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Will Mt. Gox mint Bitcoin millionaires in 2021?

Exclusive Research

  • Bitcoin exchange Mt. Gox accounted for 70% of all BTC transactions at its height.
  • It filed for bankruptcy in February 2014 with 850,000 BTC missing or stolen.
  • A civil rehabilitation plan would see users getting repaid in BTC but requires 50% agreeing.
  • Many have lost track of the legal proceedings as they drag into their eighth year.
  • 20 October 2021 is the deadline for votes pending further delays.

It all starts with magic

Magic, the Gathering, in this case.

The popular card game stimulates a bout of peer-to-peer trading activity as devotees improve their decks.

Before Jed McCaleb co-founded Ripple and Stellar Lumen network, he put up a site to help Magic traders do business online. Named ‘Magic, The Gathering - Online Exchange’, he bought the domain mtgox.com in 2007 and published the site shortly afterwards. Just three months later, he closed the doors on his business again, having decided it was not worth his time.

The prodigal entrepreneur read about bitcoin on Slashdot in 2010 and saw an urgent need for an easy way to buy and sell the digital currency online. He decided to build what became the most significant bitcoin exchange for years after having launched it on 18 July 2010.

McCaleb was not stricken with the task of running the exchange day to day and started to look for a buyer. A short while after not finalising a deal with US-based CoinLabs, French developer Mark Karpelès bought the exchange. The headquarters remained in Shibuya, Tokyo, during the whole time.

CoinLabs secured the right to run the US division of Mt. Gox. Peter Vessenes, CoinLab’s CEO, had already run into trouble when he wanted a look at the books and suddenly received a call from the SEC’s enforcement division. The SEC held the opinion that Mt. Gox was an unregistered money transmitter in the US and eventually collected a $5m fine.

A hack and a theft

Mt. Gox unravelled shortly afterwards. With 850,000 BTC stolen, the exchange filed for bankruptcy in a Tokyo court on 28 February 2014 and left a multitude of creditors behind.

And this is when the trouble really started.

Mt. Gox had processed up to 70% of all bitcoin transactions, worldwide, in its heyday, and the mounting payout troubles already had plenty of users waiting for weeks, or even months, for withdrawals.

The bankruptcy threw a gigantic wrench into the stuttering behemoth that Mt. Gox had become. In the last years, users had seen 25,000 BTC stolen from 478 accounts, 2,609 BTC sent to invalid addresses and lost forever, a leak of customer data and mounting dread over the exchange’s solvency.

Would-be US partner CoinLab filed a $75m lawsuit against Mt.Gox in May 2013, accusing Karpelès of breach of contract.

The Tokyo district court later found CEO Mark Kapelès guilty of tampering with the company's books to tide over the growing amount of bitcoin stolen in hacks.

All bitcoin on the exchange is frozen as possible collateral of the bankruptcy.

The waiting begins

In bankruptcy, a company's liabilities are prioritised and then covered by the assets the bankruptee still has. The exact amount of Mt. Gox’s liabilities also depend on the result of CoinLab’s 2013 lawsuit, which continues to this day.

In an interview with Bloomberg, CoinLab’s CEO Peter Vessenes recalls that it took six months to serve Karpelès with the lawsuit. The Hague Convention on the Service Abroad of Judicial Extrajudicial Documents had to be employed and it then took a year to arrange depositions. International litigation is painfully time-consuming and expensive.

Thousands have submitted claims on BTC deposited on the exchange. Mt. Gox trustee Nobuaki Kobayashi made it clear that only 0.23 BTC could be repaid for every coin claimed. At the time of bankruptcy, bitcoin’s price was $450. In mid-October 2021, it was more than $60k. A payout factor of 0.23 is still a 30x return on investment.

If the payout happens, that is.

An exercise in coordination and grit

The Mt. Gox rehabilitation plan intends to distribute BTC from the bankruptcy estate to claimants. Mt. Gox Investment Fund LP (MGIFLP), now owned by private equity firm Fortress Investment Group, handles the estate.

Where there is blood, there are sharks.

An orderly pursuit of bankruptcy would repay outstanding liabilities in proportion to their dollar-denominated value in 2014. More than $6bn worth of bitcoin would go to Karpelès, Jed McCaleb (who owns a 12% share of Mt. Gox), Fortress and the Japanese Government, who is legally entitled to any unclaimed funds ten years after the bankruptcy.

Six hundred and fifty thousand of the original 850,000 stolen bitcoin are still unaccounted for. An end of the bankruptcy process would free up the estates’ trustee resources to pursue them.

Conversely, the Mt Gox rehabilitation plan would repay bitcoin in proportion to the total BTC that the estate controls.

Adoption of the rehabilitation plan depends on the number of claimants that support it. Yahoo! Finance reports: “A minimum threshold of 50% of votes is required for the proposal to pass. The coordinator of a creditor group called Mt. Gox Legal has implored all creditors to cast their vote before the 8 October deadline. He said: ‘The chance to finally recover something from the Mt. Gox debacle is now, and the way is to approve the civil rehabilitation plan in the ongoing vote.’

Mt. Gox’s customer database is hopelessly outdated by now. Many email addresses are obsolete. And more than a few exchange customers have given up on their claim and don’t follow the developments of the nearly decade-long lawsuit.

Another salient aspect is that many of the BTC bought on Mt.Gox were destined to be used on Silk Road, the infamous bazaar of drugs, weapons and sometimes even hitmen or fake passports. Since blockchain transactions are stored forever, and the FBI has SilkRoad’s Bitcoin addresses, there’s a distinct possibility that SilkRoad users could be traced back to Mt.Gox users’ identities.

Hanging on for seven long years of delays takes grit and patience. Will enough claimants coordinate to pass the rehabilitation plan?

Showdown on 20 October

After Covid mitigation measures made in-person claims impossible last year, the Tokyo district court set Wednesday, 20 October 2021, as the ultimate date to vote on Mt. Gox’s civil rehabilitation plan.

Karpelès diffused the tensions around the potential loss. He could “file for Mt. Gox to not be in bankruptcy anymore and perform distribution to creditors directly from Mt. Gox” or “revive Mt. Gox, not as an exchange, but something else that could benefit creditors”, as reported by Yahoo! Finance.

Initially scheduled to finish in October 2020, the process got delayed due to pandemic mitigation measures. Further delays are a distinct possibility.

If the rehabilitation plan passes, all the potential BTC could be paid out at once or in tranches.

Bitcoin pioneer Max Keiser, among others, is worried that a swift release of Mt. Gox funds could depress Bitcoins price as many fresh-minted millionaires cash out. Twitter account @CryptoWhale echoes this sentiment:

The effect on Bitcoin’s price depends on:

  • How many funds are released at once
  • The desire of claimants to sell immediately
  • The amount of OTC sales

Claim release in tranches would reduce the downward pressure on bitcoin, even if all the claimants want to sell right away.

There’s little incentive to sell everything summarily and at once. BTC price is going up, and introductory crowd psychology would instruct all but the most paper of hands to hold.

OTC sales could snatch up payouts before they hit exchanges and diffuse sell off potential.

Numbrs daily Bitcoin on-chain snap is an excellent source of information on developments.

Conclusion

Will the civil rehabilitation plan pass on 20 October 2021? Will this lead to a sell-off, as Keiser worries?

Or will the plan fail, the bankruptcy clear in dollars and Karpelès and the Japanese Government walk away with billions?

We don’t have to wait long to find out.

Nothing in this article constitutes professional and/or financial advice. The content is provided exclusively for informational and/or educational purposes. Nothing is to be construed as an offer or a recommendation to buy or sell any type of asset. Seek independent professional advice in regards to financial, tax, legal and other matters.

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