The Rise and Fall of the World’s Largest Bitcoin Exchange

The Rise and Fall of the World’s Largest Bitcoin Exchange 

Updated by Endah

The Rise and Fall of the World’s Largest Bitcoin Exchange

Mark Karpeles, the man behind Mt. Gox. Screenshot: Reuters
TOKYO, Japan — Mark Karpeles is the man who built the world’s largest bitcoin exchange. But now that the digital currency is reaching the mainstream, his success may slip through his fingers.
In 2011, Karpeles bought a fledgling website called Mt. Gox. Founded a few years earlier by an unemployed software hacker named Jed McCaleb, the site was originally an online marketplace where people could buy and sell cards for Magic: The Gathering, a weirdly addictive trading card game. Mt. Gox was short for “Magic: The Gathering Online Exchange.” But then McCaleb turned it into a website where people could exchange cash for bitcoins, a digital currency that had only just found its way onto the internet, and just as the exchange started to take off, he sold it to Karpeles.
Under Karpeles, Mt. Gox evolved into a reliable marketplace for buying and selling bitcoins, now the world’s most popular digital currency. By one estimate, Karpeles has made over $8 million plus 345,000 bitcoins (at current rates: $86 million) swapping bitcoins for dollars and yen and other federal currencies. But much like McCaleb, he’s a hacker rather than a businessman. He seems more at home talking about IRC than the IMF, and as Mt. Gox has grown, he and his company have found it difficult to deal with the realities of the financial world.
Bitcoin is at a point where it will either find a way to play nicely with regulators or fail to reach its obvious potential as a currency that can truly change the world
In all, 2013 has been a horrible year for Mt. Gox. The feds have seized $5 million from its bank accounts, claiming that Karpeles and company operated a money transmission business without properly registering with federal and state authorities. Then there’s the $75 million lawsuit with onetime-partner CoinLab. And with its U.S. bank accounts seized, Mt. Gox has had a terrible time moving money to U.S. customers, many of whom are rather uphappy about it. Although the company won’t answer questions about its problems, they appear to have spread to other countries as well. In Vancouver, Canada, owners of a bitcoin trading shop called Bitcoiniacs say that every week they deal with walk-in customers who are frustrated by their inability to get their money out of Mt. Gox.
Then, last month, Mt Gox briefly lost its status as the world’s largest bitcoin exchange, failing behind not one but two other operations: one in China and one in Slovenia.
Karpeles and his company are a metaphor for the bitcoin world as a whole. Created by an anonymous computer scientist — or group of computer scientists — the digital currency rose to prominence after it was embraced by software geeks across the globe. But now, as its influence continues to grow, these young, idealistic hacker types are running into the government regulators who control the existing financial system, and this doesn’t always go well. Bitcoin is at point where it will either find a way to play nicely with regulators or fail to reach its obvious potential as a currency that can truly change the world.
When someone using the name Satoshi Nakamoto dreamed up the math-based bitcoin currency in 2008, it was very much born of a mistrust in the international financial system. Lehman Brothers had just declared bankruptcy and rampant speculation had pushed the world’s economy to the brink. The bitcoin standard was quickly seized as a rallying point by libertarians and cryptographers — a technically elegant financial hack that embodied both a payment processing system that would work without the banks, and a currency that would be inoculated against inflation. The total number of bitcoins is fixed at 21 million. The last one will be minted in 2140.
Mt. Gox was a big part of the currency’s growth. Back in January, a single bitcoin traded for $13, and Mr. Gox was a rarity in the Wild West of bitcoin startups: a trusted brand. When the exchange was hacked soon after Karpeles took over in 2011, he didn’t fold and leave his customers hanging, as other fly-by-night bitcoin businesses had done. He made good on his obligations and built a measure of goodwill throughout the bitcoin community. “They’ve made it through a lot of difficulties in the past,” says Greg Schvey, head of research with The Genesis Block, a bitcoin market analytics company. “They basically built the digital currency exchange market.”
But you can point to the exact date that this goodwill started to sour: May 14, 2013. That’s when federal agents seized $2.9 million, shutting down a Wells Fargo bank account belonging to a Mt. Gox subsidiary. Mt. Gox had been using this account as a critical stepping stone to pay off its U.S. customers. The next month, the government seized another $2.1 million from a second bank account. Later that month, Mt. Gox temporarily suspended U.S. money transfers, and since then, its ability to move money to the U.S. has ground to a near-halt.
Mt. Gox was receiving between $5 million and $20 million in incoming transfers each day, while paying out somewhere between $300,000 and $1 million.
Karpeles may have helped bootstrap the bitcoin world, but the feds say he made a basic mistake when he set up the bank account used to disburse funds in the U.S.: he claimed that he was not in the money transmission business. He hasn’t had a lot of contact with the media, and he won’t talk to WIRED. But you can glean at least a little about the man online. Until this summer, he was ubiquitous on bitcoin forums, where he posts under the pseudonym Magical Tux, also his Twitter and GitHub handle. His LinkedIn profile says he’s the CEO of Mt Gox’s parent company, but the skills he lists on the site tell a different story. It’s all geeky programming stuff: “Linux Servers, Network Security, PHP, Bash, C, C++, Posix API, ASM.”
In interviews posted online, this same geeky side of the man is even more pronounced. When Reuters interviewed him about bitcoin’s future last April, Karpeles spent the interview perched — awkwardly and without explanation — on a blue exercise ball. He told the news agency that Mt. Gox was receiving between $5 million and $20 million in incoming transfers each day, while paying out somewhere between $300,000 and $1 million.
Even for those who count themselves among Mt. Gox’s friends, this interview was a bit weird. You can’t take the interview seriously if you have “the CEO of the most important business in bitcoin sitting on top of a bouncy ball talking about world-changing ideas,” says Roger Ver, an early bitcoin investor who knows Karpeles well and considers him a friend. And when you consider its ongoing banking woes, and how opaque Mt. Gox has been about explaining them, the company is even harder to believe in.
A placard in the lobby of the Mt. Gox offices in Tokyo. Photo: Ariel Zambelich/WIRED

The building that houses the Mt. Gox offices in Tokyo. Photo: Ariel Zambelich/WIRED

A Knock on the Door

Mt. Gox is based in Japan, the spiritual home of bitcoin. WIRED recently asked for a meeting with the company’s principals, hoping to understand why the company is having so much trouble transferring money in the U.S. But they declined, even though we were making the trip from San Francisco to Tokyo.
‘Because it’s such a difficult time for us, we can’t talk to journalists without first talking to our lawyers’
— Mt. Gox
So we turned up at the company’s offices, hoping to change their minds. Apparently, the company has recently moved locations. It’s now on the second floor of a small office building in Tokyo’s Shibuya neighborhood, not far from the city’s largest railway station. Its name is listed on the placard just inside the front door, as is something called the Bitcoin Cafe. When we asked the building’s Japanese receptionist to speak with Gonzague Gay-Bouchery, the company’s manager of business development, she suggested we sit in the lobby while she called up to the company, and eventually, she told us that Gay-Bouchery was out of the office. When we asked for another employee, we were told to wait again, and eventually, we were greeted by someone who represented the company.
He told us that both Gay-Bouchery and Mark Karpeles were out of town, and he declined to talk about the company’s business. “Because it’s such a difficult time for us, we can’t talk to journalists without first talking to our lawyers,” he said. He did tell us that the Bitcoin Cafe is a Mt. Gox project set to open in December, but he wouldn’t let us see the space or take photos, and he wouldn’t give his name.
The company has declined to talk to us on several other occasions. And though it may very well have a good legal reason for keeping mum, the longer Mt. Gox remains in lockdown, the more concern it raises across the globe. When he was interviewed in April, Karpeles oversaw the exchange that booked 70 percent of Bitcoin trades. Now that number is closer to 14 percent, according to the Genesis Block.
Roger Ver, photographed in San Francisco. Photo: Ariel Zambelich/WIRED
One person who will speak for Mt. Gox is Roger Ver. Ver lives across the street from Mt. Gox, and he just happens to be one of the world’s most enthusiastic and vocal bitcoin evangelists. He helps run the Tokyo Bitcoin Meetup Group, and some have called him the “Bitcoin Jesus.”
In June 2011, when a hacker broke into the Mt. Gox system, wired a large amount of money to himself, and temporarily drove the value of bitcoins on the exchange to nearly nothing, Ver helped the company sort out the mess. And amidst its more recent troubles, with many claiming that Mt. Gox is insolvent, he shot a video from inside the company’s offices, assuring investors that the company’s has ample funds in its Japanese bank account and that it was just having trouble moving this money across borders.
Skeptics call this “the hostage video,” a play on Ver’s wooden delivery. But he says that although they asked him to make the video, he wasn’t coerced in any way, and he’s adamant that Mt. Gox is merely having trouble reaching agreements with U.S. banks, which are needed to transfers funds into U.S. accounts. “I consider the guys at Mt. Gox my friends,” he says. “Right before my eyes, Mark logged into his bank account at the biggest bank in Japan and showed me the account balances in their accounts. That’s not proof that Mt. Gox is solvent or not. But it’s definitely proof that … whatever is causing all their wire transfer delays, it is not a lack of money in the bank.”
But he also paints the company as a small operation that isn’t necessarily suited to the global, around-the-clock nature of internet business. When Mt. Gox was hacked, he says, he worked to help right the company’s system until late on a Friday, and when everyone finally headed home and he asked what time he should return the next day to get the exchange back up and running, he was told they would all take a break until the following Monday.
‘A lot of the early bitcoiners are 19-year-old kids, still living at home with their parents, and they don’t have any business experience’
— Roger Ver
For Ver, Mt. Gox and Karpeles are very much a microcosm of the larger bitcoin community. “Bitcoin is coming from a bunch of young computer nerds who saw this thing and thought it was neat,” he says. “A lot of the early bitcoiners are 19-year-old kids, still living at home with their parents, and they don’t have any business experience.”
Though he considers Karpeles and others at Mt. Gox his friends, Ver doesn’t recommend buying bitcoins there. Prices on Mt. Gox are higher than they are on other exchanges — a reflection of the difficulties customers have withdrawing their funds. “Anybody who has enough information about what’s going on in the bitcoin world, you would not buy your bitcoins on Mt. Gox,” he says.
Dan Held, the founder of bitcoin market data company, Zero Block, has less sympathy for Mt. Gox. He points out that the U.S. government warned businesses like Mt. Gox that they’d need to register as money services businesses in March of this year. But Mt. Gox didn’t do this until months later — after the feds has seized its bank accounts. “A lot of it, I think, is incompetence,” he says.
Despite its woes, Mt. Gox is still pulling in new customers. According to Ver, this is because of its reputation as the world’s biggest bitcoin exchange. “They just think Mt. Gox is the biggest and the best, and they don’t know,” he says of new customers. If they don’t know about Mt. Gox’s trading delays, a large part of that blame must go to Mt. Gox itself, which has downplayed its difficulties on its website.
Mt. Gox is not the dominant exchange it once was.

Bank Speed vs. Bitcoin Speed

Clearly, Mt. Gox is working to reverse the trend. It seems that the company is rewiring its international banking relationships in hopes of finding a new channel to the U.S. and European countries where it has had problems, and in its communication with customers, Mt. Gox blames its financial partners without mentioning the fact that it has effectively been frozen out of the U.S. banking system because of its regulatory problems.
Take this Sept. 11, 2011 letter sent to David Spitzer, of Phoenix, Arizona. He wrote to complain after his August 20 transfer request hadn’t been processed. “All of the problems with the current state of global banking are what has given bitcoin so much strength, and yet are also what continue to hold bitcoin back,” read the letter, signed by the Mt. Gox’s support staff. “Case in point, our traditional financial partners work at ‘bank speed,’ as the current financial system has not yet evolved to match the pace of Bitcoin transactions.”
In a September, 2013 court filing, Mt. Gox said it “has no established banking relationships in North America.”
‘I think that they’re being unfairly hassled by regulators and so on, but if they’re going to feed me bullshit than I’m no longer sympathetic’
— Tom Huppi
People are still unhappy. Mt. Gox has refused, so far, to explain exactly what it’s doing to get funds to waiting overseas customers. Karpeles vanished from the Bitcointalk discussion forums in June. But some traders report that he’s popped up on IRC to explain things. According to this post, Mt. Gox’s Japanese bank is limiting the company — which Karpeles said was processing between $300,000 and $1 million in withdrawals each day back in April — to just 10 wire transfers per day. In an interview, Roger Ver confirmed the 10 transfers per day number.
David Spitzer got his money after a six-week wait. The Mt. Gox money came to him via Deutsche Bank. He believes that the publicity he was attracting to Mt. Gox’s problem helped move him to the front of the line. Others, like Tom Huppi, haven’t been so lucky. He’s been waiting for a transfer since mid-August.
In early October, Huppi got a note that was similar to Spitzer’s. “They just came back and said: ‘We’re working with new banks and hope that we’ll have it worked out in a few weeks,’ which is bullshit,” he tells us. And yet he sympathizes with Mt. Gox — to a certain extent. “I think that they’re being unfairly hassled by regulators and so on, but if they’re going to feed me bullshit then I’m no longer sympathetic.”