|Mt.Gox was once the preeminentBitcoin exchanges, and as late a the spring of 2013 looked like they would dominate the future ofBitcoin trading. Originating as a trading site for game cards, the exchange soon shifted into trading the new digital money. In 2011, the original owner, JedMcCaleb sold the site to MarkKarpeles and is still active in projects such as Ripple.Starting early 2013, the site started to show signs that it would not be able to scale up its operations to meet the growing popularity ofBitcon. In April 2013 they had to suspend trading to allow the market to cool when trading exceededthe capacity of their trading engines. They then had a bank account seized in the US due to a failure to properly report that they were engaged in money transmission on the bank account application. As a result they were dropped byDwolla, a budget payment processor, freezing them out of the dollar market.At the beginning of 2013 Mt. Gox announced a link up with CoinLab, which would handle their US operations. The deal fell apart with both sides accusing the other of not living up to the agreement. Mt. Gox claimed CoinLab did not become fully compliant with US money transmitter laws as they had promised. In its countersuit, CoinLab claimed that they were unable to make the necessary applications due Mt. Gox’s failure to provide customer information that would have allowed CoinLab to prove to regulators that they were compliant with Know Your Customer laws.
In the fall of 2013, Mt. Gox was no longer processing US dollar withdrawals and withdrawals to other currencies were slow due to banking restrictions and manual processing, they claimed. This caused the price of Bitcoin to inflate above other exchanges as investors drove prices up by buying Bitcoin to get them off the exchange. There were great arbitrage opportunities, but these were so difficult to take advantage of that the price remained artificially high for months.
In February of 2014, Mt. Gox ceased Bitcoin withdrawals, claiming that a bug had been discovered in the Bitcoin protocol had been discovered. The bug, a real one, was well-known and minor aberration that allowed someone to copy a new, unconfirmed transaction with and give the copy a different identifying tag. If the copy of the transaction was confirmed in the blockchain rather than the original, the person could then go back to the sender and claim it had never been received. If the sender checked only for the tag, and not for the full transaction, they could be fooled into resending the funds, thinking that the transaction had not completed.
The Bitcoin community erupted in indignation when Mark Karpeles announced that the exchange was crippled due to this bug. It was a well-known aberration and was slowly being fixed through various technological improvements in wallets and systems. As soon as Mt. Gox made its statements, all the other major exchanges came under attack from persons unknown and many shut down for a few days. All of the exchanges updated their systems and were operational within a week. Although Silk Road 2 was crippled in the attack, as a dark site that was not professionally run, it could not be used as an example of the weakness of the network.
Within a few weeks, Mark Karpeles had given up his seat on the board of the Bitcoin Foundation, deleted the Gox twitter account, pulled the Mt. Gox site, and declared bankruptcy. A leaked ‘Crisis’ document that appeared to be one proposal for how to get Gox up and running again claimed that the exchange had been the victim of the theft of more than 744,000 bitcoins that had happened years earlier and remained undiscovered.
Karpeles story has not been consistent here, but it seem either that a theft had drained the Gox cold-storage wallets years earlier and never been discovered because they were never checked on, or that the theft had been ongoing for years due to automated systems double paying Bitcoin withdrawals to hackers using transaction malleability. Both of these explanations cannot be true, but if it is one, the other, or something else again, it is clear that Mark Karpeles was wantonly irresponsible in his role as the caretaker of his customer’s investments.
There are many claiming that this is an inside heist, as is usual in these cases. But, this does not seem to be the case. Mark Karpeles, as of this writing, is still in Tokyo, working with Japanese authorities, and, according to reports, trying to salvage the company somehow. This does not seem to be realistic, but does seem in keeping with what we have seen from Karpeles, a guy who bought a Magic: The Gathering trading card exchange.