There is a Japanese saying, “The foundation of success is failure.” Nobody knows that better than Mark Karpeles, the former chief executive officer of Mt. Gox. The world’s largest Bitcoin exchange at the time collapsed in 2014 after it was hacked and half a billion dollars worth of the cryptocurrency was stolen from the company.
Karpeles is back, and in a bittersweet development is creating a company built on the lessons he’s learned. UNGOX aims to be the first comprehensive rating agency for cryptocurrency exchanges across the world and Karpeles hopes to make it the Moody’s of the cryptocurrency world.
And to show that he’s learned from his mistakes, with the launch of the company, Karpeles is offering a Mt. Gox non-fungible token (NFT) which will grant former customers a lifetime of free access to the new website and service.
Remembering Mt. Gox
Mt. Gox was one of the first Bitcoin exchanges in the world and started automated trading on July 18, 2010. It once represented over 80% of the global Bitcoin trading volume. On Feb. 28, 2014, the company filed for bankruptcy after finding out it was hacked, and losing most of its assets.
But there were some 200,000 Bitcoins with the exchange at the time of bankruptcy. These have since increased in value exponentially, meaning creditors may be able to realize more value from the fiasco than they lost during the bankruptcy. While roughly 50,000 Bitcoins were sold a few years back by the trustee for some US$600 million, the remaining Bitcoins are worth over US$6 billion at current rate, and are due to be distributed anytime now, according to Karpeles.
If that happens, it will turn out to be a sort of happy ending for Mt. Gox and its creditors and for Karpeles. Karpeles might not have had a happy ending at all; he could have spent 10 years in jail for crimes he didn’t commit.
Ghosn Before Ghosn
Even before Mt. Gox went bankrupt on Feb. 28, 2014 — with 850,000 Bitcoins reported missing (200,000 Bitcoin were later recovered by Karpeles), the Japanese police had begun an investigation into the exchange which Karpeles said he cooperated with.
According to a detective in the Cyber Crimes Unit of The Tokyo Metropolitan Police Department, the Second Investigative Division who took over the case midway was not technically savvy and under pressure to solve a case that threatened the then Prime Minister Shinzo Abe’s political ambitions to make Tokyo a cryptocurrency trading capital. They decided that Karpeles must be the person responsible. The top brass of the police force decided they would arrest him on any charges possible and get him to confess to the crime.
Karpeles was first arrested on Aug. 1, 2015, by the Tokyo Metropolitan Police White Collar Crimes Unit (Investigative Division 2) who believed he would crack under interrogation. He did not. They arrested him two more times. He was held in jail, without bail, for nearly a year because he would not confess. Karpeles was eventually indicted on three charges–a scary thing when you consider Japan has a conviction rate of 99 percent for those indicted.
During Karpeles’ time in jail, a task force of Japanese federal investigators and the US’ Internal Revenue Service, including former special agent Tigran “The Blockchain Wizard” Gambaryan from the Criminal Investigation (IRS-CI) Cyber Crimes Unit in Washington, D.C.,
began to narrow in on the actual hacker.
They believed a Russian criminal had hacked into Mt. Gox along with several other Bitcoin exchanges. In July of 2016, fellow journalist Nathalie-Kyoko Stucky and I met with one of the members of the task force in Tokyo. The agent had reached out to the Japanese police asking for access to the Mt. Gox database in their possession. The task force, which included the U.S. Department of Homeland Security, the Federal Bureau of Investigation, and the Secret Service were sure that the key to identifying the real culprit–who they allege was Alexander Vinnik — could be found in the records.
“Why doesn’t the National Police Agency share the data with us? Or the Tokyo Police? I don’t get it,”a special agent with the Internal Revenue Service (IRS) asked us.
We explained it to him.
“You make idiots of them if you catch someone else hacking Mt. Gox,” I told them.
“What would motivate them to do something that could potentially harm their case?” the agent asked. “The goal is to win,” we said. “Japanese prosecutors put saving face above justice.”
The Special Agent was surprised but nodded. He asked if I could get him a copy of the database and I agreed to do it. In September of 2016, I took a copy of the Mt. Gox database to the task force in San Francisco. It helped them solve the case. The Japanese authorities weren’t actually very happy about it. When the Feds finally got their man on June 25, 2017, one of the special agents on the case gave me a heads up. As a courtesy, the federal authorities made sure to put in the press release that Vinnik was suspected of involvement in the hacking of Mt. Gox and stealing the missing Bitcoins.
The Japanese press, who had more or less already convicted Karpeles for the crime in print, found themselves in a tough spot reporting on the arrest of the actual hacker.
But the Japanese authorities would not back down. Prosecutors requested that he be sentenced to 10 years in prison in December of 2018. Over five years had already passed since both his business and life had fallen apart.
A panel of judges found him innocent of the major charges of embezzlement and breach of trust in March of 2019. But they found him guilty of improperly handling electronic funds. They did however suspend his sentence for four years. So, if he behaves himself and doesn’t break the law, he won’t go back to prison and is a free man.
It was a rare victory for the accused and a slap in the face to the prosecutors. This puts him and his lawyer Nobuyasu Ogata in “The 1% Club” — that’s slang in Japan’s criminal defense legal community for those rare individuals who actually manage to obtain a verdict of innocence.
As pointed out by one of the presiding judges, all charges against Karpeles had nothing to do with the missing Bitcoins and that Karpeles had never intended to harm the company or embezzle funds. His sole offense was installing a program that tried to recoup missing Bitcoins the firm had been saddled with since its takeover in March, 2011.
When Carlos Ghosn, the foreign-born Chief Executive Officer of Nissan Motor Co., Ltd. was arrested by prosecutors in Tokyo in November of 2018, many recalled the case of Karpeles. In fact, before escaping from Japan in December of 2019, Ghosn and Karpeles met several times. They had an enlightening discussion about the nature of the Japanese criminal justice system, where you could argue that in practice you’re presumed guilty until proven guilty.
No one can deny that Karpeles faced impossible odds and won.
He’s turned his adversity into knowledge. He’s kept his sense of humor about events that would leave others raging with anger. The name of his new firm, UNGOX, is a subtle recognition of the fact that Mt. Gox was turned into a term used to describe a cryptocurrency exchange failure. Mark says, “Following Mt. Gox’s bankruptcy, goxed (sometimes written goxxed) has become a synonym of losing cryptocurrencies due to faulty Bitcoin exchange or wallet that screwed up.”
He notes, “After the Mt. Gox bankruptcy, I have been following the developments in the crypto space, and I have seen some exchanges taking steps to prevent a second Mt. Gox. For instance by implementing transparency reports. Despite this, the trend died down very quickly and today’s situation for many exchanges is very similar to what led to Mt. Gox’s bankruptcy.”
In January of 2018, Tokyo-based cryptocurrency exchange Coincheck admitted that a hacker had stolen about ¥58 billion (US$532 million) worth of its holdings. Losses exceeded even those of Mt. Gox, and clients became anxious about the fate of their virtual currencies; it was also revealed that the firm had ignored warnings about security. However, the CEO of the firm at the time, Koichiro Wada, was never arrested on charges of breach of trust or other minor charges in an effort to solve the crime — or make it appear to be solved.
UNGOX will provide ratings for cryptocurrency exchanges and related entities by conducting checks in key areas such as technology, transparency, people, and legal context. The majority of the checks can be performed externally or as a regular customer, says Karpeles, such as if the exchange is a real company? When a fiat deposit is made? Is it through a regular bank account or through a system that helps money laundering? “There are many things that can be seen with the right knowledge and experience, but most people do not look closely enough or lack the experience to recognize red flags,” Karpeles told Forkast.
The company will also follow the successful business model of credit rating agencies in Japan who always approach an entity directly before rating it. “We will also be asking for cooperation and confirming accounting information, management, and procedure,” said Karpelese. “If a company cooperates, it will allow us to more accurately score them based on the information they provide, such as security policies,” he added.
UNGOX, which will launch in early Q3 2022, will provide information on existing crypto businesses and projects and their risk level. A score and some details will be shown for each service, based on Mark Karpeles’ experience managing crypto businesses, a proprietary algorithm and the research of a team of dedicated staff. Ratings will be free but a subscription gives deeper levels of information as well as active alerts, changes in ratings, and a full history report with detailed scores.
But if you were a Mt. Gox customer, you will get the keys to the kingdom, said Karpeles.
The Nifty NFT
If you had an account with Mt. Gox you can now access mtgoxnft.net and provide the needed information to get your Mt. Gox account ownership verified and NFT minted. That gives you top level access to the service, so you don’t get “goxxed” again.
Since there is expected to be a large number of applications, the actual process will take a few weeks. This is no surprise since Mt. Gox had 1,066,097 customers. As soon as your NFT is ready, you will receive an email and will be able to login to confirm the status.
One should note the initiative is not related to the ongoing Mt. Gox bankruptcy, and has no impact on it. And to top it all off, this year, it’s highly likely that many of the customers will be reimbursed for their 2014 losses, thanks to the treasure trove of Bitcoins that remains even after the firm was looted almost a decade ago. The details of how much they will receive are still up in the air, but the lessons of Mt. Gox are going to pay off–for everyone.