Under the laws of Japan, owners of “property” or “things” being held by a bankrupt entity are entitled to get that property directly back, without entering into the bankruptcy system and sharing that property with creditors. This is called the Right of Segregation, meaning that the property should not be mixed with the bankruptcy estate.

In the MtGox bankruptcy the bitcoins were not returned to the owners as property should be, so in 2015 there was a lawsuit to get the bitcoins given back to the depositors. The court refused on the grounds that it claimed that bitcoins are not tangible therefore could not be ownable and considered as property. This is the reason why our bitcoins are trapped in this bankruptcy.
The Financial Services Authority in Japan, a government organisation, has since classified bitcoins as property. This is certainly very interesting and we’re looking further into this at the moment.

This seems like a serious flaw in the legal system. For example, any company or person in Japan holding the keys to certain assets such as investments, could surely push themselves into bankruptcy and pocket any appreciation in value – effectively taking over the investment benefits for themselves.

The Japanese government has already amended some laws to modernise the system to take account of cryptocurrencies in the wake of MtGox. They did it possibly to demonstrate that the MtGox disaster was being addressed (though they failed to address the most important issue, and there will be an article about that at some point).
It’s expected that more laws will be updated too, such as the Banking Act. Perhaps there could be scope for updating laws to allow digital assets such as bitcoins to be ownable property. That could be one possible route for ending the bankruptcy without giving the bitcoins to the shareholders.

Quick summary of the problem – our bitcoins were valued by the trustee at approximately $483 at the start of the bankruptcy but are now worth an order of magnitude more. This means that the MtGox administrators can sell our 200,000 bitcoins, pay us a fraction of the money from the sale, and regard our claims as having been paid in full. The rest of our money may go to the parent company Tibanne, meaning the Tibanne shareholders Mark Karpeles and Jed McCaleb would be the beneficiaries. Karpeles claims he doesn’t want the money because of the personal lawsuits it would attract, but says has no power over the process.

The lawyers were initially upbeat about the prospects of the creditors receiving the full value from their sold 200k bitcoins. But after more investigation their advice is now that it looks like the bitcoin creditors could be paid only the original valuation amount at around $483 per bitcoin, and the value above that would be passed into the company liquidation. Liquidation is performed under corporate law rather than bankruptcy law, and the remaining money in the company would go to the shareholders. They don’t currently know of a way to avoid this situation. This is not good news.

Please note that the rest of this post is my personal opinion and not necessarily that of the lawyers.

The thoughts and plans of the bankruptcy trustee are as yet unknown. He may be able to perform actions which can change this. Give his stature and the uniqueness of a bitcoin bankruptcy, his suggestions hold a deep influence over the bankruptcy court. They must always comply with the letter of the law, but laws are often not clear-cut when applied to particular contexts – especially one as unprecedented as MtGox. And so there could be scope for either movement within the bounds of the law or for varying interpretations of the law.
The trustee’s responsibility is to maximise return to creditors in a manner which is fair and in the interests of justice. If the creditors’ money passed to the shareholders it would be neither fair nor in the interests of justice. The question is how able and willing he is to achieve this within the constraints of the law.

The lawyers have advised that the best way to discuss this situation with the trustee is to ask at the upcoming creditor meeting on 27th September. I’ll be at the meeting to ask that and other questions, and will be providing a report here.
Having been to these creditor meetings before, I expect we won’t get a significant answer on this. The meaty questions are rarely answered. Creditors come out of that meeting looking about as satisfied as a Bitcoin Core member who’s wife just sold all his bitcoins for BCH.

If we don’t get a resoundingly positive and clear answer at the meeting, I’ll regard this bankruptcy and our money as being in a critical state of emergency. At that point I think it should be a major concern for everyone who wants their bitcoins back.
I’ve been making plans for if this happens. I’ll be spending at least the next 2 months working on this full-time and longer if necessary.
For what it’s worth I believe the situation can be resolved, but it may only be possible if we are all willing to push hard enough for it.
Let’s see what happens at the creditors’ meeting.

As mentioned previously, I hired a law firm in Tokyo to help out with some issues with the bankruptcy.
They have been asked to look into 5 things so far:

1. Sorting out who will be the beneficiary of the creditors’ 200,000 bitcoins, due to the legal technicality of MtGox now being solvent.
2. Looking at options for speeding up the bankruptcy process, in particular finding out if there are any options in managing the Coinlab case.
3. Looking into ways of creditors being represented as a group in order to have a louder voice.
4. Increasing the transparency of the bankruptcy process.
5. Trying to reserve seats for creditors at the Karpeles trial so we know what’s happening in the trial.

1. and 2. are covered over the next 3 articles because they’re a bit lengthy for one post.
3. This will be covered in a future post.
4. If the trustee is opaque about much of the state of the bankruptcy there’s not a lot which can be done to force things. In theory creditors should be given important information about the progress of the bankruptcy, but only if it is not deemed to be against the interests of the creditors for the information to be released. Requests could be made to the trustee for more transparency but it seems unlikely this would have much effect. Complaints could be made to the court but if the trustee claims the secrecy is in the interests of creditors then the court would be likely to rule in his favour. However, it could be possible to apply some gentle pressure and that’s something I’m working towards.
5. We weren’t able to secure any creditor seats in the Karpeles trial – there was a lot of talking but the prosecutor didn’t want to accept requests from an individual creditor because it could be seen as special treatment. I still managed to get into the trial but it was difficult, and my interpreter didn’t get in on day 1. Getting seats in the future will also be problematic but I’m trying to arrange something.

Today’s big news is that Russian national Alexander Vinnik was arrested in Greece for alleged laundering of $4bn of money which included most of the lost MtGox bitcoins. The Greek police said that he ran a huge criminal enterprise and they claim that a specific website, believed to be the popular bitcoin exchange BTC-e, is a major part of this enterprise. The US authorities are seeking to extradite him.

The MtGox coins were sent to various exchanges for laundering, but most notably around half went to BTC-e. Some of those BTC-e coins were said to have been apparently stored directly by administrators of BTC-e, implicating the exchange in possible collusion.
Btc-e has now gone offline, and the fate of the money held in that exchange is unknown.

For more details of how this relates to MtGox, please see Kim Nilsson’s blog post on this. Kim has worked hard for years uncovering what happened to the coins but has had to keep much of it quiet until now to avoid disturbing any official investigation.

What does this tell us?

This confirms that the bulk of the missing bitcoins at MtGox were taken out of the exchange by an individual or small group over a period of time from 2011-2013, and that the money was subsequently laundered. The identity of the alleged launderer of that money is known, and there are strong alleged links to the BTC-e exchange. It appears that the launderer may actually be the operator of BTC-e. It now seems that the MtGox theft was in some way linked to a wider network of thefts from various exchanges – at least in how the money was laundered.

What this does not tell us

Vinnik is being accused of being the launderer, not the thief who took the money in the first place. The relationship between the launderer and the thief is at the moment unknown. This is the uncovering of a giant stepping-stone in the story but where that stone leads is still not quite certain.

Does this mean Karpeles did not steal the MtGox coins? Will it affect the trial?

Karpeles is on trial for embezzlement and for the large-scale trading of non-existent assets. He is not on trial for stealing the bulk of the MtGox bitcoins because there is not enough evidence for such a case. This new information should not affect the trial, and it’s almost certain that the prosecutors had this information before the start of the trial.

Assuming the laundering allegations are true, there is still an unknown link between Vinnik and MtGox. That link is the thief who supposedly compromised the hot wallet and arranged for the bitcoins to be drained over time.
It could have been Vinnik himself, it could have been Karpeles, or it could have been someone different. Perhaps Vinnik was a part of a small gang which hacked exchanges.
One big question which remains is how Karpeles could not have noticed the draining of such a massive amount of bicoins over a period of years until the exchange was almost bled dry, and also how security could have been so lax over a period of years.
I can’t imagine a situation where an exchange owner would avoid doing a quick check on exchange-held assets for a period of years, especially if that person was actively transferring them between bitcoins and USD on an industrial scale.

Might MtGox creditors see any money back if funds are seized?

It’s too early to tell based on limited information, but I think it’s pretty unlikely that we will see anything from this – and even if it did happen it would probably be years in the future.

Will there be any other implications?

I have my doubts that the $4 billion sum is a realistic figure, more likely it’s vastly inflated for impact using some carefully-picked method of measuring it. But my thoughts are that the US government could use this as the opening justification for a regulation-war with the crypto industry, especially if they manage to get hold of BTC-e’s internal records.
We could see US-led pushes for cryptocurrency regulation and prosecutions around the world, intended to help keep tabs on the flow of crypto money. It could end up being a pivotal point for the industry and for the users.

What next?

If Vinnik is extradited to the US, he’ll have the book thrown at him. A very, very heavy book thrown by the Statue of Liberty herself. The US does not like anyone who facilitates money laundering or anyone even remotely connected to such a thing. If the allegations are true then he’s likely to know the identity of the thief and other people in the network and we might see a plea deal happening which sheds more light on things.
We might learn about all sorts of related people and exchange hacks over the past few years. If someone is writing a movie script about MtGox, it’s now back to the drawing board to drink a few very long cups of tea and possibly change the focus of the story.

 

Thoughts go out to the BTC-e customers who must right now be panicking about their money.

To receive updates during the trial days, please subscribe to my twitter feed @The_K_meister with the button on the right.

日本語は英語の後にあります

The Karpeles trial will begin this coming week, but it will only last for two days in the first instance. There is likely to be a long break after that – perhaps for months.
It will be held on Tuesday 11th July at 10am JST at the Tokyo District Court, and then on Thursday 13th July at the same time.
We are not expecting anything from the realms of excitement to be visiting the courtroom this week. It will be a big media field day of course and many people will not manage to get through the door, but the trial itself is likely to consist of some standard reading out of charges and a lot of formalities. Formal advice from the court is that anyone with those glasses with eyeballs painted on the front should bring them along. If anybody makes a loud noise such as a badly-managed sneeze, expect to see 60 journalists removing their glasses in a startled manner.

As for events here at mtgoxprotest.com HQ in sunny Tokyo, a lot of activity has been going on in the past 1-2 weeks. I’ve been working almost full-time to organise various things. We now have legal support from one of the top 10 Japanese law firms, who are advising on aspects of the bankruptcy as well as other things. We’re getting the site translated into Japanese and fielding a lot of media enquiries. We tried hard to get reserved seats for creditors in the trial but it looks like this is not likely to be possible. There are a few other things we are looking into and hope to have more to report soon.

(Disclaimer – the opinions on mtgoxprotest.com will not necessarily be the same as those of the law firm.)

カルプレス被告の初公判がいよいよ今週に開かれるが、今回は二日だけの開廷となる。その後はしばらく沈黙が続く模様だー数ヶ月間にわたる可能性もあるだろう。 初公判は東京地方裁判所にて7月11日火曜日日本時間午前10時に開廷、続けて7月13日木曜日、同裁判所同時間にての開廷が予定されている。 今週の裁判が興奮の渦に巻き込まれることはないだろうと予測される。もちろんメディアにとっては大きな事件に違いなく、また限られた人数しかその門をくぐることはできないが、今回の裁判自体は起訴状朗読など、形式的なやりとりが主となるだろう。裁判所は、参加者に目玉が書かれた眼鏡を持参するよう推奨している。もしそこで誰かが大きないびきなどかけば、60人ものジャーナリストがいっせいに眼鏡を外して目を丸くするだろう。 一方、mtgoxprotest.com本部の近況についてだが、ここ1、2週間、様々な出来事が進行中だ。ほとんどフルタイムでそれぞれの仕事に注力している。日本の法律事務所からは法的サポートを得られることとなり、倒産方面やその他様々な助言を得ている。当サイトの日本語翻訳も進行中だ。多数メディアから寄せられる問い合わせにも精力的に応じている。また、今回の裁判で債権者として座席を確保しようと懸命に働きかけていたが、どうやら実現の可能性は低そうだ。この他にまだ進行中の案件がいくつかあるが、もうすぐ詳細を報告できるだろう。

免責事項：当サイトにおける意見・見解は個人もしくはmtgoxprotest.comによるもので、当該法律事務所のものとは必ずしも一致しません。

過去の記事の日本語翻訳版は準備中です。日本語でお読みになりたい場合、しばらくしてからまたアクセスしてくださいますようお願いします。

It doesn’t seem to be very widely known for some reason, but the Karpeles criminal trial has been set for 11th July 2017 at the Tokyo District Court. Yes, that’s 2 weeks from now! There has been a lot of confusion over why the charges which have been brought so far only seem to cover a subset of the suspected illegal activities at MtGox. For example, there are no charges of fraud or of violation of the Banking Act. Now that the trial date has been set, we can assume there are no other charges intended to be brought. This is a very significant point and we’ll be covering it in more detail later.

I’ll be attending the trial at least for the beginning. It would be good to see other creditors turn up. It will of course be in Japanese and I will be taking a lawyer/translator to help.

The courtroom is likely to be full up. There will be a lottery for places held on the day if too many people turn up. Do creditors have a right to a priority place? We have been advised by the prosecutor that individual creditors will not qualify for reserved places, but if they make a group request via a lawyer then it might be possible. Therefore if anyone wishes to attend please contact us and we will try to arrange it.

There will be a lot of people wanting to know what happens at the trial. So far, everything related to the investigation and charges has been almost completely opaque to the outside world. In the interests of justice we believe it’s absolutely vital that the trial is as transparent and accessible as possible. Therefore we have a plan to appoint someone to go to the court to monitor it on a permanent basis. More on this later.

Hello and welcome back. Mtgoxprotest.com has been reconstructed and reopened! The last site went down in flames after being hacked and we had to use archives to piece it back together. We’ve lost the original comments but have all the articles. This one has a more secure hosting.

It’s June 2017 and there’s a lot of confusion and teeth-grinding right now about the MtGox situation in general. As time goes on, our money seems to be slipping further and further away and our hopes of obtaining real justice are looking very hazy.

To address the elephant in the room, I am sorry that I have been silent for a long time. I have free time right now and I promise to help in any way reasonably possible.

A lot has transpired since the last post at the end of 2014. In time we hope to address any important issues which might still be outstanding.

I’ll be landing in Tokyo this week and I’m currently in the process of sourcing a major law firm there to advise on some of the ongoing issues.

Some of the main problems are:

1) Due to a legal technicality, the assets of MtGox now exceed the level of creditor debt which has been officially recognised. This means that the proceeds from the sale of our remaining 200k bitcoins (now worth $500m) will be split and anything over a certain amount will by default go to the shareholders of MtGox, mainly Mark Karpeles. Therefore as the price of bitcoin rises, we lose more and more of their value.

2) The ever-expanding bankruptcy length.

3) The incredible lack of transparency in both the bankruptcy case and the criminal case against Mark Karpeles.

There are more, but hey let’s keep this from being too controversial on a first date.

Kolin Burges

50 angry crypto-nerds, an army of lawyers, boiling hot room… Yes it’s the MtGox Creditors’ meeting again!

Much less busy than last time round though, and no media waiting outside before the start. The number of attendees was only 40%  that of the last meeting. There were virtually no foreigners there (non-Japanese) except the Tokyo-based regulars.

The meeting itself went very much like the last one except shorter.

With regards to the missing bitcoins, we were told that there is missing customer transaction data and this is blocking the investigation. Deloitte has been doing the investigation and they’re currently not sure whether they can solve the mystery of the bitcoins because of the missing data. It seems highly unlikely that the data went missing by accident. As to who might have deleted it, I’ll leave that for your imagination to ponder.

The main news was that the bitcoin exchange Kraken is now about to begin helping with the investigation, and also helping with the proof of claims and bankruptcy distribution. I’ll get back to that later. If you lose interest in this post before the end, skip to the last couple of paragraphs before leaving.

Other than this, it was very disappointing and more of the same. It doesn’t seem that any real progress has been made in the past 4 months – at least nothing which has been reported. As there was little progress in the previous 4 months, that means the whole process looks like it’s just stumbled drunkenly over the starting line. There was the same secrecy as there was in the last meeting. Secrecy is sprinkled over everything like an artificial sweetener to hide things we’re not going to like, to cover up poor progress, and to avoid answering awkward questions etc. The meetings are supposed to be about giving out information but the feeling is they’re about conforming to the requirement for a meeting but  with the aim being to give away as little as possible.

Karpeles and his companies are seemingly not giving the $13 million back that they took from MtGox. Karpeles has disagreed that Tibanne owes $7 million, and he also claims it wasn’t a loan but it “was not intended to be repaid”. What this means is unclear. If it was a genuine payment for services, it would never have been classed as a loan. I’d say that after accounts were reconciled a few months ago there was $7 million transferred to Tibanne which was inexplicable so it was classed as a loan. Now Karpeles effectively wants that amount to be “forgotten” about! After pressure from Kobayashi to repay he now says he will try to repay it after he raises the funds. He doesn’t really have much option other than to say this, but he almost certainly doesn’t intend to actually do it. Tibanne has a bitcoin’s chance in MtGox of magically raising $7 million from nowhere. And if Karpeles knew a way to raise $7m you can bet he would be doing it in a way whereby he wouldn’t have to pay it back to us.

His company Shade 3D which owes $3m has provided a repayment plan which Kobayashi didn’t accept, in other words Karpeles would not agree to pay it back in any acceptable way. He may have said something like they’d pay back a tiny sum each year. If they don’t produce a better plan they will be forced into bankruptcy by Kobayashi. That’s the realistic outcome, but the money has probably already gone.

The Bitcoin Cafe owes around $550,000 but there is a dispute with the amount and now a petition to bankrupt the company has been filed. Basically it’s not likely any significant sum of money is recoverable anyway.

Karpeles has a personal “loan” of around $1.2 million from MtGox, and he has not provided a replayment plan. In other words it doesn’t seem like he’s planning to pay it back. So Kobayashi will take legal action if this continues. How this loan came about is unknown. I’d venture he’s been gleefully throwing money around between business and personal accounts and god knows where else, and when the music stopped this is the shortfall which was not accounted for in his other company bank accounts.

Kobayashi was asked to give details of the $100,000 per month payments to Karpeles / Tibanne, and put them on the internet. He said he would take the point into consideration. He was pressed again on it but wouldn’t give any commitment. I can’t think of a valid reason for this to be hidden from us, and apparently neither can Kobayashi.

I asked in possibly the worst Japanese ever why Karpeles/Tibanne was being commissioned vast sums to help when they had already proven their incompetence, and why they couldn’t bring in an expert instead. Kobayashi said they don’t know where the information is so even if they had an expert they would be stuck. I think that basically means we’re being held to ransom because the data is in a mess. I would say Karpeles knows the information is needed to get through the bankruptcy process, so he can squeeze whatever ridiculous sums he likes for it. Any pretence that he has any sorrow for the creditors’ loss and wants to pay us back is now looking about as genuine as a goxcoin.

Kobayashi also said they don’t think it’s weird to be getting help from Karpeles. I’d say that given the allegations of massive fraud, it is rather weird! Imagine Madoff doing the investigation into his own ponzi scheme. The fact is that the data should have been signed over to a 3rd party at the very beginning, around the same time Karpeles should have been fitted with a shiny new pair of handcuffs.

Karpeles was asked why he wouldn’t give the money back which he “borrowed”. He said he wouldn’t answer. Asked why he wouldn’t answer, he said he didn’t want to answer.

Kobayashi got a grilling on why he was accepting that Tibanne and MtGox were separate entities. The point was made that MtGox never really existed as a separate company because it had no employees, and basically that it was just an artificial extension of Tibanne. Kobayashi said that they regard them as separate companies and we might think it’s illegal to keep the companies separate but it isn’t. Very poor answer.

After the creditors meeting I went to the press conference for the Kraken deal. It turned out that Kraken is not just giving some consulting help but is actually being handed over some serious responsibility. The fact that this press conference was even set up showed this. Their task is to try to track the bitcoins, but also to help with bankruptcy payouts and proof of claims.

Deloitte is currently handling the bitcoin tracing and Kraken is meeting them tomorrow to discuss the situation. Maybe the task will eventually get fully handed over to Kraken or maybe they will work together somehow.

I ended up going for dinner with Jesse Powell the CEO of Kraken and his team, along with Daniel Kelman from Bitocean, Roger Ver (who did a runner after we sat down), J Maurice aka Wiz, and some others with less rap-sounding names.

I was very impressed with Jesse’s attitude, he seems very down-to-earth and genuine (and the others at Kraken also). I asked him if it would be made public how much they were getting paid, but it turns out Kraken actually effectively paid MtGox $300,000 for the privelege of helping them! This is a world away from how things have been going so far – which is MtGox throwing around the largest sums of cash possible at people who don’t necessarily seem a natural fit for the task, and hoping everything will somehow work out. We now have quite a trusted name in the bitcoin industry, and he has said he is willing to be open with the investigation in terms of collaborating with others in the bitcoin world. But of course he can only be as open as Kobayashi allows him to be, and we don’t know yet what he will allow. 

Kraken have actually been talking with Kobayashi for 8 months now, giving occasional advice, and they’ve just got to the point of making a deal. They say they want to get the bitcoins returned ASAP, faster than has been planned.

Anyway I’ve got to get some sleep now. I’ve dedicated less space to the Kraken part than it deserved. If I have time tomorrow to add anything then I will. It’s a very positive and exciting development that they are now on board and that they seem to have a lot of control. So to sum up the meeting overall, I’d say it was bittersweet.