This post originally appeared in Money Stuff.
In 2014, Mt. Gox — “Magic: The Gathering Online eXchange,” which grew from that improbable name into at one point the world’s largest bitcoin exchange — suffered the fate of all bitcoin exchanges, and had its bitcoins stolen. Since then everyone has just gotten used to the idea that all bitcoin exchanges get their bitcoins stolen, but at the time it was kind of a big deal; Mt. Gox filed for bankruptcy protection in Japan, where it was based, and customers lost something like 750,000 bitcoins, worth about $ 500 million at the time.
But Mt. Gox kept looking for the bitcoins, and I guess it found some. This could lead to some weird results. When Mt. Gox imploded, in February 2014, bitcoin was trading in the hundreds of dollars. (It got as high as $ 806.83 on February 3, and as low as $ 451.58 on February 24.) Right now, three and a half years later, bitcoin is trading in the thousands of dollars. (Call it $ 6,500 and change, with continuing massive volatility.) And Mt. Gox’s bankruptcy estate now has about 200,000 bitcoins. Meaning that, in very round numbers, it has about a quarter as many bitcoins as it did at its bankruptcy filing, but each bitcoin is worth 10 times as much.
In Mt. Gox’s bankruptcy — as is generally the case in bankruptcy — claims against it were reduced to yen amounts shortly after the bankruptcy (in April 2015, when bitcoin was mostly in the $ 400s), and creditors are entitled to recover up to 100 percent of the yen amount of their claims, but no more. But there is more:
The bankruptcy estate for Mt. Gox holds 202,185 bitcoins worth about ¥169 billion or $ 1.5 billion at current rates. Meanwhile, the trustee has recognized claims by exchange customers of ¥46 billion based on the April 2014 bitcoin price, a procedure that lawyers say has a sound basis in bankruptcy law.
After accounting for smaller amounts of nonbitcoin assets and liabilities, Mt. Gox has a surplus on paper of ¥111 billion, or $ 977 million, that could go to its shareholders, according to a calculation by The Wall Street Journal.
This strikes many people — particularly Mt. Gox’s customers — as unfair. They had bitcoins worth (say) $ 500. Mt. Gox lost them. Now those bitcoins would be worth $ 6,500. Mt. Gox is going to give the customers back the $ 500 — the amount of their claims in fiat currency — and keep perhaps a billion dollars for itself. This is particularly galling because “itself” means mainly Mark Karpelès, its former chief executive officer and main shareholder, who is currently on trial for embezzlement. (For allegedly embezzling some bitcoins from Mt. Gox — but not the 750,000 bitcoins that were stolen by hackers. Again, the main function of a bitcoin exchange is to get its bitcoins stolen, so it shouldn’t be surprising that lots of people were allegedly stealing Mt. Gox’s bitcoins.)
Here is where I have to confess that people spotted this problem back in 2014 and proposed a solution consisting of, basically, giving Mt. Gox’s customers bitcoin-linked claims (“Goxcoins”) that would trade on the blockchain and give them a recovery denominated in bitcoins rather than yen. And at the time I … made fun of them? “If your claim now is for, say, 10 bitcoins worth $ 6,000 or whatever, then by the time those bitcoins are recovered, they’ll be worth $ 60,000, because Bitcoin is deflationary, and its price can only go up,” I wrote, and that sentence was completely accurate (well, the numbers would be about $ 5,000 and $ 65,000), but I cannot feel good about it because it was sarcastic. The lessons here are:
- Do not take anything I write as investment advice, ever, for any reason, not only the things that look like investment advice but also the general comments; and
- Always buy bitcoins. (This is not investment advice.)
In my defense, though, Goxcoin didn’t happen. The regular old bankruptcy system did, and it reduced the claims to yen, and now there seems to be a massive surplus over the yen claims, and the claimants are aggrieved. It is hard to know what to make of this. It happens sometimes. If you are going to have a bankruptcy system, it will probably need to reduce claims to commensurable dollar/yen/whatever amounts so that it can divide up the bankruptcy estate. (Simplistically, you can imagine the working of bankruptcy being that you take all the estate’s stuff, sell it, and divide the money among the claimants: You sell it for dollars or yen, not bitcoins.) And if you are going to have a bankruptcy system, it will probably take time. There are plenty of debates about how to treat elements of value beyond the strict dollar face amount of the claims — bond make-whole premiums, for instance, have been litigated a lot in the U.S. recently — but it is not exactly surprising that Japan’s bankruptcy system thinks in yen rather than in bitcoins.
On the other hand you shouldn’t worry too much about this. Someone will sue Mark Karpelès until he doesn’t have a billion dollars’ worth of bitcoins any more. The bankruptcy estate might only owe the customers $ 500 per bitcoin, but they — and regulators, etc. — might have a case that Karpelèsowes them the remainder, due to negligence or unjust enrichment or general come-on-man. Even if Mt. Gox makes it out of bankruptcy with a billion dollars, even if he beats the embezzlement charges, it just seems too improbable that he’ll walk the tightrope at the end of which is a billion dollars worth of bitcoins just for him.
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