Mt. Gox begins repayment to creditors after 10 years of its
“When Japanese bitcoin exchange Mt. Gox collapsed in February 2014, there were well-founded fears that it could kill the first cryptocurrency before it reached five years of life.”
Rise and fall of crypto exchange Mt. Gox
Japanese exchange Mt. Gox was founded in 2010 by Jed McCaleb and was one of the largest bitcoin (BTC) exchanges, handling 70% of global crypto transactions at its peak. In 2011, its founder McCaleb sold the crypto brokerage [exchange] to Mark Karpelès.
More than 880,000 BTC were lost or stolen from Mt. Gox in various forms between March 2011 and January 2014, a staggering value of $45 billion today.
Mt. Gox halted bitcoin transactions in February 2014, shortly after Messari founder Ryan Selkis published1 an internal document2 suggesting it had lost nearly 750,000 BTC.
Soon after, CEO Mark Karpelès made an unofficial statement3 via email to Reuters, stating that the broker was "at an inflection point."
After filing for bankruptcy in February 2014, with liabilities that far exceeded his assets, the case went into civil rehabilitation in 2018, and Mark Karpelès was convicted of falsifying financial records in 2019.
How were Mt. Gox bitcoins lost?
Of the 881,865 BTC that left Mt. Gox unintentionally, it is only possible to say with certainty how 72,409 BTC were lost.
30,000 BTC were recorded as deposits for customers by the Mt. Gox system when in fact they were being siphoned off by hackers.
An error made by CEO Mark Karpelès in October 2011 caused 2,609 to be sent to a non-existent address.
Two bots operating on Mt. Gox, Markus and Willy, lost 22,800 BTC.
And add to this the price paid by Karpelès when purchasing the Polish broker Bitomat in July 2011.
For the rest of the funds, the mode of entry is generally unknown or merely suspect.
In the case of the June 2011 hack, we know that the hacker was able to gain access to the Mt. Gox server through an administrator-level account. This account was initially attributed to auditor Auden McKernan, but it was later revealed to be the account of Jed McCaleb [the founder who had sold Mt. Gox to Mark Karpelès], who inexplicably still had administrator privileges. The hacker is believed to have obtained the details when the entire Mt. Gox user database was stolen along with the 79,956 BTC in the 1Feex hack.
Considering that US authorities were confident in naming Russians Alexey Bilyuchenko and Aleksandr Verner as part of a group of cybercriminals who broke into Mt. Gox in October 2011, they must have some evidence to support their claims, but unless If a trial takes place, this evidence will probably never come to light.
Who are responsible for the collapse of Mt. Gox?
One of the main questions that remains unknown is whether we know all the culprits.
More than 809,000 BTC were stolen in six hacks during Mt. Gox's lifetime, and we only know of two names linked to one hack: Alexey Bilyuchenko and Aleksandr Verner, who are accused of being part of the Russian hacker group that compromised the exchange in October 2011. Over the course of 26 months, the duo helped steal and launder 647,000 bitcoins from the broker's cold wallets.
The US Department of Justice has charged Russian nationals, alleging that Bilyuchenko was also an operator of the now-defunct BTC-e crypto exchange.
Aside from these accusations, confirmed in 2017 and made public in June last year, we have no idea who stole the remaining 162,000 BTC.
79,956 BTC remain linked to a well-known address starting with "1Feex", while 77,500 stolen in September 2011 have never been traced. This latest hack was so successful that it was only detected in 2015.
There is also the individual who stole 2,000 BTC in June 2011, which caused the value of bitcoin to fall from US$17.50 to US$0.01 at the time, and the hacker who stole more than half of the bitcoins held by broker at the time, when Mt. Gox CEO Mark Karpelès left the wallet on a drive with an unencrypted network. Fortunately for Karpelès, the hacker got scared and negotiated a 1% reward, leading to a loss of just 3,000 BTC for the exchange instead of 300,000 BTC.
Many suspect that the 1Feex hack was a rehearsal for the devastating cyber exploitation from October 2011 to January 2014, as the modus operandi was the same, but this has never been confirmed.
Regulatory bodies' reaction to the virtual disappearance of Mt. Gox
Regulatory bodies quickly responded to what had happened.
The chairman of the US Homeland Security and Governmental Affairs Committee at the time, Tom Carper, issued a statement5 on the matter, stating that US lawmakers and regulators can and should learn from the Mt. Gox incident to protect consumers:
"For months, our committee has been calling on law enforcement, industry, and relevant regulatory bodies to come together and engage in meaningful dialogue to provide clear rules for business owners, investors, and consumers. Without these rules, companies cannot be well -successful and consumers cannot be protected. If today's news is true, this is a sad violation of consumer trust, whether through malicious action or simple incompetence."
Carper emphasized that his team was working closely with federal agencies to determine what lessons can be learned from the failure and to ensure it doesn't happen in the US. And he added:
"Our Committee will continue to work closely with relevant U.S. government entities to steer the ship away from nefarious actors – and it is up to the industry's legitimate, law-abiding partners to row the ship into law-abiding waters."
US regulator Ben Lawsky, New York's Superintendent of Financial Services at the time, also issued a statement, saying that although all the facts were not yet clear, "these developments highlight that smart, personalized regulation could play a role important in protecting consumers and the security of the money they entrust to virtual currency companies.”
At the time, both Carper and Lawsky clearly pushed the ball to crypto industry leaders, who did their best to steer clear of Mt. Gox.
The process of repaying Mt. GOX creditors
The long-awaited refund process for creditors of the defunct Mt. Gox has begun, with refunds scheduled in Bitcoin (BTC) and Bitcoin Cash (BCH).
According to several posts6 from Reddit users, bitcoin [BTC] and bitcoin cash [BCH] have started to be credited to crypto exchanges for repayment from creditors.
The repayment process follows approval of the rehabilitation plan in November 2021, supported by the majority of Mt. Gox creditors.
Administrator Nobuaki Kobayashi announced that eligible creditors will begin receiving compensation this July after multiple delays since 2014.
The balance to be repaid amounts to a staggering $9 billion, which includes BTC and BCH as well as additional funds held by the administrator.
Second post7 from a Reddit user replicating an email received from Mt. Gox regarding BTC/BCH refunds:
“On July 5, 2024, the Rehabilitation Administrator made a blockchain transfer of the amount in BTC/BCH refundable to you as a Base Refund and Early Global Refund or Interim Refund.”
The transcript above details the email received from “Mt. Gox Co., Ltd.”, as Rehabilitation Debtor, submitted by Nobuaki Kobayashi, Lawyer and Administrator of the brokerage's rehabilitation plan.
Repayments will be made to certain rehabilitation creditors through designated cryptocurrency exchanges in accordance with your rehabilitation plan.
According to a post on Mt. Gox document X, refunds of bitcoin and bitcoin cash to creditors began on July 5, 2024.
As for the conditions for repayment, rehabilitated creditors will be “immediately effected” after multiple conditions have been met.
These conditions include confirmation of the validity of the account and the acceptance by lenders of the intention to sign the agency receipt agreement of the designated cryptocurrency exchanges.
In addition to ensuring that refunds are made securely, discussions regarding refund procedures between the rehabilitation administrator and exchanges must also be completed.
The impact of creditor repayments on the price of crypto assets
"Mt. Gox moved 47,228 BTC, signaling the start of its refund process, which caused some fear in the market due to the large liquidation potential...
With this, there has been an increase in bitcoin selling pressure and the broader crypto market capitalization after Mt. Gox announced last month its intention to begin payments in early July.
Bitcoin fell to $53,600, its lowest level in five months. The freefall led to the liquidation of more than $580 million in bullish bets. The world's biggest digital asset remained below $55,000 mid-morning in Europe, according to data from CoinDesk. It started the week at close to US$63,000, reaching US$53,550 on July 5th, according to the Bitstamp brokerage index.
Final considerations
Despite fears of mass liquidations, it is important to note, however, that despite these concerns, the long-term impact on the crypto market may be less severe as the sector gradually absorbs selling pressure.
Some customers may have to wait 60 to 90 days to receive their payments.
Add to this the fact that such deadlines are directly related to the number of transfers to be processed, and that each broker has a slightly different internal policy for crediting refunds to creditors.
