Mt. Gox Knew It Was Selling Phantom Bitcoin 2 Weeks Before Collapse

An anonymous reader writes "Mt. Gox CEO Mark Karpeles wrote in a sworn declaration in the company's U.S. bankruptcy filing he suspected hundreds of thousands of bitcoins were missing on Feb. 7, more than two weeks before it finally halted trading. That means Mt. Gox allowed its customers to continue trading, knowing that its bitcoin stash was wiped out and collecting as much as US$900,000 in trading fees. Since Mt. Gox said it was also missing $27.3 million in cash from customer deposits, it raises the possibility that customers — despite seeing a cash balance displayed in their account — might have actually been buying bitcoins that did not exist, with cash that was already long gone."

Comments

Bitcoin

[roninmagus]

I'm all for what bitcoin is trying to achieve. But this is just a news story about an exchange which didn't know what it was doing, trading in a currency that hasn't been fully proven, operating in an unknown capacity from somewhere in Japan, and without any oversight at all. That's like millions of people asking my buddy Joe who lives in a trailer to hang onto their money for them. Oh no, bad decisions were made?

Re:Bitcoin

[jhol13]

I'm all for what bitcoin is trying to achieve.

I'm not. Actually I do not know what it is trying to achieve, but "unregulated" and "not backed up by anything" are certainly not what I am after.

But this is just a news story about an exchange which didn't know what it was doing, trading in a currency that hasn't been fully proven, operating in an unknown capacity from somewhere in Japan, and without any oversight at all.

I think they knew what they were doing. I think the currency is proven - to be faulty. I think the "achieve" part means "no oversight at all" so you are already contradicting yourself.

That's like millions of people asking my buddy Joe who lives in a trailer to hang onto their money for them. Oh no, bad decisions were made?

What you "bitcoin people" seem to want is anymous (i.e. can buy drugs without getting caught) which can be easily transferred (i.e. no exchange can steal or stop you) backed up (i.e. you cannot lose your money - just win with it) non-government (i.e. not backed up ...), non-fiat (i.e. er, I have no clue) money.

Then someone makes "cryptographic mathematically proven" - and you expect that to mean it holds all above. You fail to understand that money has just one necessary condition: majority of people trust it - mostly because the country they live in would collapse without it, and the persons backing it up knows this and you know they know.

Re:Bitcoin

[rudy_wayne]

Yeah, those fools should have definitely given their money to the pros.
You know what, that's too much sarcasm for me to fart out at once. This sounds essentially like the subprime mortgage crisis. And a lot of other banking crises. It doesn't seem totally insane to me to trust your friend Joe in a trailer over the banking industry: when he runs off with my money, at least he might go to jail rather than getting millions in rewards.

As much as people (including me) like to hate on banks, when was the last time you actually lost money? When was the last time you put money in a bank and they "lost" all or part of it? When was the last time you put money in a bank and lost all or part of it because the bank was robbed?

Re:Bitcoin

[evilbessie]

Is fraud not specifically doing things against regulations? Without any form of regulation at all it wouldn't be fraud. The SEC are the police but they are paid by the people they police, if not actually being the same people. Bad policing of regulation isn't a problem with the regulations and to draw such comparisons hides the nature of the problem.

Re:Bitcoin

[Ralph Wiggam]

Madoff ran a ponsi scheme masquerading as a hedge fund with SEC reporting requirements and everything.

Hedge funds are a notoriously unregulated part of the finance industry. The reporting requirements are minimal.

Re:Bitcoin

[Oligonicella]

Pedantry of that nature indicates you already know you have no real argument.

Re:Bitcoin

[Ralph Wiggam]

My point is that there is an inverse relationship between the amount of regulation and the instances of massive fraud. Don't point to Bernie Madoff and assume that he was operating under the same rules as a commercial bank.

Re:Bitcoin

[DigitAl56K]

As much as people (including me) like to hate on banks, when was the last time you actually lost money? When was the last time you put money in a bank and they "lost" all or part of it? When was the last time you put money in a bank and lost all or part of it because the bank was robbed?

When was the last time the fed printed as much money as it wanted, devaluing the money you had put in the bank?

Oh, I see, all the time.

Re:Bitcoin

[sstamps]

I'm part of the "regulations crowd", and I most assuredly DO get it.

You point to a number of things in your propaganda which are patently false or misleading.

The first thing is that regulations are not intended to "create some magical inviolate barrier" to fraud and other shenanigans. They are designed to lessen such things, and bring them to light sooner than without. That's all that regulation can really do -- to foster an environment where such things are minimalized, even if they can't be totally eliminated.

The second thing is that the financial sector has been massively DE-regulated over the last two decades (and even farther back than that, if you want to include the removal of usury ceilings in the 70s). The prime reasons why the recent massive financial meltdown occurred aren't due to a failure of regulation, but of a failure TO regulate.

As it relates to BitCoin, REAL regulation would provide that their accounting and security methods were audited regularly, and that they maintain proper reserves of money to meet the payment demands of their clients.

While regulation wouldn't prevent the exchange from failing, it likely would have been caught sooner, and less people would have been impacted for less money.

At the very least, I would never assent to put any significant amount of money in any BitCoin exchange unless it submitted to some kind of third-party auditing and financial standards, absent real regulation. To do otherwise is simply throwing your money down a drain.

Re:Bitcoin

[m.dillon]

What regulations surrounding the dollar? Perhaps you mean regulations on banks and brokerages. Unfortunately, MtGox was neither a bank nor a brokerage. Plus they are run out of Japan, so they are hardly going to be subject to U.S. law.

Customers who got creamed by MtGox were idiots. I feel sorry for them, but sometimes it takes a hard lesson to punch through blind idealism.

-Matt

Re:Bitcoin

[Ralph Wiggam]

When was the last time that a customer of a US bank requested a withdraw and was refused because the bank didn't have the funds available?

Re:Bitcoin

[m.dillon]

In other words, you have this insane idea that since a few people have made out like bandits from Bitcoins extreme volatility, that it is somehow this magical deflationary entity that is a better investment than any of the thousands of securities one can purchase on the regulated stock market. That, somehow, magically, is a store of value that can beat inflation and, somehow, will magically be able to beat all the other umpteen crypto currencies out there that anyone can create with a flick of a finger (literally).

You also seem to believe that bitcoin exchanges are somehow magically governed by banking and securities laws that allow people to 'invest' and 'trade' safely, and that one can be insured against theft by putting their trust in unknown third parties running piss-ant little companies who happen to be able to set up a web site and throw some glitter on it.

I will tell you what Bitcoin is. Bitcoin is worthless as a currency (too volatile and too illiquid), meaningless as a commodity (because anyone can create their own crypto currency with a flick of a finger), not even remotely deflationary except in the minds of the true believers, and unusable as any sort of store of value except by idiots who think that quoted numbers on an exchange lend it credibility and back-of-the-hand calculations that someone, somewhere has gotten filthy rich trading it (ignoring the thousands of people who have gone broke trying to do the same).

There are always a few people with crazy views. It doesn't mean the views are any less crazy just because the internet lends them a voice. You actually believe that the stock market is some kind of scam and that bitcoin is somehow magically better? The level of stupidity required to form your opinion is beyond my comprehension.

-Matt

Interesting...

[Agares]

I do not see why there are still people out there who keep saying Bitcoin is a good investment. We keep seeing these exchanges fold up and run off with all this money. I know they claimed they were hacked, but how do we know for sure. To me the whole Bitcoin thing is just a way for a few to get rich by ripping off so many others. Also no one should be surprised that they were sold phantom Bitcoins. You have no way of knowing what you actually have on a site like that since you can’t directly access the wallet. It seems like common sense to me, but I guess I will never understand this kind of thing.

Re:Interesting...

[Anonymous Coward]

Curious you think this is isolated to BitCoin. Look up MF Global.

The nature of the Ponzi

[NotDrWho]

The only people who make money in a pyramid scheme are the people at the very top. Everyone else is a sucker.

buying nonexisting bitcoins...

[Anonymous Coward]

Isn't the bitcoin protocol expected to prevent exactly this? Assuming that the cryptographic part wasn't broken, the existence of a 6-block chain telling you the coins are there means they *are* there. Something tells me that a lot of people blindly trusted some random guy on the internet with their money instead of simply validating the fckn block chain, which would have told them immediately that they were screwed over.

Pyramid or pump and dump?

[sjbe]

I do not see why there are still people out there who keep saying Bitcoin is a good investment

For those at the top of the pyramid scheme it probably is. For everyone else? Yeah, not so much. Bitcoin has all the hallmarks of a pump and dump scheme. Thinly traded asset of dubious future value? Check. Marketing campaign to recruit investors? Check. Early large purchases at discounted rate? Check. Absurdly fast rise in "value"? Check. Early investors selling out or disappearing and leaving the new investors holding the bag? Check.

Unregulated bitcoin exchanges are basically pyramid schemes waiting to happen. The bitcoin currency itself looks shockingly like a pump and dump scheme and should be treated as radioactive (i.e. very carefully) until proven otherwise.

Re:The Free Market

[JoeyRox]

That all depends on how one prefers to be robbed. The transparent, libertarian way is to have your money stolen in front of you. The opaque, governmental way is to have it stolen in 3% to 5% increments every year via government-mandated inflation.

Re:Fractional Reserve

[Ralph Wiggam]

Except banks have multiple layers of safety nets to cover depositors and investors if things go bad.

Climbing a mountain with and without a rope are identical most of the time, but the difference is very important under certain conditions.

Where's the Tokyo Metropolitan Police Department?

[Animats]

Half a billion dollars has been stolen. Where's the Tokyo Metropolitan Police Department? This is their job. It's embarassing that they haven't made any arrests.

Re:Reply to Comment - Beta, why no default subject

[goose-incarnated]

Though, with the likes of Overstock accepting BTC now, the marketplace itself might soon serve that function without needing an external point of reference.

Why is this lie perpetually getting repeated? Hell, some moron even modded it up. Overstock (and Tigerdirect, etc) do not accept bitcoins as payment.

Once again for those of you too stupid to read carefully - No major retailer accepts bitcoins as tender!. Some of them allow you to pay via an exchange such as coinbase, but note that even though the customer is parting with bitcoins, the seller is only ever receiving dollars (AKA real currency).