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

[interkin3tic]

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.

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

[bws111]

Complete bullshit. As a depositor in a bank you are NOT an 'unsecured creditor'. Where does this nonsense come from? Thousands of banks have failed since FDIC was formed 80 years ago, and no depositor has lost any insured money.

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

[tlhIngan]

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.

You know, in 2008, Washington Mutual (aka WaMu) failed. Dead, A lot of people used them, too.

And yet, they're all happily going about their lives - having lost none of their money that was stored at WaMu.

Another bank took over the remains and all of WaMu's customers were automatically integrated in.

For all intents and purposes, the only thing that changed was the name on the envelope and on the card - the money that was deposited was still there, all the other assets were still there, etc.

So for all the banking crises, regulation does help, because instead of bank failures hurting regular joes by losing all their hard earned savings, life pretty much continued on as no one lost their deposits. You put your money in, you can be reasonably assured you will get it out.

Re:Bitcoin

[m.dillon]

Not quite true. Nobody has lost any insured money in a bank failure. Up to the FDIC limit. Plenty of people have lost money due to bank failures who had more than the insured amount in their account.

Strangely enough, very few people with balances over the FDIC limit actually lost any money due to the larger bank failures which occurred in 2008 and 2009, because the U.S. government brokered agreements with other large banks to buy their assets whole in exchange for some big tax breaks. Wells Fargo's purchase of Wachovia, for example.

Wells Fargo took on almost $30B in liabilities which would normally have made the purchase impossible, but the U.S. government relaxed some laws and allowed Wells to declare those liabilities against future profits to reduce their tax bill. Essentially, the U.S. government bailed out the bank customers of Wachovia.

However, a good chunk of the bank failures since 2008 were liquidations and any customer with a balance greater than the FDIC limit will have lost the difference.

-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?

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.

Change in name expected

[Mister Transistor]

It's official. The name is now changed to MtGotchya.

I'm thinking of a word -

[Darth Snowshoe]

I'm thinking of a word for a kind of system where, I don't know, someone makes rules for how large chunks of assets are managed, traded, stored. This word would mean that some PEOPLE, some kind of official-sounding types of PEOPLE, would "check up" on these places, these places that handle and store and manage other people's money, or assets, stuff. They would be checking up to make sure that the people who run those places, those people, wouldn't be, knowingly or unknowingly, doing things with other people's money that they shouldn't be doing. Maybe there could be a kind of system, say, where those people doing those things, are encouraged or made to do some things, to prove, that they have the money and things that they are supposed to have, and doing the things, those things that they are supposed to do, and not doing those things that they are not supposed to be doing, to those other people's money, and assets and stuff. And that they're honest, about what they say that they're doing, and that they're not doing. Who would be doing all that checking, and what would that process be, and who would be subject to it. If only there were one simple word for all of that.

Re:Stick to GOLD

[compro01]

Gold is not hard currency. That term really should really only apply to diamonds.