Bitcoin world shaken as ramifications of Mt. Gox demise mount

5 March, 2014

The bitcoin world was recently shaken to its core following the shutdown of the Mt. Gox website and the company's subsequent bankruptcy filing.

Once the most prominent bitcoin exchanges in the world, Mt. Gox has battled technological problems for months. The Japan-based exchange first opened in 2010 following on the heels of the virtual currencies release to the public. Almost overnight, Mt. Gox gained notoriety as the most popular exchange for buying and selling bitcoins. Since then, the exchange has experienced a number of technological issues.

The first rumblings of future problems began as early as April 2013 when Mt. Gox temporarily suspended trading. The site reopened the following day but once again put a halt on withdrawals just a few months later. Although the company announced in July that they had once again resumed withdrawals, a statement was issued just a few weeks later announcing that the exchange had incurred significant losses due to deposits that had never actually cleared.

Meanwhile, the exchange was facing an onslaught of legal issues. In May, Mt. Gox had been slapped with a multi-million dollar lawsuit by CoinLab for breach of contract. Eventually, the two firms worked out an agreement; however, Mt. Gox was once again hit hard when the US Department of Homeland Security seized millions of dollars from the exchange's payment processor for lack of a money services business license.

In November, it was reported that numerous customers were experiencing weeks-long delays in being able to withdraw funds from their Mt. Gox accounts. Complaints from customers regarding the delays continued to mount throughout the winter and had reached the thousands by February. On February 7th, the firm halted customer withdrawals, citing a flaw contained in the basic bitcoin code. Customers were reassured that the company was working to mitigate the problem.

In all fairness, Mt. Gox was hardly the only exchange to be besieged by similar problems. Even so, other exchanges eventually came back online while Mt. Gox never actually reopened. A week later, other exchanges were fully operational, but withdrawals were still halted at Mt. Gox. Customers grew increasingly frustrated as CEO Mark Karpeles refused to comment or provide a date on which withdrawals could be expected to resume.

Within just a few days, Karpeles resigned as CEO. Within hours, all of the site's Twitter posts were removed. All trading on the exchange was suspended the following day with the site going dark within hours. The Mt. Gox website finally came back online; however, the only reassurance users received was a statement indicating that the site had been closed to protect them.

Matters worsened when the exchange released a statement reporting that as many as 750,000 BTC belonging to users may have been stolen as a result of a significant theft operation. Mt. Gox further asserted that it had lost up to 100,000 of its own BTC. The exchange speculated that the theft might have spanned a period of several years. Representing approximately 6 percent of the total number of bitcoins currently in circulation, the missing currency immediately set off alarms in the bitcoin world.

Once Mt. Gox went completely offline, prosecutors in both Japan as well as the United States opened investigations into the exchange. At the same time, regulators in the U.S. began exploring ways in which oversight of virtual currencies could be increased. While users anxiously awaited any type of news from the site regarding reopening, others took to the streets in protest. When many traders realized they were unable to withdraw their bitcoin from the exchange, they began selling it in an effort to withdraw funds in fiat currency.

Eventually, Mt. Gox filed for bankruptcy claiming a total amount of debt beyond assets of $26.4 million. Still more bad news was to come for the now defunct exchange when a U.S. based customer sued Mt. Gox just hours after it filed for bankruptcy.

While the virtual currency had at one time topped $1,000, values quickly began to decline and even fell below $100 on a major exchange. For the moment, former customers of the exchange were left with a litany of questions, including whether the company was actually using incoming funds in order to pay outgoing funds and why Mt. Gox's activities remained shrouded in mystery regardless of a clamor from loyal customers for increased transparency. Despite the fact that many of the site's customers are based in the U.S., regulators there will not be able to offer any assistance in helping them to reclaim their lost funds. Due to the fact that Mt. Gox is based in Japan, the exchange simply is not subjected to the same strict controls of American based firms. FDIC also will not kick in for the same reason.


Mt. Gox statement in Japanese and English.