The Bitcoin Bank Back From the Dead With Billions at Stake
A Tokyo bitcoin exchange collapsed in 2014 after losing $400 million. Five years later, it’s worth $1.2 billion and everyone wants a cut.
TOKYO—“Everybody loves a winner,” it is said, but “when you lose, you lose alone,” especially when you lose nearly half a billion dollars and bankrupt your company.
But what would happen if even after that loss, your company miraculously managed to come back from the dead—with over a billion dollars worth of assets, twice what it lost?
You’d be a winner again and everyone would love you, right?
Not if you’re Mark Karpeles, former CEO of Mt. Gox (Tokyo), which was once the world’s biggest cryptocurrency exchange. This guy, instead of flying on the wings of a dove, is fending off buzzards—particularly one big carrion-eater: cryptocurrency entrepreneur and billionaire Brock Pierce.
Last month, Pierce, whom comedian John Oliver once described as “that sleepy creepy cowboy from the future,” began making claims that he’s the real owner of the firm, wild claims that were repeated by some major news organizations as revelations.
In the February 2018 issue of Forbes magazine, Pierce, a former child actor, was listed among the “top 20 wealthiest people in crypto” with an estimated net worth between $700 million and $1.1 billion. But with his great wealth come some great problems.
Join us in unwinding the sordid tale of a well-meaning, cat-loving, computer coding French genius, and a unicorn-loving Silicon Valley visionary and how they came to be waging a Harry Potteresque and very public battle over The Company That Would Not Die.
The prize: $1.2 billion worth of assets.
The stakes: the hard-earned savings of thousands of people.
Bitcoin aka “digital gold” is the mother of all cryptocurrencies, and despite the huge fluctuations in price, the cryptocurrency boom rages on. In 2008, the mysterious Satoshi Nakamoto, who may or may not be Japanese, posted a paper on creating a digital currency that was safe, secure, and could not be duplicated. The currency was engineered to max out at 21 million bitcoins, ensuring scarcity as well. The key to this was using a public ledger—the block chain—dispersed over the internet, to make forging bitcoins impossible and also keep a record of every bitcoin transaction. By 2009, there was a working version of the software available.
The invention of bitcoin enabled people to trade virtual money over the internet with no central bank and little oversight. Anarchists, libertarians, and economic idealists all became fascinated with the idea of a currency free from government boundaries with almost no transaction fees. To some extent, there was also great anonymity.
No one was precisely sure what could be done with bitcoin in those early days. Some suggested online betting; Satoshi Nakamoto thought it might be perfect for purchasing porn without your wife knowing or giving your credit card details to “the porn guys.”
The first real-world transaction with bitcoin took place on May 22, 2010 when Laszlo Hanyecz bought two pizzas for 10,000 BTC (bitcoin) from Papa John’s via a third party. (BTC was worth .25 cents at the time). On Dec. 17, 2017, at the height of the bitcoin bubble, that pizza would have been worth $197,830,000.
The problem with bitcoin during its infancy was that there was no easy way to buy, sell, or trade it. In 2010, Jed McCaleb, a cryptocurrency pioneer, turned a website originally set up to trade Magic: The Gathering playing cards into a cryptocurrency exchange: Mt. Gox. It became possible to buy and sell the virtual currency online, sort of like beanie babies.
In February of 2011, Karpeles, a young Frenchman and coder fluent in Japanese and very much in love with Japanese culture as well as the idea of bitcoin, took over the website via his company Tibanne. McCaleb kept 12 percent.
Karpeles was a workaholic who only had a few hobbies: coding, pastry-cooking (quiche especially) and caring for his beloved cats.
He might not have been the best person to run a company dealing with millions of dollars and one that needed top-notch cybersecurity.
Karpeles once said that the reason he loved Japan is that when he would forget his laptop on a park bench, a kindly Japanese person would run after him to make sure he didn’t lose it.
Perhaps not suited for a job requiring great attention to cybersecurity.
He is in some ways a very lucky guy. Or at least luck was with him in the early days.
On April 20, 2011, Forbes writer Andy Greenberg wrote up a very positive take on bitcoin under the title “Cryptocurrency.” Prices started to rise and Mt. Gox became the most important bitcoin exchange around.
But what really made bitcoin take off was an article on The Silk Road, which worked a little like an Amazon Marketplace for recreational drugs, guns and contraband. All purchases had to be made in bitcoin.
“The Underground Website Where You Can Buy Any Drug Imaginable” was published on Gawker (RIP) on June 1, 2011. Word spread fast. Yes, finally bitcoin had a use: you could buy drugs with it, anonymously, and over the internet. The Gawker article not only turned people on to bitcoin, it had a link to Mt. Gox. The firm prospered.
By January of 2014, Mt. Gox was handling the majority of bitcoin transactions in the world and up to $20 million dollars a day.
However, the site had been hacked as far back as 2011 and by late 2013 over 650,000 bitcoins were stolen.
When Karpeles reconciled accounts in February 2014, he realized the coffers were nearly empty. The site went offline and while a plan to save the company was drafted—word leaked onto the net, and everything fell apart.
Mt. Gox declared bankruptcy on Feb. 28, 2014. Thousands of people lost their money and some their life savings. Bitcoin prices plummeted and many commentator heralded it as the end of the bitcoin bubble. They were wrong.
But there was also widespread suspicion that Karpeles had stolen the coins himself. He became the most hated man in the bitcoin community.
Shortly after this, cryptocurrency entrepreneur Pierce (once known for his role in The Mighty Ducks) approached Karpeles as a white knight. He offered to take over Mt. Gox and acquire all its assets. On March 11, 2014, he signed a letter of intent to that effect. We will get back to that letter in a bit.
Mark Karpeles reported the theft of the bitcoins to the Tokyo police. And after a long investigation, one division of the police force concluded that the only solution could be that Mark Karpeles must have stolen them.
Keep in mind that the Tokyo Metropolitan Police Department has a glorious record of failing to solve cybercrimes and arresting the wrong people. A cat-loving hacker (not Mark Karpeles) ran circles around them in 2012 framing innocent people for making terrorist threats. Not surprisingly, after weeks of interrogation without a lawyer present, some confessed to crimes they hadn’t even committed. This caused the police great embarrassment when the real criminal came forward.
Obviously no lessons were learned.
On Aug. 1, 2015, Karpeles was arrested on charges of improper electronic transfer of funds. The police hoped to make him confess to hacking his own exchange during the standard 23 days of detention. He did not.
They re-arrested him again. And again. They did not grant him bail—essentially doing what was done to former Nissan Chairman CEO, Carlos Ghosn, who was held for 108 days. In July of 2016, Karpeles finally was released on bail.
Roughly a year later, while the Karpeles trial was going on, on July 26, 2017, U.S. authorities tracked down cryptocurrency exchange manager Alexander Vinnik in Greece. The 38-year-old Russian national was detained and later indicted on 17 counts of money laundering, unlawful monetary transactions and other crimes. The Department of Justice in a press release entitled “Russian National And Bitcoin Exchange Charged In 21-Count Indictment For Operating Alleged International Money Laundering Scheme And Allegedly Laundering Funds From Hack Of Mt. Gox” stated clearly that it believes Vinnik was behind the Mt. Gox theft.
The United States and other countries are fighting to have Vinnik extradited while he and Russia resist. It was reported last year that he would be extradited first to France to face charges of fraud.
Karpeles himself is still on trial and will face a verdict on Friday of this week. But at this point none of the charges have anything to do with the missing bitcoins and the prosecutors refuse to discuss the Vinnik case in court.
In 2017, bitcoin prices surged to an all-time high of $19,783 dollars per bitcoin (BTC) on Dec. 17. In the middle of this boom, the trustee of Mt. Gox sold off a chunk of the 200,000 bitcoins the company had managed to salvage. The trustee also may have crashed the bitcoin market temporarily, but the bankrupt Mt. Gox became solvent again and is now in civil rehabilitation.
If you count the remaining bitcoins, the company is now worth over a billion dollars in assets. In actual cold cash, independent of bitcoin price fluctuations: $700 million. That’s a nice chunk of change.
While Mark was spending time getting to know the Japanese prison system and the cruelty of a justice system where you are presumed guilty until proven guilty, Pierce was making quite a name for himself.
Brock, by the age of 17, already was investing in the digital future—involved in failed venture projects like DEN (Digital Entertainment Network) which was supposed to provide cutting edge online video content.
He later became the chief strategy officer and co-founder of Block.one, a firm developing a blockchain platform known as EOS, which raised over a billion dollars.
He was exiled from the firm after the March 2018 “sleepy creepy cowboy” segment on John Oliver’s Last Week Tonight, which devoted several minutes to ridiculing Pierce. Oliver lampooned Pierce’s rhetoric, his unicorn-themed wedding held at Burning Man (the Woodstock of millennials)—and it was an amusing riff. However, when Oliver urged viewers to google, “Brock Pierce Scandal,” Pierce’s business buddies were not amused.
The search turns up articles about lawsuits by former employees of the bankrupt Digital Entertainment Network. There were lawsuits that also allege that the cryptocurrency co-founder had pressured minors for sex, and those allegations, which Pierce vehemently denies, have haunted him. He was never convicted of any such crimes.
In 2014, several members of the Bitcoin Foundation, a nonprofit group that advocates for the cryptocurrency, and a foundation where Karpeles had once also been a director, resigned in protest of Pierce’s election as the chief director. (Karpeles resigned on Feb. 24, 2014).
The triple-punch of the allegations, the ridicule, and the airing of his past dubious and failed start-ups probably contributed to Pierce’s precipitous departure from Block.one, but the company never really clarified the circumstances.
And so, while Pierce is by all accounts still a very wealthy man, he needs something to keep himself alive as a wheeler/dealer, and a dead agreement with Mark Karpeles seems to be his new meal ticket.
He is quite a flamboyant individual. On Twitter he even uses several emojis in his icon, perhaps symbolic of his tastes. In the real world it’s going to take more than a unicorn, a magician’s hat and prayers to claim ownership of a billion dollars, or revive a troubled career.
On February 1 of this year, Brock Pierce made a visit to Tokyo and met with Mark Karpeles. He brought with him a letter of intent that was signed in March of 2014. Karpeles explained to him that the letter of intent, which is not a contract, was never validated and that Pierce had nothing to really contribute, “but thanks for the interest.”
A few days later, on Twitter and other media, Pierce proclaimed himself the 100 percent owner of Mt. Gox and explained that he could possibly recover all the 650,000 missing bitcoins, and a number of other assertions.
It was a claim with a tiny grain of truth. When Mt. Gox collapsed in 2014 and entered civil rehabilitation in Japan for the first time (loosely equivalent to bankruptcy protection), Pierce and his company Sunlot approached and negotiated with Mark Karpeles’ firm Tibanne, the owner of Mt. Gox, to acquire and attempt to rehabilitate Mt.Gox. That was when the letter of intent was signed to add some legality to the negotiations.
Despite the wording of the letter, it was no more than an outline for how the parties intended to proceed while negotiating an actual agreement. There’s no purchase price mentioned. According to Nobuyasu Ogata, the lawyer for Karpeles, since Mt. Gox was already under court jurisdiction at the time, the firm couldn’t enter into any binding agreements without the permission of the court, and especially could not be sold.
Pierce didn’t go through the court first, rendering the entire attempt a moot point. In addition, the last page of the document says the deal would have to be completed within 45 days after signing, which it was not.
Pierce, whose claim to ownership of the company seems dubious at best, has put himself forward as the savior for all those who lost money when Mt. Gox was hacked and collapsed. Mark Karpeles stands to make little or nothing as civil rehabilitation goes forward.
On Twitter, on Feb. 10, Pierce taunted Karpeles, “Mark knows he sold his 88% [of the company]….I want creditors to receive the entire surplus. Mark is hoping to pocket the $700-800 m[illion]. Do you trust Karpeles?”
An equally valid question would be: Do you trust the Unicorn Prince?
Pierce didn’t respond directly to my requests for clarifications but he did tweet on Feb. 23, walking back previous statements about owning the company. He said his stated intention is to acquire the intellectual property and launch a new exchange under the old brand. He seemed to agree he had no legal claim to ownership but, “Ownership doesn’t matter as long as creditors get everything.”
(If you’d like to know more, Kim Nilsson, the blockchain analyst who worked with the U.S. Internal Revenue Service to track down the real hacker of Mt. Gox, does a wonderful job of analyzing why Pierce’s claims are dubious. It can be found here.)
In fact, the legal situation of Mt. Gox is a nightmare involving multiple lawsuits and all of this has delayed creditors trying to get back their funds.
Karpeles, who clearly would like to put the past behind him and have people repaid, is not happy about the latest attempt of an interloper to get a chunk of a firm that once no one wanted–and thus further delay repayments.
Karpeles told The Daily Beast,“Brock came to meet me on February 1 last month. He sounded nice and helpful. But now he’s trying to push his agenda with lies. I don’t appreciate some clown coming here and trying to make things harder for creditors.”
He did have one positive thing to say.
“After my business failures, I didn’t think it was possible for anyone to make me look good in the public eye. He has done that at least, so maybe I should be grateful.”