The Mt. Gox bitcoin debacle: Bankruptcy filed, customer bitcoin lost

Summary:UPDATE: Mt. Gox has closed the bitcoin exchange and filed for bankruptcy in Japan.

The Mt. Gox debacle has become a confusing, frustrating mess for users who have no idea whether their investments are safe.

Just days after resigning from Bitcoin advocacy group The Bitcoin Foundation and wiping its Twitter feed clean, bitcoin exchange platform Mt. Gox suspended trading. What suspended trading? It is believed to be the leak of an alleged Mt. Gox document by well-known bitcoin blogger Two-Bit idiot.

The leak -- which has not been verified -- is called the "Crisis Strategy Draft." The document, which the blogger says has been verified by sources close to Mt. Gox, reads:

"For several weeks MtGox customers have been affected by bitcoin withdrawal issues that compounded on themselves. Publicly, MtGox declared that 'transaction malleability' caused the system to be subject to theft, and that something needed to be done by the core devs to fix it.

Gox’s own workaround solution was criticized, and eventually a fix was provided by Blockchain.info. The truth, it turns out, is that the damage had already been done. At this point 744,408 BTC are missing due to malleability-related theft which went unnoticed for several years.

The cold storage has been wiped out due to a leak in the hot wallet. The reality is that MtGox can go bankrupt at any moment, and certainly deserves to as a company."

At today's trading rate, 750,000 BTC equates to roughly $375 million in missing funds, thought to be the result of a hacking spree that went unnoticed for several years. 

After posting this document, the blogger then linked to the original file, hosted on Scribed as below:

There are some interesting sections of note within the document, namely, the mention of rebranding to Gox.com:

Screen Shot 2014-02-25 at 15.17.48

Originally, identical statements issued by a number of other bitcoin exchanges -- Coinbase, Blockchain, Circle and Kraken -- spoke of the company's insolvency, before later revisions on some of the statements removed any mention of the insolvency and the "tragic violation of the trust of users of Mt Gox."

Today, as many bitcoin holders discovered, checking the source the of Mt. Gox website resulted in the following code:

screen-shot-2014-02-25-at-13-28-15-v2

If you attempt to access Gox.com, which appears to have been registered by the Mt. Gox chief executive recently, then a domain forward sends you back to mtgox.com. The domain was previously owned by domain investor Andy Booth, who confirmed the deal to transfer the domain to Karpeles while speaking to Domain Investing :

"Basically I got gox.com like any other LLL -- didn’t directly target Mt Gox. My brother met domain broker Joe Politzer in Singapore who got excited about gox.com and then I said he could try to sell it if he wanted. He called Karpeles and Gox to find out if they wanted it and immediately they expressed pretty strong interest. I’ve asked Mark if it’s ok to publish details (no response as yet)."

Joe Politzer of DN.BIZ, Booth's brother, also said:

"I reached out to Mt Gox and the deal took a few weeks to come together but we made a deal for the domain that included both a fair amount of cash and some bitcoins. Mark was a very nice guy and very patient in my opinion especially considering all that seems to be going on in his world from what we see in the media. I never really asked him about all of that; I just stayed focused on the deal as that was really the point."

Screen Shot 2014-02-25 at 13.27.41

According to computer security researcher Nicholas Weaver, who purchased historical WHOIS data on gox.com, the leaked document creator would have had to have known when the reported acquisition of the website from Mt. Gox's parent company occurred:

Following this, a new Twitter account registered as Gox.com appeared on the microblogging website, sporting a different logo. In addition, a Facebook page appeared -- while some believe this to be a real account, it is almost certainly a trolling account. However, the group -- as does multiple Reddit threads -- show the depth of anger and frustration felt by many Mt. Gox users who may have lost their investments.

Screen Shot 2014-02-25 at 14.31.59

In fact, the term "Goxxed" is now being used as a way to describe the loss of bitcoin across the web.

While the company has been keeping very, very quiet over the past few days, CEO Mark Karpeles did respond to Reuters over email, saying:

"We should have an official announcement ready soon-ish. We are currently at a turning point for the business. I can't tell much more for now as this also involves other parties."

Blockchain, a bitcoin mining data provider, later released its thoughts on the Mt. Gox debacle. In a statement, the firm said:

"Blockchain has always recommended that users store their bitcoins in such a way as to maintain control and ownership of their keys. Custodial accounts, like those used by Mt. Gox, where other people hold the keys to your bitcoins are risky.

Last night, we were shocked to find out about Mt. Gox’s insolvency, as they appear to have committed a grievous breach of trust against their customers.

The Blockchain staff will continue to collaborate with other industry leaders to establish better controls to ensure that events like this are not repeated. We are hopeful that together we can create a more trustworthy industry for the benefit of all existing and future Bitcoin holders."

We are yet to see whether Mt. Gox's problems will impact on the future of bitcoin as a viable currency permanently -- or whether investors will choose to take advantage of slumping prices in the hope of making a profit if, and when, the currency stablizes.

Update at 11.38 a.m. ET: Mt. Gox posted a statement on the home page of its website, saying :

Dear MtGox Customers,

In the event of recent news reports and the potential repercussions on MtGox's operations and the market, a decision was taken to close all transactions for the time being in order to protect the site and our users. We will be closely monitoring the situation and will react accordingly.

Best regards,

MtGox Team

Update at 7.05 a.m. GMT: Authorities in Japan and the U.S. have begun investigating the sudden closure of the Bitcoin exchange. 

Update at 2.43 p.m. GMT:

A new update appeared on the Mt. Gox website:

Dear MtGox Customers,

As there is a lot of speculation regarding MtGox and its future, I would like to use this opportunity to reassure everyone that I am still in Japan, and working very hard with the support of different parties to find a solution to our recent issues.

Furthermore I would like to kindly ask that people refrain from asking questions to our staff: they have been instructed not to give any response or information. Please visit this page for further announcements and updates.

Sincerely,

Mark Karpeles

A leaked internal chat obtained by Fox suggests that the crisis documents are "more or less" genuine.

"As the name suggests it’s a draft, and it’s a bunch of proposals to deal with the issue at hand, not things that are actually planned and/or done," the Mt. Gox chief said.

Karpeles also said that the bitcoins held at the exchange were not lost, "just temporarily unavailable."

Update Friday 28. 11.12 a.m. GMT: Mt. Gox has filed for bankruptcy protection in Japan, admitting to the loss of its customer's bitcoin.

Karpeles said at a press conference that bitcoins have been lost "due to weaknesses in the system," and "we are really sorry for causing trouble to all the people concerned."

The firm's lawyer said 750,000 customer-owned bitcoin have gone, as well as Mt. Gox's store of roughly 100,000 coins, worth almost $500 million in total. 

Developing... more soon. Check back as we will be updating this story as updates occur.

Topics: Tech Industry

About

Charlie Osborne, a medical anthropologist who studied at the University of Kent, UK, is a journalist, freelance photographer and former teacher. She has spent years travelling and working across Europe and the Middle East as a teacher, and has been involved in the running of businesses ranging from media and events to B2B sales. Charli... Full Bio

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