Bitcoins

I don’t think any of us thought that MtGox was particularly well managed but the more we find out the worse it all seems to get. For today they’ve announced that they’ve just found 200,000 Bitcoins that had slipped down the back of the couch. No, really, someone running an exchange, offering a safekeeping and conversion facility, managed to just lose in their own systems over $115,000,000 at today’s prices, and what was once worth $200,000,000. It was in an old wallet that they thought was empty you see:

MtGox Co., Ltd. had certain oldformat wallets which were used in the past and which, MtGox thought, no longer held any bitcoins. Following the application for commencement of a civil rehabilitation proceeding, these wallets were rescanned and their balance researched. On March 7, 2014, MtGox Co., Ltd. confirmed that an oldformat wallet which was used prior to June 2011 held a balance of approximately 200,000 BTC (199,999.99 BTC).

There’s two implications of this announcement. The first being that the organisation wasn’t, in fact, an organisation at all. It was a bunch of script kiddies having a lark. This isn’t, perhaps, the greatest of surprises to anyone who has been following the story.

The second is that MtGox has clearly been trading insolvently since June 2011. For those not entirely current on accounting law (and why should you be? This is a most, most, boring area) this is one of those no-nos that every entrepreneur is warned about. It’s OK to go bust: failure is how we learn. But don’t cross over into fraud and deception which is what insolvent trading is.

Think through what is being said here. They found these Bitcoin in an old wallet that was used before June 2011. And they’ve only just found them: therefore, between June 2011 and March 7 2014 they had a hole of 200,000 Bitcoin in their accounts. Yes, they were still there: but the management must have known that they didn’t have them for it to be even possible for them to have just found them. At which point the management should have stopped trading. Because with that 200,000 hole there’s no way that they could have met their accumulated financial obligations. This is what it means to trade insolvently. To pretend that you’ll be able to meet past, current and future financial obligations while knowing that you’ll not be able to do so.

It is nicely ironic that, given that the coins were there all along, MtGox wasn’t actually insolvent (not until the other problems happened). But that MtGox didn’t think the coins were there meant that they should have declared themselves insolvent.

In either UK or US legal jurisdictions, this is the sort of thing that can lead to jail time. The laws in Japan, where MtGox is based, are different, of course, there being no less than five different possible corporate bankruptcy processes. But the general thrust of the law is similar to US law, for the reason that the system was largely, after WWII, built that way, on top of the old German (or Continental) civil code.

It’s true that none of us particularly thought that MtGox was being well-managed, but this serves to emphasize why the Bitcoin environment is probably better off after their exit from it.

The full English language press release is below:

March 20, 2014
To everyone concerned
Mark Karpeles
Representative Director
MtGox Co., Ltd.
We inform you as follows with regard to the balance of bitcoins (BTC) held by MtGox Co., Ltd.

1. MtGox Co., Ltd. had certain oldformat wallets which were used in the past and which, MtGox thought, no longer held any bitcoins. Following the application for commencement of a civil rehabilitation proceeding, these wallets were rescanned and their balance researched. On March 7, 2014, MtGox Co., Ltd. confirmed that an oldformat wallet which was used prior to June 2011 held a balance of approximately 200,000 BTC (199,999.99 BTC). MtGox Co., Ltd. investigated the presence of these 200,000 BTC, immediately reported it to its counsels in the application for commencement of a civil rehabilitation proceedings (“counsels”). A hearing took place on March 8 where a detailed explanation of the situation was made to counsels. Immediately on Monday (March 10), counsels reported the existence of the 200,000 BTC to the Court and the Supervisor.

2. For security reasons, the 200,000 BTC which were at first on the 7th moved to online wallets
were moved between the 14th and the 15th to offline wallets. These bitcoin movements (including the change in the manner in which these bitcoins were stored) has been reported to the Court and the Supervisor by counsels. Further, the bitcoins held today by MtGox Co., Ltd. amount to a total of approximately 202,000 BTC, including the above 200,000 BTC and the approximately 2,000 BTC which existed prior to the application for commencement of a civil rehabilitation proceeding.

3. MtGox Co., Ltd. had previously reported about the disappearance of bitcoins which had triggered this application for commencement of a civil rehabilitation proceeding that MtGox Co., Ltd. had lost almost all of the approximately 850,000 bitcoins it held (approximately 750,000 BTC corresponding to the balance of bitcoins belonging from users as seen from transaction records as well as approximately 100,000 BTC belonging to MtGox). Taking into account the existence of the 200,000 BTC, the total number of bitcoins which have disappeared is therefore estimated to be approximately 650,000 BTC. (Please note that the reasons for their disappearance and the exact number of bitcoins which disappeared is still under investigation and that the above figures may still change depending on the results of the investigation.)