Welcome back to the Deep Dive. We are doing something
a little different today. Usually we're looking
forward at the next big tech breakthrough or,
you know, the latest shift in the global economy.
Right. The future. But today we are getting into
a time machine. We are traveling back to a moment
that feels like ancient history in Internet years,
but... Well, it was really only a decade ago.
We are going back to the Wild West. And it really,
really was the Wild West. I mean, there were
no sheriffs, no rules, and the saloons were being
run by computer programmers who were just figuring
it out as they went along. We are talking about
a story that has everything. It's got magic trading
cards. It's got disappearing fortunes. It's got
federal agents seizing bank accounts. A total
collapse. A catastrophic collapse that didn't
just bankrupt a single company. It nearly killed
an entire industry in its crib. It's the foundational
myth of crypto. It is absolutely the Titanic
story for Bitcoin. If you were around in, say,
2013 or 2014, you remember exactly where you
were when the site just went dark. We are talking,
of course, about Matt Gox, and I think for a
lot of people entering the space now, maybe you've
got in during the 2021 Bull Run, or maybe you're
just casually interested, Matt Gox is just a
punchline. Yeah, it's a meme. It's a meme. You
hear people say, don't get doxxed, or they talk
about the MetGox trustee moving coins. But the
visceral reality of what this place was, I think
that's been lost. Completely. It's treated like
a footnote in a history book now. Yeah. But when
you actually dig into the source material, the
historical transaction logs, the legal filings
from Tokyo, the investigation reports, you realize
this wasn't just an exchange. No. For time, it
was the exchange. That is the first thing I want
to really hammer home for you. The scale. Because
I was reading through the background on this
and there is one statistic that just stops me
cold every single time. At its peak in late 2013
and early 2014, this single entity based in an
office building in Shibuya, Tokyo, was handling
over 70 percent of all Bitcoin transactions worldwide.
70 percent. Just let that sit for a second. It
is absolutely mind boggling. I mean, imagine
if the New York Stock Exchange handled 70 percent
of all stock trades on Earth. Every single trade
in London, Tokyo, Hong Kong, Frankfurt, all of
it funneling through one website. And then imagine
that website was run by like a couple of guys
who are really into anime and cats. And then
one day the screen just went black. That is essentially
what happened. The centralization rift was just
it was off the charts. If Gox sneezed, the entire
Bitcoin economy caught a cold. And when Gox died,
the economy went into full blown cardiac arrest.
And what makes this deep dive so fascinating
is that we aren't just going to say hackers stole
at the end. We are going to look at the why.
We're going to look at the how. Because the common
narrative is that it was this big singular heist.
Right. Like an Ocean's Eleven movie. Exactly.
But the documents show a much, much more complex
picture. It's a picture of mismanagement, of
technical debt that just piled up like dirty
laundry and a violent collision between a hobbyist
culture and serious professional financial crime.
It is the story of what happens when a hobby
project accidentally becomes the financial backbone
of a multibillion dollar asset class. So let's
start at the very beginning, because the name
itself, EmpGox. It doesn't sound very financial,
does it? It doesn't sound like the Bank of Tokyo
or Fidelity. No, not at all. It sounds like a
fantasy location, like something out of a Tolkien
novel, you know, Mount Gox. And that is because
it basically was the acronym. Please break it
down for us. What does MTGOX actually stand for?
It stands for Magic, the Gathering Online Exchange.
Magic. The Gathering. The card game. With wizards
and lightning bolts and goblins. That is the
one. I love this detail. It is my absolute favorite
part of the entire lore. It just... It sets the
stage so perfectly for the amateur hour that
was about to follow. It really does. To understand
the roots, you have to go all the way back to
late 2006. You have a programmer named Jed McCaleb.
Now, McCaleb is a legend in the crypto space
today. He later went on to found Ripple and Stellar.
A huge figure. A huge figure. Yeah. But back
in 2006, he was just a developer who played Magic
the Gathering. Specifically the online version,
right? There was a digital version of the game
where you could own and trade digital cards.
And McCaleb realized that... People needed a
better way to trade these cards. You know, like
they were stocks. If I have a rare black lotus
card and I want to sell it, I need a proper marketplace.
So he builds a stock market for fantasy cards.
Exactly. In January 2007, he buys the domain
mtgox .com. He launches a beta version later
that year. He runs it for about three months.
And then he just gets bored. Just like that.
He builds this whole thing and then just walks
away. Just like that. He moves on. He decides
it's not really worth his time. He actually repurposed
the domain in 2009 to advertise a totally different
indie card game he made called The Far Wilds.
So for a little while, if you went to MtGux .com,
you weren't seeing Bitcoin. You weren't even
seeing magic cards. You were seeing an ad for
a different strategy game. So the domain is just
sitting there in his portfolio. It's a digital
spare part. It sits dormant. Then fast forward
to July 2010. McCaleb is reading Slashdot. which
for our younger listeners was basically the Reddit
or hacker news of the tech world back then. Oh,
yeah. A huge deal. And he reads an article about
this new cryptographic currency called Bitcoin.
And Bitcoin in 2010. I mean, this is the era
where you could mine it on a generic laptop in
your dorm room. It was worth pennies. Less than
pennies, really. But McCaleb has a light bulb
moment. He looks at the Bitcoin community and
he realizes they have a massive, massive problem.
They have these coins. But they have no easy
way to trade them for regular fiat currency for
U .S. dollars. How were they even trading before
exchanges existed? It was primitive. I mean,
truly primitive. People were posting on forums
like Bitcoin Talk. Hey, I have 10 ,000 BPC. Send
me 50 bucks on PayPal and I'll send you the coins.
Yeah. It's completely trust based, incredibly
inefficient and just rife with scams. So, McCaleb,
thanks. Wait a minute. I have this exchange engine
code I wrote for trading cards and I have this
domain name lying around that already sounds
kind of financial if you don't think about it
too hard. Exactly. Mike Cox sounds vaguely like
a mountain or a gold reserve or something. So
on July 18, 2010, he launches the Bitcoin exchange
on that spare domain. It was a total improv move.
He didn't build a fortress for financial trading.
He repurposed a website meant for a card game.
Yeah. And that DNA, that sense of let's just
get it running and see what happens, haunted
the company forever. It's the classic startup
mentality. Move fast and break things. But usually.
You don't want to break the bank vault. Precisely.
And here is the real kicker. McCaleb doesn't
even stick around. He launches it. It starts
to grow. But by early 2011, he wants out again.
Why? I mean, did he see the writing on the wall?
Did you realize how big it was going to get?
It's hard to say. Maybe he just had other interests,
you know, developer ADHD. But in March 2011,
less than a year after launching it, he sells
the site. He sells it to a French developer named
Marc Karpelis, who is living in Japan. And McCaleb's
reason for selling is just it's so ironic in
hindsight. It is. I have the quote here. He basically
said to really make Matt Gox what it has the
potential to be would require more time than
I have right now. So he just handed over the
torch. He handed over what would become a billion
dollar headache because they didn't have time.
It's incredible. So enter Mark Karpalis. He takes
over in 2011. He moves the operations fully to
Tokyo and almost immediately the cracks start
to show. It didn't take long at all. We call
this period the first warning shot. June 2011.
This is a time where Bitcoin is moving from a
weird tech experiment to an actual asset with
some real value. And on June 13, the exchange
reports that about 25 ,000 Bitcoins were stolen
from 478 accounts. That's a significant breach
even back then. It was. At the time, Bitcoin
was trading around $17. So that's roughly $400
,000. It hurts. But for a growing tech company,
you can maybe swallow that loss. But the reputational
hit is the real problem. Yeah. The trust. The
reputational hit was bad. A user database was
leaked to Pastebin. But then, just a few days
later, things went from bad to apocalyptic. We're
talking about the famous flash crash of June
19, 2011. I have seen the charts for this. It
is legendary in trading circles. The price of
Bitcoin on Mt. Gox dropped to one cent, one single
penny. It's the vertical red line of death on
the chart, just straight down. How does that
even happen? How do you wipe out the entire value
of an asset in just a few minutes? It was a security
failure, plain and simple. A hacker allegedly
compromised the computer of a Mt. Gox auditor.
Not a random user, but someone with high -level
access. They got hold of credentials that allowed
them to control a massive amount of Bitcoin.
But they didn't just steal the coins and transfer
them out. Why crash the price? No, they wanted
to cause chaos. Or maybe they were trying to
manipulate the market to buy up cheap coins themselves
with other accounts. They used the exchange's
own trading engine to sell a huge chunk of coins
all at once. They placed a massive ask order
at any price. So they just flooded the market,
a supply shock. They dumped them. And because
the order book was so thin, remember, this is
2011. Liquidity isn't anything like it is today.
That one giant sell order ate through every single
buy order on the books. It ate the buy orders
at $15, at $10, at $5, all the way down to a
penny. That must have been terrifying for anyone
watching the charts. Imagine logging in and seeing
your entire portfolio is worth practically zero.
It was absolute unadulterated panic. But... To
their credit, Mt. Gox did roll back the trades.
They took the server offline, reverted the database
and essentially hit control Z on the entire disastrous
day. Which they could do because they were a
centralized exchange. Right. It goes completely
against the decentralized ethos of crypto. But
they had to do it to save the exchange. The price
corrected to its actual value pretty quickly.
But the damage was done. People were scared.
And to reassure everyone, Mark Karpal has performed
what's called a proof of funds, right? Yes, this
is where they move money on the blockchain just
to prove they still have it. It's like fanning
out a huge wad of cash to show you aren't broke.
What did they do? They moved 424 ,242 bitcoins
from cold storage offline wallets to a specific
AmpGox address. They broadcasted the transaction
ID to the whole world and said, look, we have
the coins. We are solvent. We are safe. That
is a massive amount of Bitcoin, 424 ,000 coins.
Even back then, that was a huge chunk of the
total supply. It was. And I want you to keep
that number in mind, because as this story progresses,
the question of do they actually have the coins?
becomes the only question that matters so they
survived the 2011 hack they survived the flash
crash but then later that same year there's another
incident that really highlights the technical
fragility we talked about the invalid address
error this one is less dramatic than a hacker
in a hoodie but in some ways it's maybe more
concerning from a technical standpoint oh it
is Definitely more indicative of the sloppy coding
standards at play. In October 2011, about two
dozen transactions appear on the blockchain that
sent a total of 2 ,609 Bitcoin to invalid addresses.
Okay, I want to unpack this. What does invalid
mean in this context? Is it like a typo in an
email address? It's a bit more complex than that.
So in Bitcoin, an address isn't just a random
string of characters. It's actually a script.
It's a set of instructions for the network. If
you mess up the construction of that address
in a very specific way, you are effectively sending
the money to a digital black hole. So a normal
bank, if I send money to an account number that
is missing a digit, the system will just say,
error, this account doesn't exist and the money
stays in my account. Exactly. The transaction
just bounces. But in Bitcoin, especially back
then. The protocol had some quirks. If you constructed
a transaction in a specific wrong way and the
nodes on the network accepted it, the coins were
moved to an address for which no private key
could ever possibly exist. So the coins are locked
in a box that has no key and no door forever.
They are burned, destroyed, gone forever from
the circulating supply. And Mint Gox's own software
allowed this to happen. Not only allowed it,
it created the problem. The analysis showed...
that while the standard Bitcoin client, the software
most people used, would have checked for this
error and said, no, I can't send this, Maddox
was running its own custom software. They rolled
their own code. They wrote their own backend
from scratch, likely in PHP, and they just...
They didn't include the basic sanity checks that
the standard open source client had. That is
that hobbyist DNA coming back to bite them. They
were reinventing the wheel, but they accidentally
made the wheel square. That is a perfect analogy.
It exposed a weakness in the Bitcoin protocol,
sure. But it mostly showed that MacOx's internal
systems weren't doing the basic quality assurance
you would expect from a financial institution
that was already handling millions of dollars.
It's like building a bank vault out of plywood.
It might look okay from a distance, but you definitely
don't want to lean on it. That's it exactly.
And this is all just 2011. They're already losing
money to hacks. They're losing money to bugs.
They've lost 2 ,600 coins here, 25 ,000 coins
there. But despite all of this, they just keep
growing. Which brings us to 2013. This is the
year Bitcoin really goes mainstream. And Mt.
Gox is the king. The absolute king of the North.
By April 2013, Mt. Gox is handling that 70 %
of the world's trades. In mid -May, they were
trading 150 ,000 bitcoins per day. The price
is just skyrocketing, hitting $100, then $200,
eventually over $1 ,000 by the end of the year.
It's a gold rush. And Mt. Gox is the shovel seller.
They should be making money hand over fist. They
were making massive revenue and trading fees,
no doubt. But with great volume... comes great
regulatory scrutiny. And this is where the walls
really start closing in. It's not just about
buggy code anymore. It's about the law. Specifically,
the U .S. government. See, Mt. Gox was dealing
with a lot of U .S. customers. Americans were
flocking to the site because it had the most
liquidity, the most action. But Mt. Gox hadn't
really dotted their eyes and crossed their lets
regarding U .S. financial regulations. But not
all. They were operating like a tech startup
in Tokyo, not a global bank. And in February
2013, they ran into serious trouble with a company
called Douala. Douala. That is a blast from the
past. I remember them. Right. Douala was an online
payment system, kind of like an early competitor
to PayPal or Venmo's business side. A lot of
U .S. users used it to send dollars to and from
their Mt. Gox accounts. But new anti -money laundering
requirements kicked in and Douala started restricting
some accounts. Mt. Gox transactions started getting
canceled left and right. And the customer service
response was just classic Mt. Gox chaos. I have
the quote here from an email they sent to users.
They said, please be advised that you are actually
not allowed to cancel any withdrawals. We have
never had this case before. We've never had this
case before. That should be the tagline for the
whole company. Just complete confusion. They
were making up as they went along. But then in
May 2013, it gets really serious. The Department
of Homeland Security, the DHS, enters the chat.
Yeah, that's never a good sign when the DHS shows
up with a warrant. The DHS issued a warrant to
seize money from Mt. Gox's U .S. subsidiary's
account with Jwala. They seized $2 .9 million.
On what grounds? What was the charge? Operating
as an unregistered money transmitter. They hadn't
registered with FinCEN, the Financial Crimes
Enforcement Network. The argument was basically,
if you are moving money for U .S. citizens, you
have to follow U .S. rules. Mt. Gox hadn't bothered
to do that. So the feds grabbed nearly $3 million.
Then they seized another $2 .1 million from a
Wells Fargo account. That's $5 million gone in
a flash. That has to hurt your cash flow. It
hurt cash flow for sure, but it hurt their banking
relationships more. The banks got spooked. Imagine
being Mizuho Bank, their main bank in Tokyo.
You see the U .S. Department of Homeland Security
seizing your clients' funds. You start thinking,
I do not want to be involved in this. Well, only
they're radioactive. Exactly. Mizuho Bank started
pressuring them to close their account. They
just didn't want the heat. By June of 2013, Mt.
Gox had to suspend all USD withdrawals. And this
is the beginning of the Hotel California phase
of Mt. Gox. You can check out anytime you like,
but you can never leave. Wired Magazine did a
big report in November 2013, essentially saying
Mt. Gox had been completely frozen out of the
U .S. banking system. Customers were waiting
weeks, then months, to get their cash out. If
you sold your Bitcoin on the platform, you got
these fiat numbers on a screen. But good luck
ever getting that into your real bank account.
And this created a really fascinating market
dynamic. Bitcoin on Mt. Gox started trading at
a premium and then later a discount. People were
trying to figure out the best way to escape.
Some people would buy Bitcoin on Gox just to
transfer out to another exchange where they could
actually sell it for real cash. Right. Because
at this point in late 2013, withdrawals of Bitcoin
were still working. It was just the dollars that
were stuck in the system. Exactly. So people
thought, OK, the traditional banking rails are
broken, but the crypto rails are still fine.
Until they weren't. Until they weren't. We move
into early 2014. The tension is building. The
forums Bitcoin talk are on fire. There are threads
with over 3 ,000 posts just complaining about
delays. People are getting angry. And then February
7, 2014, the other shoe finally drops. This is
the beginning of the end. On February 7, Mt.
Gox halts all Bitcoin withdrawals. Now, real
panic sets in. It's not just cash anymore. Now
you can't even get your crypto out. The exit
doors are welded shut. And their excuse for this
was, well... It was complicated. They blamed
something called transaction malleability? Yes.
This is a technical term that got thrown around
a lot in 2014. Let's really unpack it because
it's crucial to understanding their defense and
also why it was mostly smoke and mirrors. Okay,
lay it on me. As simply as you can, what is transaction
malleability? Okay, think of a Bitcoin transaction
like a signed check you send to the bank. The
bank reads the check, verifies your signature,
and moves the money. Now imagine if someone could
intercept that check in the mail. change the
font on the signature, not the signature itself,
just the way it looks, and then hand it to the
bank. So the content of the check is the same,
the amount is the same, the recipient is the
same, the signature is valid. Right. But because
the visual appearance changed slightly, the bank's
computer system assigns it a different reference
number. It files it under a different ID. OK,
I follow. So the money moves, but the receipt
number changes. Exactly. In Bitcoin terms, a
hacker could slightly alter the transaction data
before it was confirmed on the blockchain. this
would change the transaction ID, which is the
hash of all that data. So if I send you a Bitcoin,
my wallet creates a transaction with, let's say,
ID number 123. You mess with it, and on the blockchain,
it shows up as ID number ABC. Yes, but the transaction
still happened. The money moved from your address
to mine. But here is the critical problem. Mt.
Gox's software was very, very rigid. It would
send the coins and then watch the blockchain
specifically for ID number 123 to appear. And
when it doesn't see ID number 123? It assumes
the payment failed. Ah, I see. So the system
thinks, oops, the payment didn't go through.
And then what? The user complains? The user writes
a support ticket. Hey, my withdrawal failed.
It says pending forever. The automated system
or maybe a support agent would check, see that
ID 123 never confirmed, and they would say, oh,
sorry about that. And then they would resend
the coins. So the user gets paid twice. Double
spending. It's an infinite money glitch. That
sounds like a pretty legitimate bug in Bitcoin.
That's a serious flaw. It was a known issue in
the Bitcoin protocol at the time, yes. It was
a quirk. But here is the catch. Every other exchange
knew about it and had already implemented workarounds.
They adjusted their software to look for the
transaction differently or to track wallet inputs
instead of just transaction IDs. When Mt. Gox
halted withdrawals citing this bug, other exchanges
like Bitstamp and Kraken were back in full operation
very, very quickly. So the bug was real, but
their reaction to it was suspicious. The expert
consensus at the time and now was that Mt. Gox
was using this bug as a shield. They were blaming
the Bitcoin protocol for their own deep, deep
insolvency. They needed an excuse to stop the
bleeding. A shield for the fact that they simply
didn't have the coins to gift people. They were
stalling for time. That becomes painfully clear
as February rolls on. Withdrawals are still halted.
Mark Arpolis, the CEO, is refusing to comment
on the company's financial status to the Wall
Street Journal. He famously had to move the office
to a different location in Shibuya because of
safety concerns. There were protesters standing
outside their office building holding signs.
Where is our money? Mt. Gox is a scam. I remember
seeing the photos of these guys just standing
in the Tokyo rain. It was tragic. And the market
reacted instantly. The price of Bitcoin on Mt.
Gox completely diverged from other exchanges.
It crashed. It was trading at 20 percent of the
value you see on Bitstamp or elsewhere. That's
the Gox discount. Basically, the market was saying
a Bitcoin inside Mt. Gox is worth way less than
a real Bitcoin because there is an 80 percent
chance you will never, ever see it again. Exactly.
It was a prediction market on their insolvency.
You know. And then on February 23, Karpeles resigns
from the Bitcoin Foundation board. The company's
Twitter account gets wiped completely clean.
And then the blackout. February 24, 2014. The
website goes offline. If you typed in mtgox .com,
you just got a blank page. I remember seeing
screenshots of that. Just pure white space, no
logo, no login, no error message, just a void.
And then a document leaks, an internal crisis
management draft. And this document dropped a
bombshell that I don't think anyone, even the
biggest critics, was fully prepared for. The
document claimed the company was insolvent. Everyone
expected that. But the number. The number was
just staggering. It said they had lost 744 ,408
bitcoins. 744 ,000 plus another 100 ,000 of the
company's own coins. All told, it was roughly
850 ,000 bitcoin. At the time, that represented
about 7 % of all Bitcoins in existence. Let that
sink in. 7 % of the entire global supply of the
currency. I mean, imagine if a bank announced
today, whoops, we seem to have misplaced 7 %
of all the U .S. dollars currently in circulation.
The global economy would just melt down. It was
cataclysmic. It was a potential extinction level
event for Bitcoin. And the document said this
theft had gone undetected for years. For years.
How do you not notice? 850 ,000 missing coins.
How does your accountant not scream and run out
of the building? That is the multi -million or
rather multi -billion dollar question. The other
major exchanges, Coinbase, Kraken, Bitstamp,
they immediately released a joint statement.
They had to quarantine the rot. They basically
said, this is a tragic violation of trust by
this one company. This is not a failure of Bitcoin
itself. They threw Mt. Gox under the bus to save
the entire industry. Which was probably necessary.
If everyone thought Bitcoin itself was fundamentally
broken, it would have gone to zero. So on February
28, 2014, Mt. Gox files for bankruptcy protection
in Tokyo. Minji Seisei, which is civil rehabilitation.
Right. They reported liabilities of 6 .5 billion
yen, about $65 million at the time, against assets
of only 3 .84 billion yen. They were underwater.
Deeply, deeply underwater. Kerpel has held a
press conference. He bowed deeply at traditional
Japanese apology and blamed hackers and technical
issues. Okay, so they file for bankruptcy. The
coins are gone. Everyone thinks it's over. But
then the story gets even stranger. A month later,
March 20, 2014, Mt. Gox makes an announcement.
They found some coins. Laughs. Yes! This is one
of the most bizarre twists in the history of
finance. They announced on their website that
they had found... 199 ,999 .99 bitcoins. How
do you just find 200 ,000 bitcoins? That was
worth $116 million at the time. Did they check
the office couch cushions? Did they look in the
pockets of an old pair of jeans? Technically,
they checked an old digital wallet format. They
claimed these coins were in a wallet they hadn't
used since June 2011. They just thought it was
empty or obsolete. They re -scanned it after
the bankruptcy filing. And lo and behold, a massive
fortune was just... sitting there, forgotten.
That speaks volumes about the level of incompetence
we mentioned earlier. They didn't even know what
they had. They were sitting on $100 million and
had no idea it was there. It confirmed that they
had absolutely no idea what they were doing regarding
basic inventory management. But that discovery
was a miracle for the creditors. It meant there
was something left in the pot to salvage. It
brought the total missing amount down from $850
,000 to about $650 ,000, which is, you know,
better, but still a complete disaster. So we
have a massive theft. But how did it actually
happen? Was it one big heist, like in a movie?
Did someone rappel down the elevator shaft and
plug in a USB drive? That's what everyone assumed
initially. Everyone was looking for the Ocean's
Eleven moment. But in April 2015, a security
company called WISAC released their investigation
results, and their conclusion was... arguably
much more disturbing than a single dramatic heist.
What did they find? They found that most, if
not all, of the missing Bitcoins were stolen
straight out of the Mt. Gox hot wallet over time,
beginning as early as late 2011. So it wasn't
a smash and grab. It was a slow bleed. A drip
feed. The hackers had access to the private keys.
They were essentially just sipping from the fire
hose for two full years. And nobody at Mt. Gox
noticed the balance dropping for two years. The
problem was, Matt Gox's internal accounting database
didn't match reality. The system thought the
coins were there. The numbers on a website said
the coins were there, but the blockchain showed
they were steadily moving out. Because they didn't
have robust reconciliation, which is basically
checking the bank vault against the ledger every
single night, they just didn't catch it. So the
exchange was effectively running a fractional
reserve. They were paying out withdrawals to
customer A using the new deposit from customer
B because the coins the customer A thought they
had were actually already stolen by the hacker.
Exactly. It was an unintentional Ponzi scheme
dynamic. They were insolvent. long, long before
they froze withdrawals. They just didn't realize
it or maybe didn't want to admit it until the
inflows of new money stopped covering the outflows
from withdrawals. That is terrifying. It means
for the entire bull run of 2013, people were
trading phantom coins. Precisely. You were trading
numbers on a screen that were backed by nothing
but air. And did they ever find who was doing
the sipping? Who was behind the slow bleed? There
were some major breakthroughs. The U .S. Department
of Justice eventually identified a Russian man
named Alexander Vinnick. He was the alleged owner
of another exchange called BTCE. I remember BTCE.
It was known for being... Let's say less than
regulated. It was the Wild West of the Wild West.
It was where you went if you didn't want to provide
any ID. And the DOJ alleged that Vinnick was
the key figure in laundering the stolen Mt. Gox
coins. So the funds were being siphoned out of
Gox, moved through various wallets, and then
washed through the BTC exchange to make them
look clean. So we have the mechanism of the theft,
the slow bleed. We have the suspect for the laundering,
Vinik. But what about Karpeles? He was the captain
of the ship. Did he go to jail for the missing
650 ,000 coins? This is where the legal system
gets very, very specific. Karpeles was arrested
in August 2015 by Japanese police. He was charged
with fraud, embezzlement, and manipulating the
computer system to increase balances. Specifically,
they accused him of taking about $2 .6 million
of investor funds and moving it to his own accounts,
right? Yes. That and falsifying data to make
the company look solvent when it wasn't. The
trial dragged on for years. until March 2019.
Then the verdict. It was mixed. The Tokyo District
Court found him guilty of falsifying data. Basically,
he cooked the books. He admitted to manually
editing the database to inflate their holdings
by about $33 .5 million. So he was pumping up
the numbers. But what about the embezzlement?
And more importantly, the theft of the 650 ,000
coins? On those counts, he was found not guilty.
Not guilty of embezzlement and not guilty of
aggravated breach of trust. The court believed
that while he messed with the data, he didn't
do it with ill intent to steal the money for
himself. He was likely just trying to patch the
holes and keep the ship from sinking, albeit
illegally. So he wasn't the master thief. He
was just the incompetent captain trying to hide
the giant hole in the hull with some duct tape.
That seems to be the court's view. And for that,
he got a suspended sentence. 30 months in prison,
suspended for four years, meaning as long as
he stayed out of trouble for those four years,
he wouldn't actually serve any jail time. Wow.
Considering the sheer scale of the loss, that
feels light. I'm sure it feels light to a lot
of the victims. Oh, absolutely. The verdict even
said he inflicted massive harm to the trust of
his users. But from a legal standpoint, they
couldn't pin the actual theft of the hundreds
of thousands of coins on him. So Carplus is out.
Vinik is tied up in legal battles. But what about
the money? What about the victims? It's been
10 years now. This is the never ending story
of the civil rehabilitation. Because they found
those 200 ,000 bitcoins and because the price
of Bitcoin has gone up so astronomically since
2014, the bankruptcy estate. actually holds a
significant amount of value. Right. This is the
irony of ironies. In 2014, Bitcoin was maybe
$500. Today, it's tens of thousands. So those
200 ,000 coins that were lost in that old wallet
are now worth billions of dollars. Exactly. The
process shifted from a simple bankruptcy liquidation
to civil rehabilitation. This is much better
for the creditors because in a normal liquidation,
they might have been paid out based on the cash
value of Bitcoin back in 2014. Which would be
pennies on the dollar compared to today's value.
If you lost 10 Bitcoin, you'd get maybe $5 ,000
back instead of the hundreds of thousands it's
worth now. Right. Civil rehabilitation allows
for the possibility of distributing the actual
Bitcoin. The trustee, a lawyer named Nobuaki
Kobayashi, holds roughly 142 ,000 BTC to be distributed.
And there was this big plan, the Goxillionaire
hope, that was approved in 2021. Yes. The creditors
finally voted on a rehabilitation plan. 99 %
of them accepted it. It promised that billions
of dollars in Bitcoin would finally be returned
to them. But the dates just keep slipping, don't
they? It's been a story of constant delays. April
2023, then September 2023, now October 2024.
The deadline for repayment keeps getting pushed
back. However, the process has officially begun.
Some creditors have started seeing movement in
payments in late 2023 and into 2024. But for
many, it's been a decade of just waiting. A decade.
Can you imagine having your life savings locked
in a legal battle for 10 years? You watch the
price go up to $60 ,000, crash down to $15 ,000
back up, and you can't touch a single cent of
it. It's agonizing. But looking at the big picture,
the fact that they're getting anything back at
all is somewhat of a miracle in the world of
crypto. Usually when an exchange dies, the money
is just gone forever. That's a good point. Mt.
Gox is almost the exception because they were
just incompetent enough to actually lose and
then find a cold wallet with a fortune in it.
So what does this all mean? When we zoom out,
what is the real legacy of Mt. Gox? Well, for
one, it's forced the world to finally take regulation
seriously. A huge impact there. The collapse
led Japan to create the first formal regulations
for cryptocurrency exchanges on the planet. They
realized you can't just let a guy run a global
financial hub on a spare domain name from a card
game. It was the event that shifted the industry
from magic cards to a regulated financial asset
class. And it taught an entire generation of
crypto users a very, very hard lesson. The mantra
was born. Not your keys, not your coins. Explain
that for the listener who might be new to this
space. What does that mean? It means that if
you leave your cryptocurrency on an exchange
like Mt. Gox or Coinbase or Binance or any of
them, you don't actually own the money. You own
an IOU from that exchange. If the exchange gets
hacked, goes bankrupt, or the CEO decides to
run away to the Bahamas. Too soon. Your money
is gone. Unless you hold the private keys yourself
in your own personal hardware wallet, you are
trusting a third party with your wealth. And
Mangox proved that even the biggest, most dominant
third party can fail spectacularly. It was a
total loss of innocence for the industry. Before
Gox, there was this kind of utopian idea that
code is law and everything is perfectly secure.
Gox showed that human error, human greed and
human incompetence are still the biggest risks
in any system. It's fascinating that we are still
talking about it 10 years later. It's the ghost
that haunts every single bull market. Every time
a new exchange collapses, like FTX recently,
everyone says it's make gox all over again. It's
set the pattern, the denial, the halting of withdrawals,
the technical issues excuse, the eventual bankruptcy
filing. It's the same script just written a decade
earlier. Before we wrap up, I want to suggest
our listeners look up one visual, the graph.
of the stolen coins. The Wizet graph. Yes. If
you look it up, it is absolutely chilling. It
shows the Ant Gox Bitcoin balance as a flat line.
That's what they thought they had. And then it
shows the actual balance on the blockchain as
a jagged line crashing downward over the course
of two years. It's the perfect visualization
of the complete disconnect between perception
and reality. And that's really the story of Make
Gox. It looked like a giant. It looked like the
center of the financial universe. But underneath,
it was being eaten away by termites until the
whole thing just collapsed into dust. And all
of it started because a guy wanted to trade magic
cards online and then he got too busy to run
the site properly. The butterfly effect in action.
OK, here is a final provocative thought to leave
you with. We talked about how Mt. Gox lost 7
% of all Bitcoin in existence. Imagine if that
happened today. Imagine the financial shockwave.
But deeper than that. In a world of digital finance,
where everything is just numbers on a server,
if you don't hold the keys, if you can't touch
it, do you actually own the money? That's the
scary part. We trust these systems implicitly
now. We have our banking apps, our exchange accounts.
But Matt Gox is the ultimate reminder that systems
are just people and code, and both can break.
On that cheerful note... Thank you for joining
us on this deep dive into the rise and spectacular
fall of MetGox. Always a pleasure. Keep your
private keys safe, everyone. We'll see you next
time.