Mt. Gox Files for Bankruptcy After $470 Million Bitcoin Loss

Photographer: Tomohiro Ohsumi/Bloomberg

Mark Karpeles, chief executive officer of Mt. Gox, left, leaves the Tokyo District Court in Tokyo on Feb. 28, 2014. Close

Mark Karpeles, chief executive officer of Mt. Gox, left, leaves the Tokyo District... Read More

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Photographer: Tomohiro Ohsumi/Bloomberg

Mark Karpeles, chief executive officer of Mt. Gox, left, leaves the Tokyo District Court in Tokyo on Feb. 28, 2014.

Mt. Gox, once the world’s largest Bitcoin exchange, filed for bankruptcy in Japan saying about $470 million in 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.

The filing yesterday follows three weeks of speculation about the fate of the Tokyo-based exchange, which suspended withdrawals on Feb. 7. Since Bitcoins exist as bits of software, they can be stolen if a hacker gains access to the computers and servers used to run online exchanges, where the virtual currency can be traded for dollars, euros and other currencies.

Investors and entrepreneurs were left asking how the exchange serving digital currency traders could become insolvent, how the encrypted coins could be pilfered 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,” Micky Malka, the founder of Palo Alto, California-based Ribbit Capital and a Bitcoin investor, said in an interview. “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.”

Bitcoin was down almost 4 percent to $553.91 at 5:03 p.m. New York time, according to the CoinDesk Bitcoin Price Index.

Bankruptcy Protection

Mt. Gox, which had revenue of 135 million yen ($1.33 million) in the year ended March, applied in Tokyo District Court today 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, for a total of 850,000, the company said.

“We are in a situation close to what you would call Chapter 11 in the U.S.,” Mark Karpeles, Mt. Gox’s chief executive officer, said in an e-mail yesterday. Karpeles said his company lost the Bitcoins because of weaknesses in its computer systems’ security measures.

Since Bitcoins exist as software, any computer or server connected to the Internet that stores those files is vulnerable to unauthorized access. Similar to a hacker copying e-mail, a thief can steal the virtual currency by duplicating the digital security key that lets a user spend it.

A standard method of keeping Bitcoins safe is to move the digital money off a Web-connected computer, according to Andreas Antonopoulos, chief security officer for Blockchain.info, a company that hosts online wallets for Bitcoin storage. An exchange or any other company handling large quantities of Bitcoins could save the bulk of them on a device that isn’t connected to the Internet, an arrangement known as “cold storage.”

Cold Storage

Mt. Gox probably failed to properly manage its online and offline Bitcoins, Antonopoulos said. Any individual or business can protect Bitcoins by physically moving the software between cold storage, and online, or hot storage, using flash drives.

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

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.

Creditors Notified

Akio Shinomiya, a lawyer for Mt. Gox, said yesterday 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.

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 yesterday that it would set up a task force in the first half of this year to review options for regulating Bitcoin and Bitcoin derivatives.

One Bitcoin user yesterday filed a proposed class-action lawsuit in federal court in Chicago, seeking to represent U.S. customers who lost money.

“This catastrophic loss has not only revealed the instability of a burgeoning new industry, it has also uncovered a massive scheme to defraud millions of consumers into providing a private company with real, paper money in exchange for virtual currency,” Illinois resident Gregory Greene said in the complaint.

The case is Greene v. Mt. Gox Inc., 14-cv-01437, U.S. District Court, Northern District of Illinois (Chicago).

To contact the reporters on this story: Carter Dougherty in Washington at cdougherty6@bloomberg.net; Grace Huang in Tokyo at xhuang66@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net

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