The Return of Mt. Gox: An Update
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The Return of Mt. Gox: An Update

10 months ago

A condensed history of crypto’s most famous hack — including the legal battle, creditor compensation details and the lasting implications.

The Return of Mt. Gox: An Update

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Mt. Gox — Where Did It Come From? 

First launched in 2010 by American programmer Jed McCaleb and later purchased by French developer Mark Karpelès, Mt. Gox was one of the largest exchanges in the world during the early days of crypto. At one point, Mt Gox was responsible for more than 70% of Bitcoin (BTC) transactions worldwide. 
From its inception, however, Mt. Gox had security issues. In 2011, hackers used stolen credentials to transfer Bitcoin out of some of the exchange’s wallets. In another instance, hackers gained access to Mt. Gox’s internal systems and changed the price of BTC, which resulted in a flood of fraudulent transactions before the issue could be fixed.  
However, the incident that put Mt. Gox in the history books occurred in early 2014, when it became known that hackers had stolen 750,000 Bitcoin from Mt. Gox users and approximately 100,000 Bitcoin from the company itself. The total BTC stolen is now worth tens of billions. 
It later emerged that most or all of the missing funds were being skimmed out of the Mt. Gox hot wallet over time, beginning in late 2011. This failure has since been attributed to organizational dysfunction, poor security practices and mismanagement driven by Karpelès. 

The Mt. Gox Fallout

Mt. Gox was a Lehman Brothers moment for the cryptocurrency space. And, the historic scale of the hack presented a near-existential threat to Bitcoin at the time, causing many to question whether the relatively unproven digital asset had a future.  
The Mt. Gox hack also had a huge impact on individual investors. In total, the incident created nearly 127,000 creditors (this number was later cut down to 25,000), some of whom famously protested outside the company’s Tokyo headquarters. Following the hack, the exchange ceased operations and filed for bankruptcy protection, claiming $63.6 million in debt. 

The implosion of Mt. Gox not only cost its users hundreds of thousands of BTC, but it also temporarily crashed the price, damaged the reputation of the crypto space and brought a new level of attention from regulators and law enforcement. 

Mt. Gox Post-Bankruptcy 

In the wake of the incident, a trustee was appointed to track down assets and help facilitate the claims headed up by Japanese attorney Nobuaki Kobayashi. However, it quickly became clear that existing bankruptcy law would struggle to adequately cover the case and that tension between the trustee and creditors would be inevitable. 

About a month after the hack became public and the Mt. Gox website went offline, approximately 200,000 BTC was discovered in a wallet that was used before 2011. This provided hope for those who had lost money, but it still left 650,000 BTC unaccounted for. 

Shortly thereafter, the exchange gave up on plans to rebuild under bankruptcy protection, rather than asking the court for permission to liquidate. Mt Gox was also quickly hit with lawsuits from customers which compounded its ongoing lawsuit with CoinLab Inc., a former partner who was supposed to handle North American operations for the exchange. In 2013, CoinLab had filed a $75 million lawsuit against Mt. Gox, alleging a breach of contract. 

Given the number of parties involved and the multinational nature of the case, processing the Mt. Gox bankruptcy was always going to be difficult. What followed was a messy protracted legal struggle. One of the most contentious issues was the fact that, under Japanese bankruptcy law, any surplus money recovered would go to Mt. Gox shareholders including Karpelès. 

To avoid this, the case was moved out of bankruptcy proceeding and into civil rehabilitation, whereby all proceeds would go to creditors. But for some people, things weren’t moving fast enough. Indeed, frustrated by a lack of progress, a few creditors choose to sell their claims at a discount rather than waiting for the saga to play out.

Karpelès himself was arrested in 2015 by Japanese police and charged with manipulating the Mt. Gox computer system. By 2019, Karpelès was found guilty of tampering with financial records — effectively falsifying data to increase the exchange’s holdings — and received a 2.5 year suspended sentence. He was found not guilty of more serious crimes like embezzlement and was also not charged in relation to the hack. 

Current Situation 

The litigation of the Mt. Gox case has been slow for many reasons, but one of the primary sticking points was the CoinLab claim on Mt. Gox assets, which had ballooned to $16 billion over the years. In early 2021, however, it was reported that CoinLab had struck a deal with the trustee, and as much as 90% of the remaining BTC tied up in proceedings would be offered to creditors.

This deal signaled that the end might finally be in sight. Shortly after that, an updated rehabilitation plan was proposed at a creditor’s meeting that laid out a scheme to compensate victims. In May 2021, a Tokyo District Court approved the revised version of the plan, opening the doors to voting on the exact details of reimbursement. 

At another creditor’s meeting in October 2021, it was announced that the rehabilitation plan had been accepted by 83% of the creditors and that billions of dollars would be paid out. The proposed payout would reportedly compensate claimants in Japanese yen, Bitcoin, or Bitcoin Cash. The plan is set to be finalized in November 2021, and creditors will be able to provide details to receive payment and finally achieve closure. 

The Legacy of Mt. Gox

Although Mt Gox is not the only exchange to suffer serious security issues, it stands above the rest in terms of notoriety. It took years for the cryptocurrency industry to recover from the reputational damage caused by this event. It also provided a dramatic call to action for centralized exchanges to improve their security systems and for users to move toward self-custody.  

The final chapter of the Mt. Gox story could also have implications for today’s market. The total sum held by the trustee for the defunct exchange is reportedly valued at over $9 billion, taking into account recent price rises. Whenever the final Mt. Gox payout does come, volatility is likely to follow as creditors take some long-awaited profits. It’s an event every crypto investor should be aware of.
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