The Mt. Gox brouhaha continues with a report alleging that the exchange’s chief executive, Mark Karpeles, used customer funds to cover the exchange’s growing expenses. The report is based on interviews with current and former employees who told Reuters about concerns that money entrusted to the exchange was being used to pay for rent, a robot, a 3-D printer, and a “souped-up, racing version of the Honda Civic imported from Britain” for Karpeles’ own use.
These concerns were first raised in 2012, when a group of former employees met with Karpeles to discuss their fears that Mt. Gox was spending more money than it was bringing in. Karpeles is said to have denied those claims without providing any evidence to support his defense. (He was the only person at the meeting with access to Mt. Gox’s bank accounts and financial info.) Now, as slighted consumers try to decide if Mt. Gox’s problems were caused by incompetence or something more sinister, these two-year-old worries have come back to haunt the exchange.
Reactions from around the Web
CoinDesk notes that this report matches previous complaints about Karpeles:
It fits with other unofficial reports of a general malaise in the office and personal dissatisfaction with Karpeles, who employees have claimed paid little attention to Mt. Gox’s exchange business and an excessive amount on side projects like the company’s planned Bitcoin Cafe and its transaction processing system.
Legally, Mt. Gox was under no obligation to release any financial details in the time it operated, since it was a privately-held company 88% owned by Karpeles.
Independent.ie highlights the problem with trusting Mt. Gox with any kind of money:
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.
Pando weighs in
Tim Worstall wrote about Mt. Gox’s lackadaisical business practices after it “found” 200,000 bitcoins in a forgotten wallet earlier this month:
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.
Michael Carney wrote about allegations that the Bitcoin Foundation, a group that often serves as the cryptocurrency’s mouthpiece, is led by corrupt individuals seeking personal profit:
The Foundation has been a central point of communication for the media and key regulators, including Congress and the New York Department of Financial Services, as they seek to understand and react to this increasingly mainstream new financial technology. In that way, the Foundation holds immense power to impact all those who are betting their time, money, and careers on the crypto-currency revolution.
The crypto-currency community is still grappling with the questions of how to present a unified and representative voice for what is still a nascent and highly distributed industry. But while there remain more questions than answers about the inner-workings of the Bitcoin Foundation, it’s clear the time for ignoring questions about its leadership has passed. Transparency and decisive action are badly needed.
That supports an earlier argument Carney made about Bitcoin’s trust problems:
In many ways this type of transparency and such a solitary leader are at odds with bitcoin’s foundational tenets: it was created as a decentralized and distributed system meant to remove the need for trust between parties. Rabid libertarians and cyberpunks may be ok with such a system, but average Joes, not to mention the regulators intent on protecting them, are not.
The bitcoin protocol solves a real problem by allowing digital transactions to be completed outside of the costly and cumbersome existing financial infrastructure, but for the value of this solution to be realized, people have to use it. Bitcoin may have emerged as an anti-establishment financial instrument, but for it to survive and more importantly fulfill its lofty potential, it will need to shed much of its early ideology. Trust is key, and trust does not grow in the shadows.
Mt. Gox’s unraveling doesn’t need to be the end of bitcoin, but it needs to be the end of its innocence.