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Mt.Gox files for bankruptcy in Japan

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Mt. Gox was the world's biggest bitcoin trader with holdings that accounted for 80 percent of all global dollar trades for bitcoin. On Friday, Mt. Gox went to a Tokyo district court and filed for bankruptcy under rules that are similar to Chapter 11 in the U.S. According to a Feb. 26 CNBC News article, Mt. Gox became insolvent from thefts that went on, unnoticed, for years.

This will be interesting because the bitcoin industry is not covered by any central bank regulations, laws or other traditional remedies. Customers are not likely to get restitution either because of the anonymity they were allowed or because they are unsecured creditors.

Here is a summary of the situation:

Mt. Gox has debts totaling $63.6 million or 6.5 billion Japanese yen

Its total assets are $37.6 million or 3.842 billion Japanese yen

This leaves a deficit of $27 million, or 2.8 billion Japanese yen

Customers lost about 750,000 and Mt. Gox lost about 100,000 of the coins

Other major exchanges are holding steady with values at about $500 per bitcoin

Unsecured creditors will be last in line when the bankruptcy takes effect. Taxes and other creditors will come first.

Mt. Gox has some 127,000 unsecured creditors, or customers.

THE THEFT

The bitcoin theft exploited a loophole in the transaction processing called "transaction malleability." In simple terms, the thieves were able to take out double the amount of the transaction while making it look as if a single transaction occurred. This allegedly went on for a long time without Mt. Gox knowing about it.

This means that all the major bitcoin exchanges were open to hacking and theft. Others discovered the problem and resolved it. So why didn't Mt. Gox look for the problem? Something is fishy here.

According to a Feb. 26 article in The Verge, the thieves had access to Mt. Gox almost from the beginning. Over time, more than 1 out of every 20 bitcoins in the world was stolen and no audit trail exists.

Other exchanges found the bug and fixed it. Mt. Gox was the only one that "failed" to catch the bug and resolve the problem. The thieves focused even more on Mt. Gox and kept hitting it hard. Years passed before the theft was discovered.

This leads to speculation that the theft was an inside job. The other explanation is that the CEO and all 18 employees were too incompetent to audit a so-called financial system. This was while a known hack was going on.

Silk Road, in comparison, lost $2.7 million from the same hacking method, but found it and recovered quickly. That should have been a warning to look for the problem.

WHAT HAPPENS NOW?

The thieves think they will get away clean because of disconnects in the audit trail. Their problem is that converting $400 million to useable currency will definitely leave audit trails. It sticks out when $400 million goes missing from a so-called "financial institution," and that leaves an audit trail of its own.

While CEO Mark Karpeles goes bankrupt and moves on like Tepco, investigators from Japan and the U.S. will be on his case until he accounts for the thefts going unnoticed for so long. The other employees will be under scrutiny, too.

A big mystery must be solved. Who stole the bitcoins? What currencies did they convert to? Was a government involved? Was it an inside job? If so, how could the thieves launder $400 million?

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