WEBVTT 00:00:00.000 --> 00:00:02.180 Welcome back to the Deep Dive. We are doing something 00:00:02.180 --> 00:00:04.139 a little different today. Usually we're looking 00:00:04.139 --> 00:00:07.639 forward at the next big tech breakthrough or, 00:00:07.660 --> 00:00:09.679 you know, the latest shift in the global economy. 00:00:09.800 --> 00:00:12.919 Right. The future. But today we are getting into 00:00:12.919 --> 00:00:16.059 a time machine. We are traveling back to a moment 00:00:16.059 --> 00:00:19.039 that feels like ancient history in Internet years, 00:00:19.199 --> 00:00:21.969 but... Well, it was really only a decade ago. 00:00:22.010 --> 00:00:24.989 We are going back to the Wild West. And it really, 00:00:25.030 --> 00:00:26.629 really was the Wild West. I mean, there were 00:00:26.629 --> 00:00:30.170 no sheriffs, no rules, and the saloons were being 00:00:30.170 --> 00:00:33.609 run by computer programmers who were just figuring 00:00:33.609 --> 00:00:35.780 it out as they went along. We are talking about 00:00:35.780 --> 00:00:38.240 a story that has everything. It's got magic trading 00:00:38.240 --> 00:00:41.039 cards. It's got disappearing fortunes. It's got 00:00:41.039 --> 00:00:43.799 federal agents seizing bank accounts. A total 00:00:43.799 --> 00:00:46.140 collapse. A catastrophic collapse that didn't 00:00:46.140 --> 00:00:48.780 just bankrupt a single company. It nearly killed 00:00:48.780 --> 00:00:51.700 an entire industry in its crib. It's the foundational 00:00:51.700 --> 00:00:54.299 myth of crypto. It is absolutely the Titanic 00:00:54.299 --> 00:00:57.200 story for Bitcoin. If you were around in, say, 00:00:57.320 --> 00:01:00.619 2013 or 2014, you remember exactly where you 00:01:00.619 --> 00:01:02.560 were when the site just went dark. We are talking, 00:01:02.619 --> 00:01:04.840 of course, about Matt Gox, and I think for a 00:01:04.840 --> 00:01:07.019 lot of people entering the space now, maybe you've 00:01:07.019 --> 00:01:09.819 got in during the 2021 Bull Run, or maybe you're 00:01:09.819 --> 00:01:12.140 just casually interested, Matt Gox is just a 00:01:12.140 --> 00:01:14.689 punchline. Yeah, it's a meme. It's a meme. You 00:01:14.689 --> 00:01:17.430 hear people say, don't get doxxed, or they talk 00:01:17.430 --> 00:01:20.549 about the MetGox trustee moving coins. But the 00:01:20.549 --> 00:01:23.730 visceral reality of what this place was, I think 00:01:23.730 --> 00:01:25.930 that's been lost. Completely. It's treated like 00:01:25.930 --> 00:01:28.049 a footnote in a history book now. Yeah. But when 00:01:28.049 --> 00:01:29.950 you actually dig into the source material, the 00:01:29.950 --> 00:01:32.790 historical transaction logs, the legal filings 00:01:32.790 --> 00:01:35.670 from Tokyo, the investigation reports, you realize 00:01:35.670 --> 00:01:38.859 this wasn't just an exchange. No. For time, it 00:01:38.859 --> 00:01:41.180 was the exchange. That is the first thing I want 00:01:41.180 --> 00:01:43.769 to really hammer home for you. The scale. Because 00:01:43.769 --> 00:01:45.030 I was reading through the background on this 00:01:45.030 --> 00:01:47.170 and there is one statistic that just stops me 00:01:47.170 --> 00:01:50.810 cold every single time. At its peak in late 2013 00:01:50.810 --> 00:01:55.129 and early 2014, this single entity based in an 00:01:55.129 --> 00:01:57.689 office building in Shibuya, Tokyo, was handling 00:01:57.689 --> 00:02:00.069 over 70 percent of all Bitcoin transactions worldwide. 00:02:00.349 --> 00:02:02.870 70 percent. Just let that sit for a second. It 00:02:02.870 --> 00:02:06.189 is absolutely mind boggling. I mean, imagine 00:02:06.189 --> 00:02:08.969 if the New York Stock Exchange handled 70 percent 00:02:08.969 --> 00:02:11.930 of all stock trades on Earth. Every single trade 00:02:11.930 --> 00:02:15.409 in London, Tokyo, Hong Kong, Frankfurt, all of 00:02:15.409 --> 00:02:17.849 it funneling through one website. And then imagine 00:02:17.849 --> 00:02:21.050 that website was run by like a couple of guys 00:02:21.050 --> 00:02:23.250 who are really into anime and cats. And then 00:02:23.250 --> 00:02:26.939 one day the screen just went black. That is essentially 00:02:26.939 --> 00:02:29.180 what happened. The centralization rift was just 00:02:29.180 --> 00:02:32.759 it was off the charts. If Gox sneezed, the entire 00:02:32.759 --> 00:02:35.860 Bitcoin economy caught a cold. And when Gox died, 00:02:36.180 --> 00:02:38.879 the economy went into full blown cardiac arrest. 00:02:39.060 --> 00:02:40.879 And what makes this deep dive so fascinating 00:02:40.879 --> 00:02:42.919 is that we aren't just going to say hackers stole 00:02:42.919 --> 00:02:44.500 at the end. We are going to look at the why. 00:02:44.659 --> 00:02:46.919 We're going to look at the how. Because the common 00:02:46.919 --> 00:02:49.719 narrative is that it was this big singular heist. 00:02:49.719 --> 00:02:51.580 Right. Like an Ocean's Eleven movie. Exactly. 00:02:52.199 --> 00:02:54.680 But the documents show a much, much more complex 00:02:54.680 --> 00:02:57.020 picture. It's a picture of mismanagement, of 00:02:57.020 --> 00:02:58.960 technical debt that just piled up like dirty 00:02:58.960 --> 00:03:01.819 laundry and a violent collision between a hobbyist 00:03:01.819 --> 00:03:04.900 culture and serious professional financial crime. 00:03:05.080 --> 00:03:07.780 It is the story of what happens when a hobby 00:03:07.780 --> 00:03:10.740 project accidentally becomes the financial backbone 00:03:10.740 --> 00:03:14.060 of a multibillion dollar asset class. So let's 00:03:14.060 --> 00:03:16.340 start at the very beginning, because the name 00:03:16.340 --> 00:03:19.520 itself, EmpGox. It doesn't sound very financial, 00:03:19.599 --> 00:03:21.280 does it? It doesn't sound like the Bank of Tokyo 00:03:21.280 --> 00:03:24.319 or Fidelity. No, not at all. It sounds like a 00:03:24.319 --> 00:03:26.199 fantasy location, like something out of a Tolkien 00:03:26.199 --> 00:03:28.780 novel, you know, Mount Gox. And that is because 00:03:28.780 --> 00:03:32.439 it basically was the acronym. Please break it 00:03:32.439 --> 00:03:35.500 down for us. What does MTGOX actually stand for? 00:03:35.639 --> 00:03:38.139 It stands for Magic, the Gathering Online Exchange. 00:03:38.740 --> 00:03:42.360 Magic. The Gathering. The card game. With wizards 00:03:42.360 --> 00:03:44.219 and lightning bolts and goblins. That is the 00:03:44.219 --> 00:03:46.740 one. I love this detail. It is my absolute favorite 00:03:46.740 --> 00:03:50.539 part of the entire lore. It just... It sets the 00:03:50.539 --> 00:03:53.080 stage so perfectly for the amateur hour that 00:03:53.080 --> 00:03:55.400 was about to follow. It really does. To understand 00:03:55.400 --> 00:03:57.180 the roots, you have to go all the way back to 00:03:57.180 --> 00:03:59.939 late 2006. You have a programmer named Jed McCaleb. 00:04:00.139 --> 00:04:02.300 Now, McCaleb is a legend in the crypto space 00:04:02.300 --> 00:04:05.199 today. He later went on to found Ripple and Stellar. 00:04:05.199 --> 00:04:07.460 A huge figure. A huge figure. Yeah. But back 00:04:07.460 --> 00:04:09.500 in 2006, he was just a developer who played Magic 00:04:09.500 --> 00:04:11.860 the Gathering. Specifically the online version, 00:04:11.939 --> 00:04:13.599 right? There was a digital version of the game 00:04:13.599 --> 00:04:15.659 where you could own and trade digital cards. 00:04:16.040 --> 00:04:19.319 And McCaleb realized that... People needed a 00:04:19.319 --> 00:04:21.439 better way to trade these cards. You know, like 00:04:21.439 --> 00:04:24.060 they were stocks. If I have a rare black lotus 00:04:24.060 --> 00:04:26.720 card and I want to sell it, I need a proper marketplace. 00:04:27.040 --> 00:04:29.199 So he builds a stock market for fantasy cards. 00:04:29.259 --> 00:04:32.879 Exactly. In January 2007, he buys the domain 00:04:32.879 --> 00:04:36.800 mtgox .com. He launches a beta version later 00:04:36.800 --> 00:04:38.759 that year. He runs it for about three months. 00:04:39.100 --> 00:04:42.259 And then he just gets bored. Just like that. 00:04:42.319 --> 00:04:44.439 He builds this whole thing and then just walks 00:04:44.439 --> 00:04:47.029 away. Just like that. He moves on. He decides 00:04:47.029 --> 00:04:50.230 it's not really worth his time. He actually repurposed 00:04:50.230 --> 00:04:53.290 the domain in 2009 to advertise a totally different 00:04:53.290 --> 00:04:55.769 indie card game he made called The Far Wilds. 00:04:56.069 --> 00:04:58.230 So for a little while, if you went to MtGux .com, 00:04:58.310 --> 00:04:59.649 you weren't seeing Bitcoin. You weren't even 00:04:59.649 --> 00:05:02.050 seeing magic cards. You were seeing an ad for 00:05:02.050 --> 00:05:04.370 a different strategy game. So the domain is just 00:05:04.370 --> 00:05:06.490 sitting there in his portfolio. It's a digital 00:05:06.490 --> 00:05:10.089 spare part. It sits dormant. Then fast forward 00:05:10.089 --> 00:05:15.000 to July 2010. McCaleb is reading Slashdot. which 00:05:15.000 --> 00:05:18.240 for our younger listeners was basically the Reddit 00:05:18.240 --> 00:05:21.100 or hacker news of the tech world back then. Oh, 00:05:21.120 --> 00:05:23.600 yeah. A huge deal. And he reads an article about 00:05:23.600 --> 00:05:26.899 this new cryptographic currency called Bitcoin. 00:05:26.980 --> 00:05:29.699 And Bitcoin in 2010. I mean, this is the era 00:05:29.699 --> 00:05:32.379 where you could mine it on a generic laptop in 00:05:32.379 --> 00:05:34.420 your dorm room. It was worth pennies. Less than 00:05:34.420 --> 00:05:36.899 pennies, really. But McCaleb has a light bulb 00:05:36.899 --> 00:05:39.259 moment. He looks at the Bitcoin community and 00:05:39.259 --> 00:05:41.899 he realizes they have a massive, massive problem. 00:05:42.139 --> 00:05:44.920 They have these coins. But they have no easy 00:05:44.920 --> 00:05:48.079 way to trade them for regular fiat currency for 00:05:48.079 --> 00:05:50.319 U .S. dollars. How were they even trading before 00:05:50.319 --> 00:05:53.120 exchanges existed? It was primitive. I mean, 00:05:53.120 --> 00:05:54.959 truly primitive. People were posting on forums 00:05:54.959 --> 00:05:57.600 like Bitcoin Talk. Hey, I have 10 ,000 BPC. Send 00:05:57.600 --> 00:05:59.560 me 50 bucks on PayPal and I'll send you the coins. 00:05:59.699 --> 00:06:02.019 Yeah. It's completely trust based, incredibly 00:06:02.019 --> 00:06:05.579 inefficient and just rife with scams. So, McCaleb, 00:06:05.600 --> 00:06:07.600 thanks. Wait a minute. I have this exchange engine 00:06:07.600 --> 00:06:09.540 code I wrote for trading cards and I have this 00:06:09.540 --> 00:06:11.399 domain name lying around that already sounds 00:06:11.399 --> 00:06:12.939 kind of financial if you don't think about it 00:06:12.939 --> 00:06:16.420 too hard. Exactly. Mike Cox sounds vaguely like 00:06:16.420 --> 00:06:19.079 a mountain or a gold reserve or something. So 00:06:19.079 --> 00:06:21.839 on July 18, 2010, he launches the Bitcoin exchange 00:06:21.839 --> 00:06:24.899 on that spare domain. It was a total improv move. 00:06:25.060 --> 00:06:27.220 He didn't build a fortress for financial trading. 00:06:27.300 --> 00:06:30.040 He repurposed a website meant for a card game. 00:06:30.139 --> 00:06:32.980 Yeah. And that DNA, that sense of let's just 00:06:32.980 --> 00:06:35.019 get it running and see what happens, haunted 00:06:35.019 --> 00:06:36.920 the company forever. It's the classic startup 00:06:36.920 --> 00:06:40.300 mentality. Move fast and break things. But usually. 00:06:41.050 --> 00:06:43.470 You don't want to break the bank vault. Precisely. 00:06:43.490 --> 00:06:45.990 And here is the real kicker. McCaleb doesn't 00:06:45.990 --> 00:06:47.970 even stick around. He launches it. It starts 00:06:47.970 --> 00:06:51.089 to grow. But by early 2011, he wants out again. 00:06:51.370 --> 00:06:53.569 Why? I mean, did he see the writing on the wall? 00:06:53.670 --> 00:06:55.329 Did you realize how big it was going to get? 00:06:55.490 --> 00:06:57.750 It's hard to say. Maybe he just had other interests, 00:06:57.850 --> 00:07:00.509 you know, developer ADHD. But in March 2011, 00:07:00.829 --> 00:07:02.810 less than a year after launching it, he sells 00:07:02.810 --> 00:07:05.269 the site. He sells it to a French developer named 00:07:05.269 --> 00:07:07.939 Marc Karpelis, who is living in Japan. And McCaleb's 00:07:07.939 --> 00:07:10.139 reason for selling is just it's so ironic in 00:07:10.139 --> 00:07:13.220 hindsight. It is. I have the quote here. He basically 00:07:13.220 --> 00:07:16.660 said to really make Matt Gox what it has the 00:07:16.660 --> 00:07:18.959 potential to be would require more time than 00:07:18.959 --> 00:07:21.000 I have right now. So he just handed over the 00:07:21.000 --> 00:07:22.980 torch. He handed over what would become a billion 00:07:22.980 --> 00:07:24.579 dollar headache because they didn't have time. 00:07:24.879 --> 00:07:29.040 It's incredible. So enter Mark Karpalis. He takes 00:07:29.040 --> 00:07:32.199 over in 2011. He moves the operations fully to 00:07:32.199 --> 00:07:35.300 Tokyo and almost immediately the cracks start 00:07:35.300 --> 00:07:37.980 to show. It didn't take long at all. We call 00:07:37.980 --> 00:07:40.819 this period the first warning shot. June 2011. 00:07:41.420 --> 00:07:43.579 This is a time where Bitcoin is moving from a 00:07:43.579 --> 00:07:46.279 weird tech experiment to an actual asset with 00:07:46.279 --> 00:07:49.279 some real value. And on June 13, the exchange 00:07:49.279 --> 00:07:52.060 reports that about 25 ,000 Bitcoins were stolen 00:07:52.060 --> 00:07:55.300 from 478 accounts. That's a significant breach 00:07:55.300 --> 00:07:57.360 even back then. It was. At the time, Bitcoin 00:07:57.360 --> 00:08:00.100 was trading around $17. So that's roughly $400 00:08:00.100 --> 00:08:03.060 ,000. It hurts. But for a growing tech company, 00:08:03.180 --> 00:08:05.779 you can maybe swallow that loss. But the reputational 00:08:05.779 --> 00:08:08.660 hit is the real problem. Yeah. The trust. The 00:08:08.660 --> 00:08:11.579 reputational hit was bad. A user database was 00:08:11.579 --> 00:08:14.639 leaked to Pastebin. But then, just a few days 00:08:14.639 --> 00:08:18.420 later, things went from bad to apocalyptic. We're 00:08:18.420 --> 00:08:20.699 talking about the famous flash crash of June 00:08:20.699 --> 00:08:24.379 19, 2011. I have seen the charts for this. It 00:08:24.379 --> 00:08:27.670 is legendary in trading circles. The price of 00:08:27.670 --> 00:08:31.569 Bitcoin on Mt. Gox dropped to one cent, one single 00:08:31.569 --> 00:08:34.009 penny. It's the vertical red line of death on 00:08:34.009 --> 00:08:35.970 the chart, just straight down. How does that 00:08:35.970 --> 00:08:38.490 even happen? How do you wipe out the entire value 00:08:38.490 --> 00:08:41.029 of an asset in just a few minutes? It was a security 00:08:41.029 --> 00:08:44.409 failure, plain and simple. A hacker allegedly 00:08:44.409 --> 00:08:46.929 compromised the computer of a Mt. Gox auditor. 00:08:47.330 --> 00:08:49.570 Not a random user, but someone with high -level 00:08:49.570 --> 00:08:51.990 access. They got hold of credentials that allowed 00:08:51.990 --> 00:08:53.750 them to control a massive amount of Bitcoin. 00:08:54.240 --> 00:08:56.000 But they didn't just steal the coins and transfer 00:08:56.000 --> 00:08:58.519 them out. Why crash the price? No, they wanted 00:08:58.519 --> 00:09:00.740 to cause chaos. Or maybe they were trying to 00:09:00.740 --> 00:09:03.100 manipulate the market to buy up cheap coins themselves 00:09:03.100 --> 00:09:05.960 with other accounts. They used the exchange's 00:09:05.960 --> 00:09:08.379 own trading engine to sell a huge chunk of coins 00:09:08.379 --> 00:09:11.159 all at once. They placed a massive ask order 00:09:11.159 --> 00:09:13.600 at any price. So they just flooded the market, 00:09:13.659 --> 00:09:16.460 a supply shock. They dumped them. And because 00:09:16.460 --> 00:09:18.620 the order book was so thin, remember, this is 00:09:18.620 --> 00:09:21.350 2011. Liquidity isn't anything like it is today. 00:09:21.750 --> 00:09:26.289 That one giant sell order ate through every single 00:09:26.289 --> 00:09:29.970 buy order on the books. It ate the buy orders 00:09:29.970 --> 00:09:35.269 at $15, at $10, at $5, all the way down to a 00:09:35.269 --> 00:09:37.509 penny. That must have been terrifying for anyone 00:09:37.509 --> 00:09:40.029 watching the charts. Imagine logging in and seeing 00:09:40.029 --> 00:09:42.590 your entire portfolio is worth practically zero. 00:09:42.769 --> 00:09:46.610 It was absolute unadulterated panic. But... To 00:09:46.610 --> 00:09:48.950 their credit, Mt. Gox did roll back the trades. 00:09:49.070 --> 00:09:51.710 They took the server offline, reverted the database 00:09:51.710 --> 00:09:54.549 and essentially hit control Z on the entire disastrous 00:09:54.549 --> 00:09:57.070 day. Which they could do because they were a 00:09:57.070 --> 00:09:59.029 centralized exchange. Right. It goes completely 00:09:59.029 --> 00:10:01.649 against the decentralized ethos of crypto. But 00:10:01.649 --> 00:10:03.789 they had to do it to save the exchange. The price 00:10:03.789 --> 00:10:05.750 corrected to its actual value pretty quickly. 00:10:05.990 --> 00:10:07.950 But the damage was done. People were scared. 00:10:08.460 --> 00:10:10.679 And to reassure everyone, Mark Karpal has performed 00:10:10.679 --> 00:10:12.700 what's called a proof of funds, right? Yes, this 00:10:12.700 --> 00:10:14.720 is where they move money on the blockchain just 00:10:14.720 --> 00:10:16.860 to prove they still have it. It's like fanning 00:10:16.860 --> 00:10:19.000 out a huge wad of cash to show you aren't broke. 00:10:19.200 --> 00:10:23.179 What did they do? They moved 424 ,242 bitcoins 00:10:23.179 --> 00:10:27.379 from cold storage offline wallets to a specific 00:10:27.379 --> 00:10:30.559 AmpGox address. They broadcasted the transaction 00:10:30.559 --> 00:10:33.279 ID to the whole world and said, look, we have 00:10:33.279 --> 00:10:35.850 the coins. We are solvent. We are safe. That 00:10:35.850 --> 00:10:39.029 is a massive amount of Bitcoin, 424 ,000 coins. 00:10:39.129 --> 00:10:40.769 Even back then, that was a huge chunk of the 00:10:40.769 --> 00:10:42.769 total supply. It was. And I want you to keep 00:10:42.769 --> 00:10:45.629 that number in mind, because as this story progresses, 00:10:45.690 --> 00:10:47.730 the question of do they actually have the coins? 00:10:48.490 --> 00:10:50.049 becomes the only question that matters so they 00:10:50.049 --> 00:10:52.450 survived the 2011 hack they survived the flash 00:10:52.450 --> 00:10:55.070 crash but then later that same year there's another 00:10:55.070 --> 00:10:57.070 incident that really highlights the technical 00:10:57.070 --> 00:10:59.450 fragility we talked about the invalid address 00:10:59.450 --> 00:11:01.730 error this one is less dramatic than a hacker 00:11:01.730 --> 00:11:04.429 in a hoodie but in some ways it's maybe more 00:11:04.429 --> 00:11:06.490 concerning from a technical standpoint oh it 00:11:06.490 --> 00:11:08.820 is Definitely more indicative of the sloppy coding 00:11:08.820 --> 00:11:11.840 standards at play. In October 2011, about two 00:11:11.840 --> 00:11:14.100 dozen transactions appear on the blockchain that 00:11:14.100 --> 00:11:17.659 sent a total of 2 ,609 Bitcoin to invalid addresses. 00:11:18.019 --> 00:11:19.940 Okay, I want to unpack this. What does invalid 00:11:19.940 --> 00:11:22.460 mean in this context? Is it like a typo in an 00:11:22.460 --> 00:11:24.539 email address? It's a bit more complex than that. 00:11:24.639 --> 00:11:27.519 So in Bitcoin, an address isn't just a random 00:11:27.519 --> 00:11:29.639 string of characters. It's actually a script. 00:11:30.080 --> 00:11:32.879 It's a set of instructions for the network. If 00:11:32.879 --> 00:11:34.860 you mess up the construction of that address 00:11:34.860 --> 00:11:37.639 in a very specific way, you are effectively sending 00:11:37.639 --> 00:11:40.019 the money to a digital black hole. So a normal 00:11:40.019 --> 00:11:42.179 bank, if I send money to an account number that 00:11:42.179 --> 00:11:44.440 is missing a digit, the system will just say, 00:11:44.500 --> 00:11:47.179 error, this account doesn't exist and the money 00:11:47.179 --> 00:11:49.460 stays in my account. Exactly. The transaction 00:11:49.460 --> 00:11:52.899 just bounces. But in Bitcoin, especially back 00:11:52.899 --> 00:11:56.350 then. The protocol had some quirks. If you constructed 00:11:56.350 --> 00:11:59.190 a transaction in a specific wrong way and the 00:11:59.190 --> 00:12:01.669 nodes on the network accepted it, the coins were 00:12:01.669 --> 00:12:04.049 moved to an address for which no private key 00:12:04.049 --> 00:12:06.830 could ever possibly exist. So the coins are locked 00:12:06.830 --> 00:12:09.509 in a box that has no key and no door forever. 00:12:09.870 --> 00:12:13.450 They are burned, destroyed, gone forever from 00:12:13.450 --> 00:12:16.330 the circulating supply. And Mint Gox's own software 00:12:16.330 --> 00:12:18.750 allowed this to happen. Not only allowed it, 00:12:18.809 --> 00:12:22.769 it created the problem. The analysis showed... 00:12:22.809 --> 00:12:25.649 that while the standard Bitcoin client, the software 00:12:25.649 --> 00:12:28.009 most people used, would have checked for this 00:12:28.009 --> 00:12:30.909 error and said, no, I can't send this, Maddox 00:12:30.909 --> 00:12:33.090 was running its own custom software. They rolled 00:12:33.090 --> 00:12:35.090 their own code. They wrote their own backend 00:12:35.090 --> 00:12:37.950 from scratch, likely in PHP, and they just... 00:12:38.320 --> 00:12:40.980 They didn't include the basic sanity checks that 00:12:40.980 --> 00:12:43.840 the standard open source client had. That is 00:12:43.840 --> 00:12:47.159 that hobbyist DNA coming back to bite them. They 00:12:47.159 --> 00:12:49.059 were reinventing the wheel, but they accidentally 00:12:49.059 --> 00:12:51.860 made the wheel square. That is a perfect analogy. 00:12:52.120 --> 00:12:54.080 It exposed a weakness in the Bitcoin protocol, 00:12:54.379 --> 00:12:57.299 sure. But it mostly showed that MacOx's internal 00:12:57.299 --> 00:12:59.600 systems weren't doing the basic quality assurance 00:12:59.600 --> 00:13:01.779 you would expect from a financial institution 00:13:01.779 --> 00:13:03.600 that was already handling millions of dollars. 00:13:03.779 --> 00:13:05.679 It's like building a bank vault out of plywood. 00:13:06.279 --> 00:13:08.580 It might look okay from a distance, but you definitely 00:13:08.580 --> 00:13:10.139 don't want to lean on it. That's it exactly. 00:13:10.440 --> 00:13:12.620 And this is all just 2011. They're already losing 00:13:12.620 --> 00:13:14.679 money to hacks. They're losing money to bugs. 00:13:14.860 --> 00:13:17.500 They've lost 2 ,600 coins here, 25 ,000 coins 00:13:17.500 --> 00:13:21.500 there. But despite all of this, they just keep 00:13:21.500 --> 00:13:24.899 growing. Which brings us to 2013. This is the 00:13:24.899 --> 00:13:27.840 year Bitcoin really goes mainstream. And Mt. 00:13:27.840 --> 00:13:30.240 Gox is the king. The absolute king of the North. 00:13:30.419 --> 00:13:34.259 By April 2013, Mt. Gox is handling that 70 % 00:13:34.259 --> 00:13:37.179 of the world's trades. In mid -May, they were 00:13:37.179 --> 00:13:40.559 trading 150 ,000 bitcoins per day. The price 00:13:40.559 --> 00:13:43.500 is just skyrocketing, hitting $100, then $200, 00:13:43.659 --> 00:13:46.080 eventually over $1 ,000 by the end of the year. 00:13:46.320 --> 00:13:49.440 It's a gold rush. And Mt. Gox is the shovel seller. 00:13:49.620 --> 00:13:51.860 They should be making money hand over fist. They 00:13:51.860 --> 00:13:53.659 were making massive revenue and trading fees, 00:13:53.799 --> 00:13:56.769 no doubt. But with great volume... comes great 00:13:56.769 --> 00:13:59.230 regulatory scrutiny. And this is where the walls 00:13:59.230 --> 00:14:01.409 really start closing in. It's not just about 00:14:01.409 --> 00:14:03.889 buggy code anymore. It's about the law. Specifically, 00:14:04.070 --> 00:14:06.190 the U .S. government. See, Mt. Gox was dealing 00:14:06.190 --> 00:14:08.370 with a lot of U .S. customers. Americans were 00:14:08.370 --> 00:14:10.269 flocking to the site because it had the most 00:14:10.269 --> 00:14:12.750 liquidity, the most action. But Mt. Gox hadn't 00:14:12.750 --> 00:14:14.610 really dotted their eyes and crossed their lets 00:14:14.610 --> 00:14:16.889 regarding U .S. financial regulations. But not 00:14:16.889 --> 00:14:19.169 all. They were operating like a tech startup 00:14:19.169 --> 00:14:22.039 in Tokyo, not a global bank. And in February 00:14:22.039 --> 00:14:25.000 2013, they ran into serious trouble with a company 00:14:25.000 --> 00:14:28.120 called Douala. Douala. That is a blast from the 00:14:28.120 --> 00:14:30.980 past. I remember them. Right. Douala was an online 00:14:30.980 --> 00:14:33.379 payment system, kind of like an early competitor 00:14:33.379 --> 00:14:36.320 to PayPal or Venmo's business side. A lot of 00:14:36.320 --> 00:14:38.500 U .S. users used it to send dollars to and from 00:14:38.500 --> 00:14:42.779 their Mt. Gox accounts. But new anti -money laundering 00:14:42.779 --> 00:14:45.279 requirements kicked in and Douala started restricting 00:14:45.279 --> 00:14:47.769 some accounts. Mt. Gox transactions started getting 00:14:47.769 --> 00:14:49.789 canceled left and right. And the customer service 00:14:49.789 --> 00:14:53.470 response was just classic Mt. Gox chaos. I have 00:14:53.470 --> 00:14:55.129 the quote here from an email they sent to users. 00:14:55.289 --> 00:14:57.889 They said, please be advised that you are actually 00:14:57.889 --> 00:15:00.309 not allowed to cancel any withdrawals. We have 00:15:00.309 --> 00:15:02.610 never had this case before. We've never had this 00:15:02.610 --> 00:15:04.860 case before. That should be the tagline for the 00:15:04.860 --> 00:15:07.000 whole company. Just complete confusion. They 00:15:07.000 --> 00:15:09.899 were making up as they went along. But then in 00:15:09.899 --> 00:15:13.039 May 2013, it gets really serious. The Department 00:15:13.039 --> 00:15:15.620 of Homeland Security, the DHS, enters the chat. 00:15:15.840 --> 00:15:18.080 Yeah, that's never a good sign when the DHS shows 00:15:18.080 --> 00:15:20.679 up with a warrant. The DHS issued a warrant to 00:15:20.679 --> 00:15:23.399 seize money from Mt. Gox's U .S. subsidiary's 00:15:23.399 --> 00:15:26.299 account with Jwala. They seized $2 .9 million. 00:15:26.759 --> 00:15:29.320 On what grounds? What was the charge? Operating 00:15:29.320 --> 00:15:32.250 as an unregistered money transmitter. They hadn't 00:15:32.250 --> 00:15:34.409 registered with FinCEN, the Financial Crimes 00:15:34.409 --> 00:15:37.389 Enforcement Network. The argument was basically, 00:15:37.490 --> 00:15:40.529 if you are moving money for U .S. citizens, you 00:15:40.529 --> 00:15:43.529 have to follow U .S. rules. Mt. Gox hadn't bothered 00:15:43.529 --> 00:15:45.990 to do that. So the feds grabbed nearly $3 million. 00:15:46.350 --> 00:15:48.889 Then they seized another $2 .1 million from a 00:15:48.889 --> 00:15:52.429 Wells Fargo account. That's $5 million gone in 00:15:52.429 --> 00:15:54.629 a flash. That has to hurt your cash flow. It 00:15:54.629 --> 00:15:57.070 hurt cash flow for sure, but it hurt their banking 00:15:57.070 --> 00:16:00.720 relationships more. The banks got spooked. Imagine 00:16:00.720 --> 00:16:03.240 being Mizuho Bank, their main bank in Tokyo. 00:16:03.679 --> 00:16:05.419 You see the U .S. Department of Homeland Security 00:16:05.419 --> 00:16:07.980 seizing your clients' funds. You start thinking, 00:16:08.100 --> 00:16:09.879 I do not want to be involved in this. Well, only 00:16:09.879 --> 00:16:12.679 they're radioactive. Exactly. Mizuho Bank started 00:16:12.679 --> 00:16:14.679 pressuring them to close their account. They 00:16:14.679 --> 00:16:17.820 just didn't want the heat. By June of 2013, Mt. 00:16:17.899 --> 00:16:21.019 Gox had to suspend all USD withdrawals. And this 00:16:21.019 --> 00:16:23.419 is the beginning of the Hotel California phase 00:16:23.419 --> 00:16:25.460 of Mt. Gox. You can check out anytime you like, 00:16:25.539 --> 00:16:27.759 but you can never leave. Wired Magazine did a 00:16:27.759 --> 00:16:30.860 big report in November 2013, essentially saying 00:16:30.860 --> 00:16:33.759 Mt. Gox had been completely frozen out of the 00:16:33.759 --> 00:16:36.039 U .S. banking system. Customers were waiting 00:16:36.039 --> 00:16:38.860 weeks, then months, to get their cash out. If 00:16:38.860 --> 00:16:40.980 you sold your Bitcoin on the platform, you got 00:16:40.980 --> 00:16:43.820 these fiat numbers on a screen. But good luck 00:16:43.820 --> 00:16:45.580 ever getting that into your real bank account. 00:16:45.799 --> 00:16:48.220 And this created a really fascinating market 00:16:48.220 --> 00:16:51.940 dynamic. Bitcoin on Mt. Gox started trading at 00:16:51.940 --> 00:16:54.830 a premium and then later a discount. People were 00:16:54.830 --> 00:16:56.289 trying to figure out the best way to escape. 00:16:56.470 --> 00:16:58.750 Some people would buy Bitcoin on Gox just to 00:16:58.750 --> 00:17:00.470 transfer out to another exchange where they could 00:17:00.470 --> 00:17:02.649 actually sell it for real cash. Right. Because 00:17:02.649 --> 00:17:05.609 at this point in late 2013, withdrawals of Bitcoin 00:17:05.609 --> 00:17:07.950 were still working. It was just the dollars that 00:17:07.950 --> 00:17:10.089 were stuck in the system. Exactly. So people 00:17:10.089 --> 00:17:12.009 thought, OK, the traditional banking rails are 00:17:12.009 --> 00:17:13.950 broken, but the crypto rails are still fine. 00:17:14.130 --> 00:17:16.670 Until they weren't. Until they weren't. We move 00:17:16.670 --> 00:17:19.890 into early 2014. The tension is building. The 00:17:19.890 --> 00:17:22.869 forums Bitcoin talk are on fire. There are threads 00:17:22.869 --> 00:17:25.029 with over 3 ,000 posts just complaining about 00:17:25.029 --> 00:17:28.190 delays. People are getting angry. And then February 00:17:28.190 --> 00:17:32.230 7, 2014, the other shoe finally drops. This is 00:17:32.230 --> 00:17:35.009 the beginning of the end. On February 7, Mt. 00:17:35.029 --> 00:17:38.329 Gox halts all Bitcoin withdrawals. Now, real 00:17:38.329 --> 00:17:41.470 panic sets in. It's not just cash anymore. Now 00:17:41.470 --> 00:17:43.809 you can't even get your crypto out. The exit 00:17:43.809 --> 00:17:46.309 doors are welded shut. And their excuse for this 00:17:46.309 --> 00:17:50.500 was, well... It was complicated. They blamed 00:17:50.500 --> 00:17:53.160 something called transaction malleability? Yes. 00:17:53.579 --> 00:17:55.799 This is a technical term that got thrown around 00:17:55.799 --> 00:17:58.640 a lot in 2014. Let's really unpack it because 00:17:58.640 --> 00:18:01.140 it's crucial to understanding their defense and 00:18:01.140 --> 00:18:03.339 also why it was mostly smoke and mirrors. Okay, 00:18:03.400 --> 00:18:06.559 lay it on me. As simply as you can, what is transaction 00:18:06.559 --> 00:18:09.059 malleability? Okay, think of a Bitcoin transaction 00:18:09.059 --> 00:18:11.180 like a signed check you send to the bank. The 00:18:11.180 --> 00:18:13.519 bank reads the check, verifies your signature, 00:18:13.640 --> 00:18:15.980 and moves the money. Now imagine if someone could 00:18:15.980 --> 00:18:18.599 intercept that check in the mail. change the 00:18:18.599 --> 00:18:20.539 font on the signature, not the signature itself, 00:18:20.680 --> 00:18:22.460 just the way it looks, and then hand it to the 00:18:22.460 --> 00:18:24.559 bank. So the content of the check is the same, 00:18:24.660 --> 00:18:26.619 the amount is the same, the recipient is the 00:18:26.619 --> 00:18:29.160 same, the signature is valid. Right. But because 00:18:29.160 --> 00:18:32.500 the visual appearance changed slightly, the bank's 00:18:32.500 --> 00:18:34.980 computer system assigns it a different reference 00:18:34.980 --> 00:18:37.680 number. It files it under a different ID. OK, 00:18:37.779 --> 00:18:39.680 I follow. So the money moves, but the receipt 00:18:39.680 --> 00:18:43.059 number changes. Exactly. In Bitcoin terms, a 00:18:43.059 --> 00:18:45.579 hacker could slightly alter the transaction data 00:18:45.579 --> 00:18:48.400 before it was confirmed on the blockchain. this 00:18:48.400 --> 00:18:50.460 would change the transaction ID, which is the 00:18:50.460 --> 00:18:52.660 hash of all that data. So if I send you a Bitcoin, 00:18:52.960 --> 00:18:55.579 my wallet creates a transaction with, let's say, 00:18:55.720 --> 00:18:59.400 ID number 123. You mess with it, and on the blockchain, 00:18:59.519 --> 00:19:02.880 it shows up as ID number ABC. Yes, but the transaction 00:19:02.880 --> 00:19:05.420 still happened. The money moved from your address 00:19:05.420 --> 00:19:08.950 to mine. But here is the critical problem. Mt. 00:19:09.049 --> 00:19:11.849 Gox's software was very, very rigid. It would 00:19:11.849 --> 00:19:13.430 send the coins and then watch the blockchain 00:19:13.430 --> 00:19:17.150 specifically for ID number 123 to appear. And 00:19:17.150 --> 00:19:19.930 when it doesn't see ID number 123? It assumes 00:19:19.930 --> 00:19:22.670 the payment failed. Ah, I see. So the system 00:19:22.670 --> 00:19:24.470 thinks, oops, the payment didn't go through. 00:19:24.569 --> 00:19:27.390 And then what? The user complains? The user writes 00:19:27.390 --> 00:19:29.609 a support ticket. Hey, my withdrawal failed. 00:19:29.750 --> 00:19:32.259 It says pending forever. The automated system 00:19:32.259 --> 00:19:34.980 or maybe a support agent would check, see that 00:19:34.980 --> 00:19:37.460 ID 123 never confirmed, and they would say, oh, 00:19:37.480 --> 00:19:39.099 sorry about that. And then they would resend 00:19:39.099 --> 00:19:41.519 the coins. So the user gets paid twice. Double 00:19:41.519 --> 00:19:43.900 spending. It's an infinite money glitch. That 00:19:43.900 --> 00:19:45.900 sounds like a pretty legitimate bug in Bitcoin. 00:19:46.000 --> 00:19:48.799 That's a serious flaw. It was a known issue in 00:19:48.799 --> 00:19:51.160 the Bitcoin protocol at the time, yes. It was 00:19:51.160 --> 00:19:54.420 a quirk. But here is the catch. Every other exchange 00:19:54.420 --> 00:19:56.799 knew about it and had already implemented workarounds. 00:19:56.900 --> 00:19:58.960 They adjusted their software to look for the 00:19:58.960 --> 00:20:01.440 transaction differently or to track wallet inputs 00:20:01.440 --> 00:20:04.920 instead of just transaction IDs. When Mt. Gox 00:20:04.920 --> 00:20:08.220 halted withdrawals citing this bug, other exchanges 00:20:08.220 --> 00:20:11.339 like Bitstamp and Kraken were back in full operation 00:20:11.339 --> 00:20:14.440 very, very quickly. So the bug was real, but 00:20:14.440 --> 00:20:17.079 their reaction to it was suspicious. The expert 00:20:17.079 --> 00:20:20.619 consensus at the time and now was that Mt. Gox 00:20:20.619 --> 00:20:24.150 was using this bug as a shield. They were blaming 00:20:24.150 --> 00:20:26.289 the Bitcoin protocol for their own deep, deep 00:20:26.289 --> 00:20:29.250 insolvency. They needed an excuse to stop the 00:20:29.250 --> 00:20:31.470 bleeding. A shield for the fact that they simply 00:20:31.470 --> 00:20:33.789 didn't have the coins to gift people. They were 00:20:33.789 --> 00:20:36.150 stalling for time. That becomes painfully clear 00:20:36.150 --> 00:20:38.910 as February rolls on. Withdrawals are still halted. 00:20:39.190 --> 00:20:42.210 Mark Arpolis, the CEO, is refusing to comment 00:20:42.210 --> 00:20:43.910 on the company's financial status to the Wall 00:20:43.910 --> 00:20:46.849 Street Journal. He famously had to move the office 00:20:46.849 --> 00:20:49.170 to a different location in Shibuya because of 00:20:49.170 --> 00:20:51.470 safety concerns. There were protesters standing 00:20:51.470 --> 00:20:53.210 outside their office building holding signs. 00:20:53.549 --> 00:20:56.990 Where is our money? Mt. Gox is a scam. I remember 00:20:56.990 --> 00:20:58.950 seeing the photos of these guys just standing 00:20:58.950 --> 00:21:02.009 in the Tokyo rain. It was tragic. And the market 00:21:02.009 --> 00:21:04.589 reacted instantly. The price of Bitcoin on Mt. 00:21:04.670 --> 00:21:06.990 Gox completely diverged from other exchanges. 00:21:07.250 --> 00:21:09.670 It crashed. It was trading at 20 percent of the 00:21:09.670 --> 00:21:12.089 value you see on Bitstamp or elsewhere. That's 00:21:12.089 --> 00:21:14.859 the Gox discount. Basically, the market was saying 00:21:14.859 --> 00:21:17.660 a Bitcoin inside Mt. Gox is worth way less than 00:21:17.660 --> 00:21:19.500 a real Bitcoin because there is an 80 percent 00:21:19.500 --> 00:21:21.859 chance you will never, ever see it again. Exactly. 00:21:22.140 --> 00:21:24.079 It was a prediction market on their insolvency. 00:21:24.099 --> 00:21:27.799 You know. And then on February 23, Karpeles resigns 00:21:27.799 --> 00:21:30.059 from the Bitcoin Foundation board. The company's 00:21:30.059 --> 00:21:31.799 Twitter account gets wiped completely clean. 00:21:31.960 --> 00:21:35.059 And then the blackout. February 24, 2014. The 00:21:35.059 --> 00:21:37.940 website goes offline. If you typed in mtgox .com, 00:21:38.079 --> 00:21:39.839 you just got a blank page. I remember seeing 00:21:39.839 --> 00:21:42.319 screenshots of that. Just pure white space, no 00:21:42.319 --> 00:21:45.059 logo, no login, no error message, just a void. 00:21:45.480 --> 00:21:48.700 And then a document leaks, an internal crisis 00:21:48.700 --> 00:21:52.160 management draft. And this document dropped a 00:21:52.160 --> 00:21:54.559 bombshell that I don't think anyone, even the 00:21:54.559 --> 00:21:56.960 biggest critics, was fully prepared for. The 00:21:56.960 --> 00:21:59.480 document claimed the company was insolvent. Everyone 00:21:59.480 --> 00:22:03.200 expected that. But the number. The number was 00:22:03.200 --> 00:22:07.259 just staggering. It said they had lost 744 ,408 00:22:07.259 --> 00:22:11.880 bitcoins. 744 ,000 plus another 100 ,000 of the 00:22:11.880 --> 00:22:14.480 company's own coins. All told, it was roughly 00:22:14.480 --> 00:22:18.019 850 ,000 bitcoin. At the time, that represented 00:22:18.019 --> 00:22:21.119 about 7 % of all Bitcoins in existence. Let that 00:22:21.119 --> 00:22:24.140 sink in. 7 % of the entire global supply of the 00:22:24.140 --> 00:22:26.200 currency. I mean, imagine if a bank announced 00:22:26.200 --> 00:22:28.480 today, whoops, we seem to have misplaced 7 % 00:22:28.480 --> 00:22:30.559 of all the U .S. dollars currently in circulation. 00:22:31.000 --> 00:22:33.460 The global economy would just melt down. It was 00:22:33.460 --> 00:22:35.819 cataclysmic. It was a potential extinction level 00:22:35.819 --> 00:22:38.200 event for Bitcoin. And the document said this 00:22:38.200 --> 00:22:40.799 theft had gone undetected for years. For years. 00:22:40.960 --> 00:22:44.500 How do you not notice? 850 ,000 missing coins. 00:22:44.740 --> 00:22:46.960 How does your accountant not scream and run out 00:22:46.960 --> 00:22:49.000 of the building? That is the multi -million or 00:22:49.000 --> 00:22:51.480 rather multi -billion dollar question. The other 00:22:51.480 --> 00:22:54.460 major exchanges, Coinbase, Kraken, Bitstamp, 00:22:54.500 --> 00:22:56.900 they immediately released a joint statement. 00:22:57.019 --> 00:22:59.059 They had to quarantine the rot. They basically 00:22:59.059 --> 00:23:01.680 said, this is a tragic violation of trust by 00:23:01.680 --> 00:23:03.980 this one company. This is not a failure of Bitcoin 00:23:03.980 --> 00:23:07.880 itself. They threw Mt. Gox under the bus to save 00:23:07.880 --> 00:23:10.420 the entire industry. Which was probably necessary. 00:23:10.799 --> 00:23:13.119 If everyone thought Bitcoin itself was fundamentally 00:23:13.119 --> 00:23:15.539 broken, it would have gone to zero. So on February 00:23:15.539 --> 00:23:18.680 28, 2014, Mt. Gox files for bankruptcy protection 00:23:18.680 --> 00:23:21.819 in Tokyo. Minji Seisei, which is civil rehabilitation. 00:23:22.339 --> 00:23:25.460 Right. They reported liabilities of 6 .5 billion 00:23:25.460 --> 00:23:29.180 yen, about $65 million at the time, against assets 00:23:29.180 --> 00:23:32.200 of only 3 .84 billion yen. They were underwater. 00:23:32.619 --> 00:23:34.880 Deeply, deeply underwater. Kerpel has held a 00:23:34.880 --> 00:23:37.019 press conference. He bowed deeply at traditional 00:23:37.019 --> 00:23:39.700 Japanese apology and blamed hackers and technical 00:23:39.700 --> 00:23:42.059 issues. Okay, so they file for bankruptcy. The 00:23:42.059 --> 00:23:44.180 coins are gone. Everyone thinks it's over. But 00:23:44.180 --> 00:23:46.880 then the story gets even stranger. A month later, 00:23:46.980 --> 00:23:49.920 March 20, 2014, Mt. Gox makes an announcement. 00:23:50.099 --> 00:23:54.339 They found some coins. Laughs. Yes! This is one 00:23:54.339 --> 00:23:56.220 of the most bizarre twists in the history of 00:23:56.220 --> 00:23:58.440 finance. They announced on their website that 00:23:58.440 --> 00:24:05.220 they had found... 199 ,999 .99 bitcoins. How 00:24:05.220 --> 00:24:07.839 do you just find 200 ,000 bitcoins? That was 00:24:07.839 --> 00:24:11.180 worth $116 million at the time. Did they check 00:24:11.180 --> 00:24:13.400 the office couch cushions? Did they look in the 00:24:13.400 --> 00:24:16.000 pockets of an old pair of jeans? Technically, 00:24:16.099 --> 00:24:18.640 they checked an old digital wallet format. They 00:24:18.640 --> 00:24:20.500 claimed these coins were in a wallet they hadn't 00:24:20.500 --> 00:24:22.500 used since June 2011. They just thought it was 00:24:22.500 --> 00:24:24.680 empty or obsolete. They re -scanned it after 00:24:24.680 --> 00:24:27.319 the bankruptcy filing. And lo and behold, a massive 00:24:27.319 --> 00:24:29.609 fortune was just... sitting there, forgotten. 00:24:29.869 --> 00:24:32.630 That speaks volumes about the level of incompetence 00:24:32.630 --> 00:24:34.190 we mentioned earlier. They didn't even know what 00:24:34.190 --> 00:24:36.170 they had. They were sitting on $100 million and 00:24:36.170 --> 00:24:38.950 had no idea it was there. It confirmed that they 00:24:38.950 --> 00:24:41.069 had absolutely no idea what they were doing regarding 00:24:41.069 --> 00:24:43.670 basic inventory management. But that discovery 00:24:43.670 --> 00:24:46.089 was a miracle for the creditors. It meant there 00:24:46.089 --> 00:24:48.450 was something left in the pot to salvage. It 00:24:48.450 --> 00:24:50.589 brought the total missing amount down from $850 00:24:50.589 --> 00:24:53.710 ,000 to about $650 ,000, which is, you know, 00:24:53.730 --> 00:24:56.430 better, but still a complete disaster. So we 00:24:56.430 --> 00:24:59.559 have a massive theft. But how did it actually 00:24:59.559 --> 00:25:03.039 happen? Was it one big heist, like in a movie? 00:25:03.339 --> 00:25:06.220 Did someone rappel down the elevator shaft and 00:25:06.220 --> 00:25:08.640 plug in a USB drive? That's what everyone assumed 00:25:08.640 --> 00:25:10.920 initially. Everyone was looking for the Ocean's 00:25:10.920 --> 00:25:14.079 Eleven moment. But in April 2015, a security 00:25:14.079 --> 00:25:16.779 company called WISAC released their investigation 00:25:16.779 --> 00:25:19.880 results, and their conclusion was... arguably 00:25:19.880 --> 00:25:22.660 much more disturbing than a single dramatic heist. 00:25:22.680 --> 00:25:24.880 What did they find? They found that most, if 00:25:24.880 --> 00:25:26.880 not all, of the missing Bitcoins were stolen 00:25:26.880 --> 00:25:29.180 straight out of the Mt. Gox hot wallet over time, 00:25:29.420 --> 00:25:32.180 beginning as early as late 2011. So it wasn't 00:25:32.180 --> 00:25:34.339 a smash and grab. It was a slow bleed. A drip 00:25:34.339 --> 00:25:36.779 feed. The hackers had access to the private keys. 00:25:37.039 --> 00:25:39.000 They were essentially just sipping from the fire 00:25:39.000 --> 00:25:41.839 hose for two full years. And nobody at Mt. Gox 00:25:41.839 --> 00:25:44.680 noticed the balance dropping for two years. The 00:25:44.680 --> 00:25:47.980 problem was, Matt Gox's internal accounting database 00:25:47.980 --> 00:25:51.200 didn't match reality. The system thought the 00:25:51.200 --> 00:25:53.619 coins were there. The numbers on a website said 00:25:53.619 --> 00:25:55.779 the coins were there, but the blockchain showed 00:25:55.779 --> 00:25:58.920 they were steadily moving out. Because they didn't 00:25:58.920 --> 00:26:00.960 have robust reconciliation, which is basically 00:26:00.960 --> 00:26:02.980 checking the bank vault against the ledger every 00:26:02.980 --> 00:26:05.720 single night, they just didn't catch it. So the 00:26:05.720 --> 00:26:07.960 exchange was effectively running a fractional 00:26:07.960 --> 00:26:10.400 reserve. They were paying out withdrawals to 00:26:10.400 --> 00:26:12.799 customer A using the new deposit from customer 00:26:12.799 --> 00:26:16.119 B because the coins the customer A thought they 00:26:16.119 --> 00:26:18.559 had were actually already stolen by the hacker. 00:26:18.700 --> 00:26:21.779 Exactly. It was an unintentional Ponzi scheme 00:26:21.779 --> 00:26:25.000 dynamic. They were insolvent. long, long before 00:26:25.000 --> 00:26:26.880 they froze withdrawals. They just didn't realize 00:26:26.880 --> 00:26:29.559 it or maybe didn't want to admit it until the 00:26:29.559 --> 00:26:32.279 inflows of new money stopped covering the outflows 00:26:32.279 --> 00:26:34.619 from withdrawals. That is terrifying. It means 00:26:34.619 --> 00:26:37.140 for the entire bull run of 2013, people were 00:26:37.140 --> 00:26:39.920 trading phantom coins. Precisely. You were trading 00:26:39.920 --> 00:26:42.059 numbers on a screen that were backed by nothing 00:26:42.059 --> 00:26:44.519 but air. And did they ever find who was doing 00:26:44.519 --> 00:26:46.799 the sipping? Who was behind the slow bleed? There 00:26:46.799 --> 00:26:49.019 were some major breakthroughs. The U .S. Department 00:26:49.019 --> 00:26:51.680 of Justice eventually identified a Russian man 00:26:51.680 --> 00:26:54.319 named Alexander Vinnick. He was the alleged owner 00:26:54.319 --> 00:26:58.000 of another exchange called BTCE. I remember BTCE. 00:26:58.099 --> 00:27:01.190 It was known for being... Let's say less than 00:27:01.190 --> 00:27:04.250 regulated. It was the Wild West of the Wild West. 00:27:04.450 --> 00:27:06.690 It was where you went if you didn't want to provide 00:27:06.690 --> 00:27:09.289 any ID. And the DOJ alleged that Vinnick was 00:27:09.289 --> 00:27:11.849 the key figure in laundering the stolen Mt. Gox 00:27:11.849 --> 00:27:14.809 coins. So the funds were being siphoned out of 00:27:14.809 --> 00:27:16.849 Gox, moved through various wallets, and then 00:27:16.849 --> 00:27:19.190 washed through the BTC exchange to make them 00:27:19.190 --> 00:27:21.750 look clean. So we have the mechanism of the theft, 00:27:21.849 --> 00:27:24.490 the slow bleed. We have the suspect for the laundering, 00:27:24.490 --> 00:27:27.490 Vinik. But what about Karpeles? He was the captain 00:27:27.490 --> 00:27:29.609 of the ship. Did he go to jail for the missing 00:27:29.609 --> 00:27:32.549 650 ,000 coins? This is where the legal system 00:27:32.549 --> 00:27:35.509 gets very, very specific. Karpeles was arrested 00:27:35.509 --> 00:27:38.970 in August 2015 by Japanese police. He was charged 00:27:38.970 --> 00:27:41.490 with fraud, embezzlement, and manipulating the 00:27:41.490 --> 00:27:44.349 computer system to increase balances. Specifically, 00:27:44.549 --> 00:27:47.390 they accused him of taking about $2 .6 million 00:27:47.390 --> 00:27:49.950 of investor funds and moving it to his own accounts, 00:27:50.029 --> 00:27:53.170 right? Yes. That and falsifying data to make 00:27:53.170 --> 00:27:56.309 the company look solvent when it wasn't. The 00:27:56.309 --> 00:27:59.299 trial dragged on for years. until March 2019. 00:27:59.519 --> 00:28:02.200 Then the verdict. It was mixed. The Tokyo District 00:28:02.200 --> 00:28:05.160 Court found him guilty of falsifying data. Basically, 00:28:05.299 --> 00:28:07.980 he cooked the books. He admitted to manually 00:28:07.980 --> 00:28:10.380 editing the database to inflate their holdings 00:28:10.380 --> 00:28:14.700 by about $33 .5 million. So he was pumping up 00:28:14.700 --> 00:28:16.839 the numbers. But what about the embezzlement? 00:28:16.900 --> 00:28:20.380 And more importantly, the theft of the 650 ,000 00:28:20.380 --> 00:28:23.720 coins? On those counts, he was found not guilty. 00:28:24.529 --> 00:28:26.750 Not guilty of embezzlement and not guilty of 00:28:26.750 --> 00:28:29.609 aggravated breach of trust. The court believed 00:28:29.609 --> 00:28:31.509 that while he messed with the data, he didn't 00:28:31.509 --> 00:28:33.430 do it with ill intent to steal the money for 00:28:33.430 --> 00:28:35.809 himself. He was likely just trying to patch the 00:28:35.809 --> 00:28:37.829 holes and keep the ship from sinking, albeit 00:28:37.829 --> 00:28:40.450 illegally. So he wasn't the master thief. He 00:28:40.450 --> 00:28:43.029 was just the incompetent captain trying to hide 00:28:43.029 --> 00:28:45.269 the giant hole in the hull with some duct tape. 00:28:45.430 --> 00:28:47.829 That seems to be the court's view. And for that, 00:28:47.990 --> 00:28:50.789 he got a suspended sentence. 30 months in prison, 00:28:50.890 --> 00:28:53.430 suspended for four years, meaning as long as 00:28:53.430 --> 00:28:55.029 he stayed out of trouble for those four years, 00:28:55.109 --> 00:28:57.250 he wouldn't actually serve any jail time. Wow. 00:28:57.650 --> 00:28:59.869 Considering the sheer scale of the loss, that 00:28:59.869 --> 00:29:02.769 feels light. I'm sure it feels light to a lot 00:29:02.769 --> 00:29:05.210 of the victims. Oh, absolutely. The verdict even 00:29:05.210 --> 00:29:07.390 said he inflicted massive harm to the trust of 00:29:07.390 --> 00:29:10.029 his users. But from a legal standpoint, they 00:29:10.029 --> 00:29:12.130 couldn't pin the actual theft of the hundreds 00:29:12.130 --> 00:29:15.140 of thousands of coins on him. So Carplus is out. 00:29:15.259 --> 00:29:17.500 Vinik is tied up in legal battles. But what about 00:29:17.500 --> 00:29:19.359 the money? What about the victims? It's been 00:29:19.359 --> 00:29:21.720 10 years now. This is the never ending story 00:29:21.720 --> 00:29:24.640 of the civil rehabilitation. Because they found 00:29:24.640 --> 00:29:28.059 those 200 ,000 bitcoins and because the price 00:29:28.059 --> 00:29:29.880 of Bitcoin has gone up so astronomically since 00:29:29.880 --> 00:29:33.960 2014, the bankruptcy estate. actually holds a 00:29:33.960 --> 00:29:36.079 significant amount of value. Right. This is the 00:29:36.079 --> 00:29:39.660 irony of ironies. In 2014, Bitcoin was maybe 00:29:39.660 --> 00:29:42.819 $500. Today, it's tens of thousands. So those 00:29:42.819 --> 00:29:45.339 200 ,000 coins that were lost in that old wallet 00:29:45.339 --> 00:29:48.880 are now worth billions of dollars. Exactly. The 00:29:48.880 --> 00:29:51.339 process shifted from a simple bankruptcy liquidation 00:29:51.339 --> 00:29:54.380 to civil rehabilitation. This is much better 00:29:54.380 --> 00:29:56.500 for the creditors because in a normal liquidation, 00:29:56.599 --> 00:29:58.460 they might have been paid out based on the cash 00:29:58.460 --> 00:30:01.319 value of Bitcoin back in 2014. Which would be 00:30:01.319 --> 00:30:03.799 pennies on the dollar compared to today's value. 00:30:03.900 --> 00:30:06.859 If you lost 10 Bitcoin, you'd get maybe $5 ,000 00:30:06.859 --> 00:30:09.579 back instead of the hundreds of thousands it's 00:30:09.579 --> 00:30:12.039 worth now. Right. Civil rehabilitation allows 00:30:12.039 --> 00:30:14.240 for the possibility of distributing the actual 00:30:14.240 --> 00:30:18.099 Bitcoin. The trustee, a lawyer named Nobuaki 00:30:18.099 --> 00:30:22.759 Kobayashi, holds roughly 142 ,000 BTC to be distributed. 00:30:23.160 --> 00:30:25.799 And there was this big plan, the Goxillionaire 00:30:25.799 --> 00:30:29.519 hope, that was approved in 2021. Yes. The creditors 00:30:29.519 --> 00:30:32.400 finally voted on a rehabilitation plan. 99 % 00:30:32.400 --> 00:30:34.500 of them accepted it. It promised that billions 00:30:34.500 --> 00:30:36.319 of dollars in Bitcoin would finally be returned 00:30:36.319 --> 00:30:38.569 to them. But the dates just keep slipping, don't 00:30:38.569 --> 00:30:40.950 they? It's been a story of constant delays. April 00:30:40.950 --> 00:30:44.309 2023, then September 2023, now October 2024. 00:30:44.930 --> 00:30:47.109 The deadline for repayment keeps getting pushed 00:30:47.109 --> 00:30:49.349 back. However, the process has officially begun. 00:30:49.549 --> 00:30:51.410 Some creditors have started seeing movement in 00:30:51.410 --> 00:30:54.869 payments in late 2023 and into 2024. But for 00:30:54.869 --> 00:30:57.509 many, it's been a decade of just waiting. A decade. 00:30:57.569 --> 00:30:59.509 Can you imagine having your life savings locked 00:30:59.509 --> 00:31:01.869 in a legal battle for 10 years? You watch the 00:31:01.869 --> 00:31:04.829 price go up to $60 ,000, crash down to $15 ,000 00:31:04.829 --> 00:31:07.269 back up, and you can't touch a single cent of 00:31:07.269 --> 00:31:10.549 it. It's agonizing. But looking at the big picture, 00:31:10.690 --> 00:31:13.029 the fact that they're getting anything back at 00:31:13.029 --> 00:31:15.890 all is somewhat of a miracle in the world of 00:31:15.890 --> 00:31:19.130 crypto. Usually when an exchange dies, the money 00:31:19.130 --> 00:31:21.789 is just gone forever. That's a good point. Mt. 00:31:21.869 --> 00:31:24.410 Gox is almost the exception because they were 00:31:24.410 --> 00:31:27.069 just incompetent enough to actually lose and 00:31:27.069 --> 00:31:29.569 then find a cold wallet with a fortune in it. 00:31:29.730 --> 00:31:32.210 So what does this all mean? When we zoom out, 00:31:32.269 --> 00:31:35.190 what is the real legacy of Mt. Gox? Well, for 00:31:35.190 --> 00:31:37.569 one, it's forced the world to finally take regulation 00:31:37.569 --> 00:31:40.829 seriously. A huge impact there. The collapse 00:31:40.829 --> 00:31:43.410 led Japan to create the first formal regulations 00:31:43.410 --> 00:31:46.259 for cryptocurrency exchanges on the planet. They 00:31:46.259 --> 00:31:48.420 realized you can't just let a guy run a global 00:31:48.420 --> 00:31:50.740 financial hub on a spare domain name from a card 00:31:50.740 --> 00:31:53.339 game. It was the event that shifted the industry 00:31:53.339 --> 00:31:56.299 from magic cards to a regulated financial asset 00:31:56.299 --> 00:31:58.920 class. And it taught an entire generation of 00:31:58.920 --> 00:32:01.980 crypto users a very, very hard lesson. The mantra 00:32:01.980 --> 00:32:05.910 was born. Not your keys, not your coins. Explain 00:32:05.910 --> 00:32:07.769 that for the listener who might be new to this 00:32:07.769 --> 00:32:09.849 space. What does that mean? It means that if 00:32:09.849 --> 00:32:11.930 you leave your cryptocurrency on an exchange 00:32:11.930 --> 00:32:15.349 like Mt. Gox or Coinbase or Binance or any of 00:32:15.349 --> 00:32:18.410 them, you don't actually own the money. You own 00:32:18.410 --> 00:32:21.230 an IOU from that exchange. If the exchange gets 00:32:21.230 --> 00:32:24.130 hacked, goes bankrupt, or the CEO decides to 00:32:24.130 --> 00:32:26.589 run away to the Bahamas. Too soon. Your money 00:32:26.589 --> 00:32:29.940 is gone. Unless you hold the private keys yourself 00:32:29.940 --> 00:32:32.960 in your own personal hardware wallet, you are 00:32:32.960 --> 00:32:35.079 trusting a third party with your wealth. And 00:32:35.079 --> 00:32:38.180 Mangox proved that even the biggest, most dominant 00:32:38.180 --> 00:32:41.119 third party can fail spectacularly. It was a 00:32:41.119 --> 00:32:43.359 total loss of innocence for the industry. Before 00:32:43.359 --> 00:32:45.500 Gox, there was this kind of utopian idea that 00:32:45.500 --> 00:32:47.519 code is law and everything is perfectly secure. 00:32:47.920 --> 00:32:50.619 Gox showed that human error, human greed and 00:32:50.619 --> 00:32:53.099 human incompetence are still the biggest risks 00:32:53.099 --> 00:32:55.559 in any system. It's fascinating that we are still 00:32:55.559 --> 00:32:58.119 talking about it 10 years later. It's the ghost 00:32:58.119 --> 00:33:00.920 that haunts every single bull market. Every time 00:33:00.920 --> 00:33:03.039 a new exchange collapses, like FTX recently, 00:33:03.259 --> 00:33:05.400 everyone says it's make gox all over again. It's 00:33:05.400 --> 00:33:08.039 set the pattern, the denial, the halting of withdrawals, 00:33:08.039 --> 00:33:11.220 the technical issues excuse, the eventual bankruptcy 00:33:11.220 --> 00:33:13.579 filing. It's the same script just written a decade 00:33:13.579 --> 00:33:16.079 earlier. Before we wrap up, I want to suggest 00:33:16.079 --> 00:33:19.039 our listeners look up one visual, the graph. 00:33:19.609 --> 00:33:22.730 of the stolen coins. The Wizet graph. Yes. If 00:33:22.730 --> 00:33:25.349 you look it up, it is absolutely chilling. It 00:33:25.349 --> 00:33:28.390 shows the Ant Gox Bitcoin balance as a flat line. 00:33:28.470 --> 00:33:30.150 That's what they thought they had. And then it 00:33:30.150 --> 00:33:32.490 shows the actual balance on the blockchain as 00:33:32.490 --> 00:33:35.150 a jagged line crashing downward over the course 00:33:35.150 --> 00:33:37.670 of two years. It's the perfect visualization 00:33:37.670 --> 00:33:41.250 of the complete disconnect between perception 00:33:41.250 --> 00:33:44.190 and reality. And that's really the story of Make 00:33:44.190 --> 00:33:46.299 Gox. It looked like a giant. It looked like the 00:33:46.299 --> 00:33:48.880 center of the financial universe. But underneath, 00:33:49.140 --> 00:33:51.579 it was being eaten away by termites until the 00:33:51.579 --> 00:33:53.559 whole thing just collapsed into dust. And all 00:33:53.559 --> 00:33:55.900 of it started because a guy wanted to trade magic 00:33:55.900 --> 00:33:58.440 cards online and then he got too busy to run 00:33:58.440 --> 00:34:00.680 the site properly. The butterfly effect in action. 00:34:00.799 --> 00:34:03.380 OK, here is a final provocative thought to leave 00:34:03.380 --> 00:34:05.960 you with. We talked about how Mt. Gox lost 7 00:34:05.960 --> 00:34:08.340 % of all Bitcoin in existence. Imagine if that 00:34:08.340 --> 00:34:11.119 happened today. Imagine the financial shockwave. 00:34:11.440 --> 00:34:14.610 But deeper than that. In a world of digital finance, 00:34:14.670 --> 00:34:16.630 where everything is just numbers on a server, 00:34:16.829 --> 00:34:19.250 if you don't hold the keys, if you can't touch 00:34:19.250 --> 00:34:21.750 it, do you actually own the money? That's the 00:34:21.750 --> 00:34:24.469 scary part. We trust these systems implicitly 00:34:24.469 --> 00:34:27.369 now. We have our banking apps, our exchange accounts. 00:34:27.690 --> 00:34:30.650 But Matt Gox is the ultimate reminder that systems 00:34:30.650 --> 00:34:33.929 are just people and code, and both can break. 00:34:34.130 --> 00:34:36.510 On that cheerful note... Thank you for joining 00:34:36.510 --> 00:34:39.389 us on this deep dive into the rise and spectacular 00:34:39.389 --> 00:34:41.869 fall of MetGox. Always a pleasure. Keep your 00:34:41.869 --> 00:34:43.789 private keys safe, everyone. We'll see you next 00:34:43.789 --> 00:34:44.010 time.