Akio Shinomiya, a lawyer for Mt. Gox, said the court will notify creditors identified by the exchange in its bankruptcy filing. Other creditors will have to make a claim themselves, and then the court would decide who gets repaid.

The company also set up a call center to answer customers' questions about the bankruptcy.

Companies from San Francisco to London as well as the virtual currency's industry group, the Bitcoin Foundation, have been seeking to assure Bitcoin users that their funds won't disappear due to theft or mismanagement.

Dressed in a suit and tie instead of his usual T-shirt, and flanked by lawyers, Mr. Karpeles bowed in apology at a Tokyo press conference, and echoed the message.

“I think bitcoin exists today because it has meaning for society,” he said. “Mt. Gox went bankrupt but I hope the bitcoin industry will last.”

U.S. and Japanese prosecutors have opened investigations into events leading to the shutdown and bankruptcy of Mt. Gox, and U.S. regulators are exploring options for increasing regulation of virtual currencies.

The European Banking Authority, set up in 2011 to harmonize banking rules across the 28-member European Union, said today that it would set up a task force in the first half of this year to review options for regulating bitcoin and bitcoin derivatives.

(Bloomberg News)

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