Special Report: Twice burned – How Mt. Gox’s bitcoin customers could lose again

TOKYO (Reuters) – When Mt. Gox, the world’s largest bitcoin trading exchange, collapsed in early 2014, more than 24,000 customers around the world lost access to hundreds of millions of dollars’ worth of cryptocurrency and cash.

More than three years later, with the price of bitcoin skyrocketing to more than $7,000, not a single customer has recouped a single cent, crypto or otherwise. It’s not clear when they will. The failed exchange has become stuck in a morass of litigation – a Russian doll of bankruptcies in Japan and New Zealand, four in all, plus lawsuits in the United States and competing claims from creditors.

And although the Mt. Gox bankruptcy trustee recovered digital currency now worth more than $1.6 billion, under Japanese law the exchange’s customers likely will recover only a fraction of that.

Kim Nilsson, a Swedish software developer who had more than a dozen bitcoins at Mt. Gox, isn’t optimistic of a payout soon. “It’s a legal twilight zone,” he says. “I wouldn’t be surprised if it took several years more.”

The court-appointed trustee in Mt. Gox’s bankruptcy, Nobuaki Kobayashi, did not respond to questions from Reuters about the payout process.

There are few better examples of the dangers of investing in cryptocurrencies than Mt. Gox. As Reuters reported in September, cryptocurrency exchanges – where digital coins are bought, sold and stored – are largely unregulated and have become magnets for fraud and deception. At least 10 of them have closed, often after thefts, leaving customers without their funds.

In all, more than 980,000 bitcoins have been stolen from exchanges since 2011 – two-thirds of those from Mt. Gox. Today, all of the stolen coins would be worth more than $6 billion, Reuters has calculated.

Mt. Gox is one of the few collapsed exchanges that ended up in bankruptcy court; some just vanished. But the problem for Mt. Gox’s thousands of creditors is that under Japanese bankruptcy law, their claims were valued at the market price of bitcoin in April 2014 just before the Tokyo District Court ordered the exchange be liquidated. At that time, one bitcoin was worth $483. On the basis of the April 2014 value, the claims ultimately approved were fixed at 45.6 billion Japanese yen, currently about $400 million.

Based on the current price of bitcoin, Mt. Gox’s bankruptcy trustee is sitting on enough cash to repay creditors whose claims have been approved more than three times that amount, according to Reuters’ calculation.

But that likely won’t happen, according to two Japanese bankruptcy attorneys. In Japan, by law any funds left over in a bankrupt company’s estate after creditors have been paid go to shareholders. Mt. Gox is 88 percent owned by a Japanese company called Tibanne. And Mark Karpeles, a 32-year-old French software engineer and Mt. Gox’s former chief executive, owns 100 percent of Tibanne.

Karpeles is currently on trial in Tokyo, accused of embezzling money from Mt. Gox and manipulating its data, as well as breach of trust. He has pleaded not guilty to the charges, some of which carry sentences of up to 10 years. He served nearly a year in jail following his arrest in August 2015.

Many creditors are livid at the prospect of a payout for Karpeles, whom they blame for Mt. Gox’s failure. “If the government just took all of it, that would be less offensive than if they just gave it to Mark,” said Aaron Gutman, a software developer who had about 464 bitcoins at Mt. Gox, which are now worth about $3 million.

Added Henry Dienn, a 61-year-old entrepreneur in Japan who had 175 bitcoins at Mt. Gox: “Some of the people say, ‘I’d rather see the money burned.'”

In a three-hour interview, Karpeles told Reuters he doesn’t want the money. The main reason: He expects he would be inundated with lawsuits. He says he already is facing about a half dozen.

“I don’t want to be the beneficiary of this,” he said. “I don’t really need money. I work, I get by.”

Karpeles also told Reuters he has been exploring a way to resurrect Mt. Gox under new management and ownership – at an estimated cost of $245 million…

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