‘Trillion Dollar’ Mt. Gox Demise as Told by a Bitcoin Insider
(Bloomberg) -- In early 2013, Peter Vessenes was in his Seattle office working on a deal to obtain the North American customer operations of the world’s largest Bitcoin exchange at the time, Mt. Gox, when his phone rang.
“We had caller ID back in that era, believe it or not,” Vessenes said in an interview. “And my caller ID says ‘SEC Enforcement Division’ and I was like ‘oh s--t!’” The team working on the deal had already run into trouble getting a look at the books, and now the main U.S. securities regulator was asking him if he’d heard of the Tokyo-based exchange. The SEC was working on a enforcement action and wanted him to testify in the case.
“As soon as we heard Gox was in an SEC enforcement, I was pretty sure we were done,” Vessenes said.
He wasn’t wrong. The deal fell through and Mt. Gox imploded in scandal. It quickly went bankrupt, leaving behind a horde of creditors across the globe.
Eight years later, a major step in the bankruptcy proceedings that have ensnared Mt. Gox and its users after the market imploded in 2014 took place earlier this month. A deal, brokered in part by Vessenes, was announced to allow creditors to get some of their money back before the case is decided.
Many of the Bitcoin lost or stolen from Mt. Gox have since been found, and the Japanese bankruptcy trustee Nobuaki Kobayashi is working to reimburse creditors. CoinLab Inc., which Vessenes co-founded, is working with MGIFLP, a unit of Fortress Investment Group LLC, to allow creditors to consider an offer of as much as 90% of the remaining Bitcoin tied up in the bankruptcy.
Not all the Bitcoin held by Mt. Gox when it went bankrupt is available for recovery. For each digital token locked up in the bankruptcy that has a claim on it, the estate has only 0.23 coin to give out, according to a CoinLab spokesman. There are many more claims on Mt. Gox Bitcoin than the amount of the cryptocurrency held by the trust.
CoinLab has a $16 billion claim against Mt. Gox in the bankruptcy.
Yet as Bitcoin hit its all-time high of $41,981 on Jan. 8, the history of Mt. Gox seems even more important, as the loss of over 850,000 Bitcoin in 2014 was perhaps the closest the digital currency came to dying. It all started with Magic, the card playing game that had gone online to offer a way for users to trade its cards over the internet. That’s when in 2007 Jed McCaleb, a developer who’d created the file-sharing network eDonkey, bought the domain for Magic the Gathering Online Exchange, or Mt. Gox for short.
McCaleb’s attention turned to Bitcoin a few years later, after its creation in 2009. He realized the methods for buying and selling weren’t very good and decided to convert Mt. Gox into one of the first exchanges for the digital asset. In 2010, Vessenes contacted McCaleb about joining his effort to make Mt. Gox the world’s biggest Bitcoin market. After closing eDonkey, McCaleb had moved to Costa Rica to surf and to raise his family. While Vessenes wanted to do business with McCaleb, he also wanted to meet him in person first.
“I took maybe my most expensive plane ride” to Costa Rica, Vessenes said, referring to a flight that cost him 1,500 Bitcoin at the time, an airline ticket worth about $47.8 million at the current Bitcoin price.
After sleeping on the floor of McCaleb’s house on a futon, the two ended up not seeing eye-to-eye on Mt. Gox, and Vessenes hitchhiked the 200 miles back to the airport.
In 2011, McCaleb sold Mt. Gox to a Frenchman named Mark Karpeles. “He had to give me half of the first six months’ revenue then I continued to own 12% of it,” McCaleb said in an interview. McCaleb no longer has any stake in Mt. Gox.
Back in the U.S., Vessenes was still convinced that Mt. Gox was a once-in-a-lifetime investment. He’d co-founded CoinLab in 2012 and counted early Bitcoin pioneers such as Roger Ver and Barry Silbert as investors. Ver actually lived just down the street from Mt. Gox in Tokyo, and in the summer of 2012 CoinLab had a deal to buy Mt. Gox outright from Karpeles for about $10 million, Vessenes said.
“We were ready to go,” he said. Then “I got cold-shouldered.” The deal morphed into CoinLab taking over operations for Mt. Gox customers in the U.S., Canada and Mexico, yet Vessenes said his team weren’t given proper access to the books to ensure everything was as it should be at the exchange.
At this point, Mt. Gox was handling 80% of Bitcoin transactions in the world, he said. Soon after the deal was announced in 2013, CoinLab sued Mt. Gox for breaching its terms. About a year later, the loss or theft of the 850,000 Bitcoin on Mt. Gox was disclosed.
In 2019, the Tokyo District Court found Karpeles guilty of tampering with financial records and received a 2 1/2 year suspended sentence where he won’t serve jail time unless he commits another violation within four years.
“It could’ve been a trillion-dollar company,” Vessenes said. “It’s so sad.” The current $16 billion CoinLab claim against Mt. Gox is based on what the company thinks their portion of Mt. Gox would be worth if it had been managed well, he said.
The CoinLab lawsuit filed in 2013 is the one that continues to this day. Part of the reason for the years-long case is that it involves international jurisdictions. It took six months to serve Karpeles with the lawsuit, where the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents had to be employed, Vessenes said. It then took a year to arrange depositions, he said.
Vessenes, whose first purchases of Bitcoin on Mt. Gox were for about 5 cents, hasn’t soured on digital currency. “I really honestly think it’s day one,” he said. “The impact of crypto is still underplayed. It still isn’t given a fair shake at how transformative it is.”
He said there is room for many blockchains, and that he still values Bitcoin for its superior privacy protections compared to other blockchains that enable Ethereum, XRP or Polkadot. Resistance to government censorship “is critical, and that’s where the growth will be,” he said.
He’s currently working on a project to embed Bitcoin into bank notes, and other blockchain-based ideas.
“I’m interested in building some stuff,” he said.
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