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Mt. Gox Knew It Was Selling Phantom Bitcoin 2 Weeks Before Collapse 263

Posted by timothy
from the but-y'know-what-the-heck dept.
An anonymous reader writes "Mt. Gox CEO Mark Karpeles wrote in a sworn declaration in the company's U.S. bankruptcy filing he suspected hundreds of thousands of bitcoins were missing on Feb. 7, more than two weeks before it finally halted trading. That means Mt. Gox allowed its customers to continue trading, knowing that its bitcoin stash was wiped out and collecting as much as US$900,000 in trading fees. Since Mt. Gox said it was also missing $27.3 million in cash from customer deposits, it raises the possibility that customers — despite seeing a cash balance displayed in their account — might have actually been buying bitcoins that did not exist, with cash that was already long gone."
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Mt. Gox Knew It Was Selling Phantom Bitcoin 2 Weeks Before Collapse

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  • Bitcoin (Score:5, Insightful)

    by roninmagus (721889) on Thursday March 13, 2014 @02:27PM (#46476033)
    I'm all for what bitcoin is trying to achieve. But this is just a news story about an exchange which didn't know what it was doing, trading in a currency that hasn't been fully proven, operating in an unknown capacity from somewhere in Japan, and without any oversight at all. That's like millions of people asking my buddy Joe who lives in a trailer to hang onto their money for them. Oh no, bad decisions were made?
    • Re:Bitcoin (Score:5, Interesting)

      by interkin3tic (1469267) on Thursday March 13, 2014 @02:35PM (#46476135)
      Yeah, those fools should have definitely given their money to the pros. [wikipedia.org]

      You know what, that's too much sarcasm for me to fart out at once. This sounds essentially like the subprime mortgage crisis. And a lot of other banking crises. It doesn't seem totally insane to me to trust your friend Joe in a trailer over the banking industry: when he runs off with my money, at least he might go to jail rather than getting millions in rewards.
      • Re: (Score:3, Interesting)

        by DarkOx (621550)

        ^^ This what all the "see you do need regulations, I told you so" crowd does not get.

        A cheat is a cheat is a cheat and they will cheat you using unregulated BitCoins, just the same way they will cheat you using regulated dollars.

        It isn't as if regulations create some magical inviolate barrier. Madoff ran a ponsi scheme masquerading as a hedge fund with SEC reporting requirements and everything. Much of the monies were never recovered. The subprime crisis is another example the brokers just faked all the

        • Re:Bitcoin (Score:5, Insightful)

          by evilbessie (873633) on Thursday March 13, 2014 @03:07PM (#46476515)

          Is fraud not specifically doing things against regulations? Without any form of regulation at all it wouldn't be fraud. The SEC are the police but they are paid by the people they police, if not actually being the same people. Bad policing of regulation isn't a problem with the regulations and to draw such comparisons hides the nature of the problem.

        • Re:Bitcoin (Score:5, Insightful)

          by Ralph Wiggam (22354) on Thursday March 13, 2014 @03:17PM (#46476629) Homepage

          Madoff ran a ponsi scheme masquerading as a hedge fund with SEC reporting requirements and everything.

          Hedge funds are a notoriously unregulated part of the finance industry. The reporting requirements are minimal.

        • Re:Bitcoin (Score:5, Insightful)

          by sstamps (39313) on Thursday March 13, 2014 @04:14PM (#46477359) Homepage

          I'm part of the "regulations crowd", and I most assuredly DO get it.

          You point to a number of things in your propaganda which are patently false or misleading.

          The first thing is that regulations are not intended to "create some magical inviolate barrier" to fraud and other shenanigans. They are designed to lessen such things, and bring them to light sooner than without. That's all that regulation can really do -- to foster an environment where such things are minimalized, even if they can't be totally eliminated.

          The second thing is that the financial sector has been massively DE-regulated over the last two decades (and even farther back than that, if you want to include the removal of usury ceilings in the 70s). The prime reasons why the recent massive financial meltdown occurred aren't due to a failure of regulation, but of a failure TO regulate.

          As it relates to BitCoin, REAL regulation would provide that their accounting and security methods were audited regularly, and that they maintain proper reserves of money to meet the payment demands of their clients.

          While regulation wouldn't prevent the exchange from failing, it likely would have been caught sooner, and less people would have been impacted for less money.

          At the very least, I would never assent to put any significant amount of money in any BitCoin exchange unless it submitted to some kind of third-party auditing and financial standards, absent real regulation. To do otherwise is simply throwing your money down a drain.

        • by cusco (717999)

          So the simple fact that widespread fraud didn't happen during the 60+ years when the regulations were in place, but suddenly bloomed into existence a few months after they had been removed is just coincidence? Really? You believe in crop circles and Sasquatch too?

      • by Darinbob (1142669)

        The banking crises hurt many more people moderately, but overall their stupidity wasn't as deep as some startup exchanges. There's a difference between an industry that's regulated but which tries every possible way to avoid regulations, and a group that doesn't even know if regulations apply to it or not. Even in the very bad banks, they will know if a customer fails to pay their fees, and if they sell items that they do not own then they are doing it on purpose rather than through ignorance.

      • Re:Bitcoin (Score:5, Insightful)

        by rudy_wayne (414635) on Thursday March 13, 2014 @02:55PM (#46476375)

        Yeah, those fools should have definitely given their money to the pros. [wikipedia.org]
        You know what, that's too much sarcasm for me to fart out at once. This sounds essentially like the subprime mortgage crisis. And a lot of other banking crises. It doesn't seem totally insane to me to trust your friend Joe in a trailer over the banking industry: when he runs off with my money, at least he might go to jail rather than getting millions in rewards.

        As much as people (including me) like to hate on banks, when was the last time you actually lost money? When was the last time you put money in a bank and they "lost" all or part of it? When was the last time you put money in a bank and lost all or part of it because the bank was robbed?

        • by jonfr (888673)

          South Park got it right.

          http://youtu.be/-DT7bX-B1Mg [youtu.be]

        • Re: (Score:2, Insightful)

          by DigitAl56K (805623)

          As much as people (including me) like to hate on banks, when was the last time you actually lost money? When was the last time you put money in a bank and they "lost" all or part of it? When was the last time you put money in a bank and lost all or part of it because the bank was robbed?

          When was the last time the fed printed as much money as it wanted, devaluing the money you had put in the bank?

          Oh, I see, all the time.

      • Thanks so much for the very interesting chart. It's most interesting feature is the remission from banking crises during the time of the Bretton Woods system.

        Turns out that the way to avoid banking crises is to have fixed exchange rates, and more regulation.

        The recent banking crisis was caused by a long standing trend towards less regulation. And worse the stupidity of the belief that they could regulate themselves.

      • by necro81 (917438)
        Yes, but every since the Great Depression, when the FDIC was instituted, you could always have confidence that the dollar you deposited at the bank would still be there tomorrow (up to the fairly generous deposit limits). Similar insurance programs exist for stocks - so long as you use a recognized brokerage, who in turn uses a clearing house to execute trades, your ownership of the shares and your cash is never in question. The stocks may fail, totally wiping you out, but your ownership of them is never
      • Re:Bitcoin (Score:5, Informative)

        by tlhIngan (30335) <.slashdot. .at. .worf.net.> on Thursday March 13, 2014 @04:44PM (#46477671)

        You know what, that's too much sarcasm for me to fart out at once. This sounds essentially like the subprime mortgage crisis. And a lot of other banking crises. It doesn't seem totally insane to me to trust your friend Joe in a trailer over the banking industry: when he runs off with my money, at least he might go to jail rather than getting millions in rewards.

        You know, in 2008, Washington Mutual (aka WaMu) failed. Dead, A lot of people used them, too.

        And yet, they're all happily going about their lives - having lost none of their money that was stored at WaMu.

        Another bank took over the remains and all of WaMu's customers were automatically integrated in.

        For all intents and purposes, the only thing that changed was the name on the envelope and on the card - the money that was deposited was still there, all the other assets were still there, etc.

        So for all the banking crises, regulation does help, because instead of bank failures hurting regular joes by losing all their hard earned savings, life pretty much continued on as no one lost their deposits. You put your money in, you can be reasonably assured you will get it out.

    • Re: (Score:2, Insightful)

      by jhol13 (1087781)

      I'm all for what bitcoin is trying to achieve.

      I'm not. Actually I do not know what it is trying to achieve, but "unregulated" and "not backed up by anything" are certainly not what I am after.

      But this is just a news story about an exchange which didn't know what it was doing, trading in a currency that hasn't been fully proven, operating in an unknown capacity from somewhere in Japan, and without any oversight at all.

      I think they knew what they were doing. I think the currency is proven - to be faulty. I think the "achieve" part means "no oversight at all" so you are already contradicting yourself.

      That's like millions of people asking my buddy Joe who lives in a trailer to hang onto their money for them. Oh no, bad decisions were made?

      What you "bitcoin people" seem to want is anymous (i.e. can buy drugs without getting caught) which can be easily transferred (i.e. no exchange can steal or stop you) backed up (i.e.

    • by Darinbob (1142669)

      Bitcoin has its own share of bad flaws. The exchanges just compound the problems. Overall it's about a community not really knowing what they're doing, sort of like your buddy Joe in a trailer hording his stash of State of Jefferson dollars that he uses to invest in hog bung futures.

      • The community seemed to be on to them; rumours about that exchange have been floating around for ages, and they apparently already had a bad payment history. The market was doing its work just fine, factoring in risk and the trustworthiness of the exchange, with BTC trading for $100 at MtGox and $500 everywhere else.
    • I'm all for what bitcoin is trying to achieve.

      Bitcoin is a currency. It cannot try to achieve anything. As for the people behind bitcoin, it's extremely unclear what they are trying to achieve and not all of the possibilities are harmless. I can very easily make an argument that bitcoin looks like merely the latest version of a pump-and-dump scheme. The exchanges look a lot like pyramid schemes. Most of the arguments supporting bitcoin show a shocking lack of understanding of economics and how and why currencies actually work. I see a lot of cred

    • by Above (100351)

      Perhaps "money" is more than just the coins, paper, or bits that represent some units, and actually only has value when it is in a predictable and stable system. Who knew!

    • But this is just a news story ...

      ... and not a very good news story. It uses "suspected" and "knew" as interchangeable synonyms.

    • In other news, CEO of a multi-million dollar crypto-currency bank/trading house decides to gather information for a few days before halting trading based on a suspicion that something might be wrong.

      Oh, wait...

  • Interesting... (Score:4, Insightful)

    by Agares (1890982) on Thursday March 13, 2014 @02:29PM (#46476049) Journal
    I do not see why there are still people out there who keep saying Bitcoin is a good investment. We keep seeing these exchanges fold up and run off with all this money. I know they claimed they were hacked, but how do we know for sure. To me the whole Bitcoin thing is just a way for a few to get rich by ripping off so many others. Also no one should be surprised that they were sold phantom Bitcoins. You have no way of knowing what you actually have on a site like that since you can’t directly access the wallet. It seems like common sense to me, but I guess I will never understand this kind of thing.
    • Re: (Score:2, Insightful)

      by Anonymous Coward

      Curious you think this is isolated to BitCoin. Look up MF Global.

      • by m.dillon (147925)

        Hey, that would be great... because, ya know, all the MF Global customers are likely to get all of their money back (if you haven't been keeping track of it). But the victims of MtGox and other exchanges that have gone dark probably never will.

        I'd say MF Global is a case that shows just how good regulation can be when the shit hits the fan. Even if they didn't follow the law, there was enough there to make it recoverable for the customers, including the freezing of funds at the target institutions that ha

    • I do not see why there are still people out there who keep saying Bitcoin is a good investment.

      Mencken's Law: "No one in this world, so far as I know — and I have searched the record for years, and employed agents to help me — has ever lost money by underestimating the intelligence of the great masses of the plain people."

      Pretty much sums it up.

    • by sjbe (173966)

      I do not see why there are still people out there who keep saying Bitcoin is a good investment

      For those at the top of the pyramid scheme it probably is. For everyone else? Yeah, not so much. Bitcoin has all the hallmarks of a pump and dump [wikipedia.org] scheme. Thinly traded asset of dubious future value? Check. Marketing campaign to recruit investors? Check. Early large purchases at discounted rate? Check. Absurdly fast rise in "value"? Check. Early investors selling out or disappearing and leaving the new investors holding the bag? Check.

      Unregulated bitcoin exchanges are basically pyramid schemes w

    • by gutnor (872759)

      There are 2 categories (within the people that really care about giving you real advices, i.e. friends and family) - the true believers that really think in 20 year bitcoin will be the only / most popular currency used on Earth. Considering the limited supply of bitcoin, that means its current value is still several order of magnitude cheaper than when it reaches that goal. So buy 10K in bitcoin today, and in 10 year you will have the equivallent of 1M buying power.

      The other category, are the guys that m

  • by Mister Transistor (259842) on Thursday March 13, 2014 @02:29PM (#46476053) Journal

    It's official. The name is now changed to MtGotchya.

  • by NotDrWho (3543773) on Thursday March 13, 2014 @02:29PM (#46476059)

    The only people who make money in a pyramid scheme are the people at the very top. Everyone else is a sucker.

    • Looks like Bernard Madhoff is doing the maximum sentence of 150 years in federal prison due to his part in the almost $65 billion Ponzi scheme. Being found guilty of such a scheme can give you some grief. https://en.wikipedia.org/wiki/... [wikipedia.org]
  • by Darth Snowshoe (1434515) on Thursday March 13, 2014 @02:30PM (#46476075)

    I'm thinking of a word for a kind of system where, I don't know, someone makes rules for how large chunks of assets are managed, traded, stored. This word would mean that some PEOPLE, some kind of official-sounding types of PEOPLE, would "check up" on these places, these places that handle and store and manage other people's money, or assets, stuff. They would be checking up to make sure that the people who run those places, those people, wouldn't be, knowingly or unknowingly, doing things with other people's money that they shouldn't be doing. Maybe there could be a kind of system, say, where those people doing those things, are encouraged or made to do some things, to prove, that they have the money and things that they are supposed to have, and doing the things, those things that they are supposed to do, and not doing those things that they are not supposed to be doing, to those other people's money, and assets and stuff. And that they're honest, about what they say that they're doing, and that they're not doing. Who would be doing all that checking, and what would that process be, and who would be subject to it. If only there were one simple word for all of that.

    • by Rick Zeman (15628)

      I'm thinking of a word for a kind of system where, I don't know, someone makes rules for how large chunks of assets are managed, traded, stored. This word would mean that some PEOPLE, some kind of official-sounding types of PEOPLE, would "check up" on these places, these places that handle and store and manage other people's money, or assets, stuff. They would be checking up to make sure that the people who run those places, those people, wouldn't be, knowingly or unknowingly, doing things with other people's money that they shouldn't be doing. Maybe there could be a kind of system, say, where those people doing those things, are encouraged or made to do some things, to prove, that they have the money and things that they are supposed to have, and doing the things, those things that they are supposed to do, and not doing those things that they are not supposed to be doing, to those other people's money, and assets and stuff. And that they're honest, about what they say that they're doing, and that they're not doing. Who would be doing all that checking, and what would that process be, and who would be subject to it. If only there were one simple word for all of that.

      Does self-policing count as your word since it's a compound word?

      I jest. I can't think of one example where self-policing led to a better outcome to society.

  • As long as the amounts were in Millions of US dollars, they can get away with it, if they can get a trial in the US.

  • by Anonymous Coward on Thursday March 13, 2014 @02:34PM (#46476109)

    Isn't the bitcoin protocol expected to prevent exactly this? Assuming that the cryptographic part wasn't broken, the existence of a 6-block chain telling you the coins are there means they *are* there. Something tells me that a lot of people blindly trusted some random guy on the internet with their money instead of simply validating the fckn block chain, which would have told them immediately that they were screwed over.

    • If you hold your own Bitcoins in a local wallet, then yes, a handful of confirmations adequately proves you really do have those coins.

      As soon as you entrust them to someone else to store in a pooled account, bam, confirmability lost.

      A key philosophy behind the BTC protocol assumes direct person-to-person transactions. If you adhere to that, you don't get screwed by a failed exchange; for that matter, you don't even care about the existence of an exchange... Except insofar as they help define the "wort
      • by devman (1163205)
        Overstock is only accepting bitcoin via an exchange so the items are not truly priced in BTC.

        Overstock doesn't hold BTC, they convert it via CoinBase. Coinbase sets Overstock's BTC prices for them by using the current exchange rate. When you go to checkout with BTC you get a quote for the price that is only good short amount of time, if you don't pay the invoice within that window you have to start over and get a new price quote.

      • Though, with the likes of Overstock accepting BTC now, the marketplace itself might soon serve that function without needing an external point of reference.

        Why is this lie perpetually getting repeated? Hell, some moron even modded it up. Overstock (and Tigerdirect, etc) do not accept bitcoins as payment.

        Once again for those of you too stupid to read carefully - No major retailer accepts bitcoins as tender!. Some of them allow you to pay via an exchange such as coinbase, but note that even though the customer is parting with bitcoins, the seller is only ever receiving dollars (AKA real currency).

    • Re: (Score:2, Informative)

      by Anonymous Coward

      It had absolutely nothing to do with the Bitcoin protocol. The attackers abused a flaw in Mt. Gox's code, not Bitcoin's, to cause them to initiate transactions where it should have failed.

  • "Mistakes were made"?
    • by bobbied (2522392)

      "Mistakes were made"?

      That much is clear.. At Mt Gox, apparently they didn't all get away with taking/loosing their customers' deposits.

  • Neoliberals will shrug this off as an anomaly, but the ability of people of privilege to steal is enhanced by unregulated free markets.

    It never fails. When there are no rules, it pays to be unruly.

    • Re:The Free Market (Score:4, Informative)

      by Jeff Flanagan (2981883) on Thursday March 13, 2014 @02:43PM (#46476237)
      Neoliberals? I'm under the impression that Libertarians with the minds of teenagers are the ones so in love with Bitcoin, and opposed to regulation that would normally keep their money safe.
      • by PopeRatzo (965947)

        Neoliberals? I'm under the impression that Libertarians with the minds of teenagers are the ones so in love with Bitcoin

        Neoliberals = libertarians. They mean about the same thing for the purposes of this conversation.

      • When you let your politics run your logic, this is the result. In one word, wrong.
    • Re:The Free Market (Score:4, Insightful)

      by JoeyRox (2711699) on Thursday March 13, 2014 @02:51PM (#46476337)
      That all depends on how one prefers to be robbed. The transparent, libertarian way is to have your money stolen in front of you. The opaque, governmental way is to have it stolen in 3% to 5% increments every year via government-mandated inflation.
      • by PopeRatzo (965947)

        The transparent, libertarian way is to have your money stolen in front of you.

        So, the 700,000 bitcoins that disappeared under Mt Gox were stolen "in front of" the people who owned them?

        Maybe we need to define "in front of".

      • That all depends on how one prefers to be robbed. The transparent, libertarian way is to have your money stolen in front of you. The opaque, governmental way is to have it stolen in 3% to 5% increments every year via government-mandated inflation.

        You are being far too kind sir, the CPI was juked in the 80s by removing "fuel" and "Food". 2 variables that everyone somewhat depends upon. Most are losing 5-13% a year in the most stable Fiat worldwide; other national currencies are much worse.

  • Suspected =/= knew (Score:2, Interesting)

    by DaveV1.0 (203135)
    In the first sentence, Karpeles is reported to have said he "suspected hundreds of thousands of bitcoins were missing". In the second sentence, the submitter, and by extension Timothy the editor, turn this suspicion of into "knowing that its bitcoin stash was wiped out". Let me demonstrate the problem with this:

    A person suspects Timothy of being a murderer and panning a second murder thus that person knows that Timothy is a murderer and will be killing again and thus can kill Timothy and claim defense of another based solely on that suspicion.

    • by BronsCon (927697)
      I don't see a problem with that. As long as we're talking about /. editorial staff, that is.
    • It doesn't matter if he suspected or knew... in either case transactions should have been suspended. Let me demonstrate the issue for you:

      "DaveV1.0 paid me to house sit while he was on vacation. I suspected that a friend had stolen the key, was taking his valuables and defiling his gerbil but I didn't bother to change the locks or even drive by the house to see if anything was amiss."

      I suspect you wouldn't care if I suspected or knew at this point, you would still hold me responsible.
  • "...buying bitcoins that did not exist, with cash that was already long gone."

    Sssoooo, it's exactly like the US dollar. Or ANY fiat currency. [wikipedia.org]

  • Half a billion dollars has been stolen. Where's the Tokyo Metropolitan Police Department? This is their job. It's embarassing that they haven't made any arrests.

    • No, bitcoins have been stolen. They're not recognised as currency or really as property in Tokyo, so essentially nothing was stolen. Perhaps with this revelation there might be a case for fraud, but not as likely for theft.

  • Ultimately the bitcoins are a digital file that we ascribe value even though there's no inherent entity, and we trust in its value because someone assured us that a computer is sure it's a unique file. So what's a weird thought to me is, when did these accounts actually go to being valueless?

    It's like... Pretend there was no insurance or regulation, and I had a bank account with no physical cash, but just a computer entry saying I had $5,000, and the bank has $5,000 to cover it if I need to withdraw. The

    • Well, when this happens to an actual bank, you have $5k up until the day the bank stops paying withdrawals, at which point you have some amount less than $5k. How much less is determined by value of the assets that remain on the books, which is usually much higher than $0. When an FDIC-insured bank fails, usually depositors eventually recover some amount over 90% of their uninsured assets as the government "winds down" the bank by selling off the loans at market value and distributing the proceeds.

      Withou

    • I'm not really deep on Bitcoin, so this probably needs to be proofread....

      Think of bitcoin as a ledger. Any time you get bitcoins (mining, giving bitcoins) the transaction goes in the ledger. "5000 BitC => wallet 0x748a53cb56" or whatever. There's fairly good crypto making sure it's a valid ledger ("mining" is actually you proving the crypto work to make it valid - you get paid in coins for validating the blockchain). There's no "unique file" per se. There's no single bitcoin.com/blockchain that everyo

  • I know regulations can't solve everything. we're all human. We're fragile, stupid, and too easily bought. Regulators and regulation writers are all those.

    But through all of this, i think of "the sign on the bar that says no backpacks on the bar".

    Whenever you see a sign at a place, that says "no something_or_other" its probably from experience. For a while everyone had their backpacks onthe bar. They took up space, and then people started knocking food on everyone else. At some point, we realized this "liber

  • by sjames (1099) on Thursday March 13, 2014 @05:42PM (#46478243) Homepage

    This is not a bitcoin failure. Nothing about bitcoin failed here.

    This is MtGox, a sorta-kinda but not really bank like entity (relax, trust us) that failed in a big way. Either it really got hacked and lost the bitcoin, or it was a giant fraud an it stole the bitcoin itself.

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