Karpeles Arrested, Not For Missing Millions

In 2010, French National Mark Robert Karpeles was charged by French courts for fraudulent accessing and changing data in an automated processing system. The issue was raised by Karpeles’ former employer Stephane Portha, CEO of small French gaming studio Eurocenter. Portha accused him of stealing customers user names, passwords, and a domain name, along with other grievances. Karpeles was sentenced to one year in prison and fined the equivalent of $60,000 USD.

Karpeles was not present for the sentencing and did not serve his year in jail. He was in Japan developing MtGox, which would become the biggest exchange of its time. According to French Courts,  the sentencing deemed Karpeles a delinquent offender and not a criminal. The term criminal in the French legal system is reserved for crimes of further severity.

The exchange he was working on came from humble beginnings, it was a trading platform for playing cards used in the popular game Magic: The Gathering. The exchange was never built for Bitcoin trading, but by 2013 was handling 70% of all Bitcoin transactions. The success was short lived and in February 2014 the company behind the exchange filed for minji saisei ho, an insolvency procedure which was introduced to Japan in 1999. As a form of bankruptcy, minji saisei ho protects the company from creditors, allowing liquidators to sell any assets.

In April 2014, Mt Gox began liquidation proceedings and announced that approximately 850,000 bitcoins were missing, and possibly stolen. 200,000 bitcoins were later found, but it is still unclear as to how they went missing and Karpeles has kept a low profile ever since, unwilling to explain.

Investigations into the funds that disappeared from MtGox have been ongoing. An alternative Bitcoin exchange Kraken, which is purpose built for the digital currency, was asked to assist in the liquidation proceedings, and the investigation into the missing millions. “The outcome of the MtGox bankruptcy proceedings will deeply affect the Bitcoin community as a whole,” said Kraken CEO Jesse Powell in the press release announcement.

“We’ve decided to volunteer our resources and expertise in an attempt to minimize damage to creditors, restore faith in the Bitcoin community, and demonstrate trusted leadership in the industry.”
— – Jesse Powell

Further investigations have also been carried out by other third parties. Bitcoin security specialists,  WizSec (Wiz Security Consulting) is based in Tokyo, and has has publicly released two reports from its unofficial, independent investigation into the collapse of the exchange.

“After a string of reported problems with bitcoin withdrawals, the MtGox exchange made big news when it collapsed in early 2014 and declared bankruptcy. Ever since then it has been the topic of vivid speculation what actually happened, but little actual evidence has surfaced and over a year later there are still more questions than answers. Some, like us, have made their own unofficial attempts at independent investigations of MtGox; ours is probably both the longest-running and the one that has made the furthest progress.” – WizSec

Speculation arose that two US federal agents were involved in the exchanges collapse. The now former federal agents have been charged with wire fraud, money laundering and related offenses for stealing digital currency during their investigation of the the online marketplace, the Silk Road.

The charges are contained in a federal criminal complaint issued on March 25, 2015, in the Northern District of California. One of the former agents, Shaun W. Bridges, allegedly diverted over $800,000 USD of digital currency  into his personal account, which he gained control of during the Silk Road investigation. The complaint alleges that Bridges placed the assets into an account at Mt. Gox. He then allegedly wired funds into one of his personal investment accounts in the United States mere days before he sought a $2.1 million seizure warrant for Mt. Gox’s accounts.

WizSec is of the opinion that the two former agents had little to do with the collapse of Mt. Gox. “we don’t think these agents are main characters in the story of the missing MtGox bitcoins, and the story doesn’t begin in 2013 either,” Kim Nilsson, Lead Investigator at WizSec.

The WizSec reports describe suspicious patterns in the transfer of Gox funds forming as early as 2011. In the most recent report, they outline concerns regarding creditors receiving any funds from the collapsed exchange.

“The fact that the coins were real, stolen and at significant risk of already having been spent would seem to further dim any hopes for creditors of recovering any more bitcoins. Realistically, we are left to hope the payout percentage might improve as invalid and illegitimate claims could potentially be filtered out.”
— – WizSec

While investigations continue in to the missing bitcoin, which are valued at $390M USD at todays exchange rate. Last week, Japanese police arrested Karpeles on suspicion he had used MtGox to illicitly add $1M USD to an account under his control. The police released a statement saying that they believed Karpeles had unjustly inflated the balance of the account, and manipulated transaction records on a system that MtGox used to swap Bitcoins for dollars.

“He created false information that $1 million had been transferred into the account, when in fact it had not been.”
— – Tokyo Metropolitan Police Department

The Japanese authorities are able to hold suspects for several weeks before deciding whether or not to bring charges. Since the arrest of Karpeles, further news has been released regarding an anonymous claimant. The claimant lost 458 bitcoin in the MtGox collapse. The Tokyo District Court has stated that the currency was “not subject to ownership and consequently the case has been dismissed.

Masumi Kurachi, the judge on the case, has ruled that Japanese law stipulates ownership can only be allowed for proprietorship of tangible entities that occupy space and which allow for exclusive control over them. A third party must be required in a transaction, according to an example provided by the judge, and as a result virtual currency could not be owned.

The regulatory environment of digital currency in Japan is in its youth. Tokyo is planning to boost their efforts in coordination with other G7 countries which include Canada, France, Germany, Great Britain, Italy, Japan, and the United States.

Canada and Great Britain are currently in the development stages of regulation. The US, however, has New York’s Department of Financial Services (NYDFS) which recently announced the final draft of the controversial BitLicense.