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 The question of how Mt. Gox handled other people's money — the issue
raised by staff in the showdown with Karpeles in early 2012 — remains crucial to unraveling a multi-million dollar mystery under
examination by authorities in Japan.
A bankruptcy administrator and police are seeking to determine how a
Tokyo start-up that shot from obscurity to dominate global trade in
bitcoin managed to lose more than $27 million in old-fashioned cash
held in a bank as well as bitcoins worth close to $450 million at
today's prices.
The still-unresolved issue has thrown a spotlight on how Mt. Gox
functioned as a hybrid between an online brokerage and an exchange.
Essentially, the more than 1 million traders who used Mt. Gox at its
peak had entrusted a 3-year-old firm to hold their money safely
until they decided to cash out.
A court-appointed bankruptcy administrator on Friday said an initial
examination of Mt. Gox — key to determining whether Mt. Gox's users
will be able to recover some of what they had on deposit with the
exchange — would not be complete until May, citing the involvement
of authorities in the case.
GROWING STRAINS
In interviews with Reuters, current and former employees at Mt. Gox
described the strains that emerged over the handling of customer
money just as the firm was gearing up for expansion and bitcoin was
edging out of the shadows as an investment and a means of online
settlement.
By early 2012, a small group of Mt. Gox employees, all of whom
worked on one-year contracts, began to worry that customer funds had
been diverted to cover operating costs that they estimated to be
rising. Those costs included rent in a Tokyo high-rise that also
housed offices for Hulu and Google, high-tech gadgets such as a
robot and a 3-D printer and a souped-up, racing version of the Honda
Civic imported from Britain for Karpeles, people who have reviewed
expenses said.
Unlike Karpeles, the employees say they did not have access to the
financial records of Mt. Gox. They asked for a formal meeting with
the then-26-year-old Karpeles in early 2012, those involved said,
and asked him to respond to their estimate that Mt. Gox was spending
more than it was taking in. They were also concerned that company
expenses were being paid from the same bank account used for
customer deposits.
Karpeles told the group that customer money was not being used to
fund the business, but declined to provide details on how the
business had covered any loss. The meeting broke off after about an
hour, those who participated said.
Several of the staff say they left the inconclusive meeting
frustrated that Karpeles would not share proof that client deposits
had been protected. For his part, Karpeles believed he had thwarted
a challenge to his leadership by staff who had no right to see the
books of a firm he owned and was funding, a person familiar with his
thinking said.
Mt. Gox referred questions to its lawyers who had no immediate
comment.
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The former Mt. Gox employees who spoke to Reuters asked not to be
named because of potential legal complications. Tokyo police have
taken evidence from Mt. Gox in recent days as part of an early-stage
inquiry into what the company has described as possible theft.
It is unclear how Japanese law would treat any such diversion of
customer funds as Mt. Gox was not regulated as a financial
institution. As a private firm in which Karpeles held an 88 percent
stake with no declared debt, Mt. Gox was under no obligation to
share any details on its finances.
ACCOUNTING
Mt. Gox said in its February 28 bankruptcy filing that hackers may
have exploited what it called "a bug in the bitcoin system" to steal
virtual currency from the exchange. It has not offered an
explanation for the missing $27 million in cash.
By 2012, from its offices in Tokyo's Shibuya neighborhood, Mt. Gox
was handling at least $14 million in bitcoin trades per month,
according to its estimates — equivalent to almost 90 percent of
global trade in the digital currency at the time.
Mt. Gox's only revenue came from a transaction fee initially set at
0.6 percent of trades and later discounted for big transactions,
according to the company. Daily cash revenue for the exchange was
just over $1,500, according to figures it posted on its website in
August 2012 in a bid to reassure its traders that it was solvent.
The company's accounting was complicated by it recording some
revenue in bitcoin, which it used to cover some expenses, such as
buying computer gear, a person who reviewed those transactions said.
By April 2013, up to $20 million was flowing into the exchange every
day, with $300,000 being cashed out, Karpeles told Reuters in an
interview then.
Karpeles was the only person at Mt. Gox who had access to the bank
accounts, and each withdrawal request was handled manually, slowing
the process, three former employees said.
In its bankruptcy filing Mt. Gox did not list what remained in its
bank accounts, including Mizuho Bank, which had been its main bank
in Japan. It said it owed 1.3 million bitcoin traders $55 million
based on deposits it had taken.
(Additional reporting by Taro Fuse, Ritsuko Ando and Antoni
Slodkowski; editing by Kevin Krolicki and Ian Geoghegan)
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