EXCLUSIVE HACKING JAPAN- Mount Gox Bitcoin Hacked: 8.5 LAKH Bitcoin Stolen by Hackers,INDIAN Investors are on Big Shocked
From a distance, the world’s largest bitcoin exchange looked like a
towering example of renegade entrepreneurism. But on the inside,
according to some who were there, Mt. Gox was a messy combination of
poor management, neglect, and raw inexperience.
Its collapse into bankruptcy last week — and the disappearance of $460 million, apparently stolen by hackers, and another $27.4 million missing from its bank accounts — came as little surprise to people who had knowledge of the Tokyo-based company’s inner workings. The company, these insiders say, was largely a reflection of its CEO and majority stake holder, Mark Karpeles, a man who was more of a computer coder than a chief executive and yet was sometimes distracted even from his technical duties when they were most needed. “Mark liked the idea of being CEO, but the day-to-day reality bored him,” says one Mt. Gox insider, who spoke on condition of anonymity.
Last week, after a leaked corporate document said that hackers had raided the Mt. Gox exchange, Karpeles confirmed that a huge portion of the money controlled by the company was gone. “We had weaknesses in our system, and our bitcoins vanished. We’ve caused trouble and inconvenience to many people, and I feel deeply sorry for what has happened,” Karpeles said, speaking at a Tokyo press conference called to announce the company’s bankruptcy. This would be the second time the exchange was hacked. In June 2011, attackers lifted the equivalent of $8.75 million.
Bitcoin promises to give a bank account to anyone with a mobile phone, no ID required. It’s clearly an amazing and potentially world-changing technology — the first viable, decentralized, reliable form of digital cash. It could democratize international finance. But it’s also a technology that was pushed forward by a community of people who were unprepared or unwilling to deal with even the basics of everyday business. A new wave of entrepreneurs may bring the digital currency a new level of respectability, but over its first several years, bitcoin has been driven largely by computer geeks with little experience in the financial world. The most prominent example is Mark Karpeles.
McCaleb had registered the Mtgox.com web domain in 2007 with the idea of turning it into a trading site for the wildly popular Magic: The Gathering game cards. He never followed through on that idea, but in late 2010, McCaleb decided to repurpose the domain as a bitcoin exchange. The idea was simple: he’d provide a single place to connect bitcoin buyers and sellers. But soon, McCaleb was getting wires for tens of thousands of dollars and, realizing he was in over his head, he sold the site to Karpeles, an avid programmer, foodie, and bitcoin enthusiast who called himself Magicaltux in online forums.
Karpeles soon set about rewriting the site’s back-end software, eventually turning it into the world’s most popular bitcoin exchange. A June 2011 hack took the site offline for several days, and according to bitcoin enthusiasts Jesse Powell and Roger Ver, who helped the company respond to the hack, Karpeles was strangely nonchalant about the crisis. But he and Mt. Gox eventually made good on their obligations, earning a reputation as honest players in the bitcoin community. Other bitcoin companies had been hacked and lost customer funds. Most of the time, they simply folded. But Karpeles and Mt. Gox did not.
When Karpeles was interviewed by Reuters in the spring of 2013 — seated, inexplicably, on top of a blue pilates ball — he was a major player in the bitcoin world. He had ponied up 5,000 bitcoins to help kickstart the Bitcoin Foundation, a not-for-profit bitcoin software development and lobbying group, where he was a board member (he has since resigned). And, according to insiders, he thought nothing of dropping the business of the day to order flat screen TVs or $400 lunches for the staff of Gox’s expanded Tokyo headquarters, which now occupies three floors of a modern office building in the city’s Shibuya neighborhood. “He likes to be praised, and he likes to be called the king of bitcoin,” says another insider who spoke on condition of anonymity. “He always talks about how he’s a member of Mensa and has an above-average IQ.”
Mt. Gox, he says, didn’t use any type of version control software — a standard tool in any professional software development environment. This meant that any coder could accidentally overwrite a colleague’s code if they happened to be working on the same file. According to this developer, the world’s largest bitcoin exchange had only recently introduced a test environment, meaning that, previously, untested software changes were pushed out to the exchanges customers — not the kind of thing you’d see on a professionally run financial services website. And, he says, there was only one person who could approve changes to the site’s source code: Mark Karpeles. That meant that some bug fixes — even security fixes — could languish for weeks, waiting for Karpeles to get to the code. “The source code was a complete mess,” says one insider.
By the fall of 2013, Mt. Gox’s business was also a mess. Federal
agents had seized $5 million from the company’s U.S. bank account,
because the company had not registered with the government as a money
transmitter, and Mt. Gox was being sued for $75 million by a former
business partner called CoinLab. U.S. customers complained of
months-long delays withdrawing dollars from the exchange, and Mt. Gox
had tumbled from the world’s number one bitcoin exchange to position
number three.
But Karpeles was obsessed with a new project: The Bitcoin Cafe. Inspired by a French bistro, it would be a stylish hang-out located in the same building as the Mt. Gox offices, a very-new-looking building of metal and glass within walking distance of Tokyo’s largest train station. You could drop by for a beer or some wine, and — using a cash register proudly hacked by Mark Karpeles — you could buy it all with bitcoin. When WIRED tried to meet with Karpeles and Mt. Gox at their offices this past October — and a company representative turned us away, saying that legal reasons prevented Mt. Gox from talking to the press — the placard in the lobby of the building already identified the cafe. This company representative said it would open by the end of the year. It never did.
One insider says that Mt. Gox spent the equivalent of $1 million on the cafe venture, renovating Mt. Gox’s office building to Karepeles’ specifications. At a time when Gox’s business was falling apart, this insider says, the project was a major distraction. “[Karpeles] was super-proud of being able to use his hacked cash register with the code he wrote,” this insider says.
Says another insider: “Aside from the cafe, he liked to spend time fixing servers, setting up networks and installing gadgets… probably distracting himself from dealing with the real issues that the company was up against.”
Then, in February, the company’s fortunes took another turn. Mt. Gox stopped paying out customers in bitcoins, citing a flaw in the digital currency, and after days of silence from the company, protesters turned up outside its offices, asking whether it was insolvent.
After Mt. Gox was hacked for the first time in summer of 2011, a friend asked Powell to help out, and soon, the San Francisco entrepreneur found himself on a plane to Tokyo. After landing, he rushed to Shibuya station, where he was met by his friend, Roger Ver, one of the world’s biggest bitcoin supporters who just happened to live across the street from Mt. Gox. Without bothering to drop off Powell’s bags, the two rushed to the Mt. Gox offices to see what they could do. They worked through the week with Karpeles, other employees, and a handful of other bitcoin enthusiasts. They answered support inquires, did troubleshooting on the site, and tried to support the tiny company in any way they could. At one point, Powell rushed to the Apple store and came back with $5,000 worth of computers that could support the cause. But two days later, the site was still offline.
Ver and Powell were set to work through the weekend, but when they arrived at the company’s tiny office that Saturday, there was a surprise. Mark Karpeles had decided to take the weekend off. The two volunteers were flabbergasted. “I thought that was completely insane and demoralizing for the rest of the team,” Powell remembers. On Monday, Powell says, Karpeles did return to work, but he spent part of the day stuffing envelopes. “I was like: ‘Dude why are you doing this? You can do this anytime. The site is offline. You need to get the site online.’”
Powell last met with Karpeles in January, before news of the latest hack broke. He now runs a competitor to Mt. Gox called Kraken. They had lunch in Tokyo, and Karpeles seemed unworried about Gox’s future. He was excited about his Bitcoin Cafe. “It was probably some light for them in a very dark world of dealing with banks and customer complaints all day,” Powell says. “I’m sure that Mark has been very stressed for a long time and probably the Bitcoin Cafe was a fun project.” But now that world is even darker.
Flexcoin,
a Canada-based bitcoin bank, said it was closing down after losing
bitcoins worth about $600,000 to a hacker attack enabled by flaws in its
software code.
Flexcoin said in a message on its website that all 896 bitcoins stored online were stolen on Sunday. Its collapse came after Mt. Gox, once the world’s dominant bitcoin exchange, filed for bankruptcy protection in Japan and said it may have lost some 850,000 bitcoins due to hacking.
“As Flexcoin does not have the resources, assets, or otherwise to come back from this loss, we are closing our doors immediately,” Flexcoin said.
It later posted an update on its site saying that the attack exploited a flaw in its code on transfers between users and involved inundating the system with simultaneous requests to move coins between accounts.
“Flexcoin has made every attempt to keep our servers as secure as possible, including regular testing,” it said, adding it had repelled thousands of attacks over the past few years. “But in the end, this was simply not enough.”
The Alberta, Canada-based firm, which said it is working with law enforcement agencies to trace the source of the hack, said it would return bitcoins stored offline, or in “cold storage”, to users.
Cold storage coins are held in computers not connected to the internet and therefore cannot be hacked.
Flexcoin said on Feb. 25 it was not affected by Mt. Gox’s closure. “While the Mt. Gox closure is unfortunate, we at Flexcoin have not lost anything,” it had tweeted then.
Bitcoin is a digital currency that, unlike conventional money, is bought and sold on a peer-to-peer network independent of central control. Its value soared last year, and the total worth of bitcoins minted is now about $7 billion.
According to Bitstamp, one of the largest exchanges for trading bitcoins, a bitcoin was valued at about $658 on Wednesday.
Has $365-million just been stolen, or nothing?
Kolin Burges, a self-styled “crypto-currency trader,” certainly believes he is out more than $300,000 after Mt. Gox, a Tokyo-based bitcoin exchange, went dark Tuesday.
“I’m very angry,” said the former software engineer who travelled to Tokyo from London for answers after the company failed to tell him what had happened to his bitcoins which at one point were worth $342,000.
“It looks like that’s disappeared,” said Mr. Burges, one of six protesters outside the Mt. Gox office.
Some of them carried signs saying, “Mt. Gox, where’s our money?” and “Mt. Gox, are you solvent?”
Mr. Burges said he had 285 bitcoins with Mt. Gox meaning they were worth $342,000 when the currency was trading at $1,200 a unit last year. Although, if he held them earlier in the year when they were trading at $12, they were worth only $3,420.
Mt. Gox halted withdrawals this month after detecting “unusual activity.” Sunday, Mark Karpeles, its chief executive, resigned from the board of the Bitcoin Foundation, the digital currency’s trade group.
A document circulating Tuesday said unidentified thieves stole 744,408 bitcoins from the exchange — about $365-million at current rates — and the theft “went unnoticed for several years.”
But, as Mr. Karpeles said last year, bitcoins were a “high-risk investment … If you buy bitcoins, you should buy keeping in mind that the value could be zero the day after.”
Some financial analysts said the “virtual vanishing” of the Mt. Gox bitcoins could spell the end for the digital currency, rendering the stolen 744,408 bitcoins worthless.
“A lot of economists had been predicting that bitcoins days are numbered,” said Lisa Kramer at the Rotman School of Management, University of Toronto.
Since its creation in 2009, the virtual currency has become popular among tech enthusiasts, libertarians and adventurous investors because it allows them to make one-to-one transactions, buy goods and services, and exchange money across borders without involving banks, credit card issuers or other third parties. Criminals like bitcoin for the same reasons.
Tuesday, Mt. Gox went offline and its website was returning a blank page.
A document posted online that appeared to be an internal strategy paper said, “The reality is that Mt. Gox can go bankrupt at any moment, and certainly deserves to as a company.”
The document, which outlined plans for leadership changes, re-branding and a possible move to Singapore, was posted by blogger Ryan Galt. A person briefed on the situation at Mt. Gox, who asked to remain anonymous because the document was private, said he believed it was authentic.
The internal document said 744,408 bitcoins from the exchange had been stolen.
Mt. Gox said this month it identified a bug that enabled people to withdraw the same bitcoins more than once, leaving it vulnerable to hackers.
Central banks across the globe have been hesitant to recognize bitcoins as a legitimate form of money.
Mt. Gox “reminds us of the downside of decentralized, unregulated currencies. There is no Federal Reserve or [International Monetary Fund] to come to the rescue. There is no deposit insurance,” said Campbell Harvey, a professor at Duke University’s Fuqua School of Business who specializes in financial markets and global risk management.
This is not the first major bitcoin heist.
Last October, the Federal Bureau of Investigation shut down Silk Road, an underground website that trafficked in illegal drugs and traded in bitcoins. Most of its operations moved to a new “drug shop,” Sheep Marketplace.
But in December Sheep Marketplace also closed, saying hackers had stolen 5,400 bitcoins. There were other reports the site may have been a “darknet” scam and had absconded with 39,000 bitcoins worth up to $44-million.
Meanwhile, Silk Road 2 — set up to replace Silk Road — said this month it had been hacked using “transaction malleability,”the same bug that afflicted Mt. Gox.
Nicholas Weaver, a researcher at the Berkeley, Calif.-based International Computer Science Institute, estimated the theft at 4,400 coins worth $2.6-million.
Events concerning Mt. Gox are still confused, with Mr. Karpeles telling Reuters news agency the company was at a “turning point” but giving no details.
Joseph David, chief executive of the Canadian Virtual Exchange, a Calgary-based bitcoin exchange, said he was skeptical about the theft from Mt. Gox.
He said each bitcoin was tracked — a blockchain — so it could be determined where they went.
Either Mt. Gox had the supposed missing bitcoins, which could be established by showing the blockchain, or it was not willing to show its hand, Mr. David said.
“We don’t know which scenario is real or not,” he said.
“We don’t know if they have the bitcoins, or if they don’t have the bitcoins. We have no idea, no one knows.”
National Post, with files from The Associated Press, Reuters, The Canadian Press and Armina Ligaya
Mt. Gox, the world’s first Bitcoin
trading exchange, issued an apology today for the recent freeze in
external transfers of the virtual currency due to a recent, crippling
hack. The Tokyo-based company also announced in its official statement
that Bitcoin withdrawals should be able to resume again soon, though at a
slower pace “and with new daily/monthly limits in place” to protect
against future threats.
The statement, released on the Mt. Gox website, noted that the company has rolled out a solution for the recent Bitcoin software transaction malleability woes that will allow withdrawals to resume. Exactly how soon, though, is anyone’s guess at the moment.
The company also announced that it has added a new login system that notifies customers by email when they successfully access their accounts. “This is an additional security layer, but as always we strongly encourage our customers to use the 2-step authorization options available in our Security Center," Mt. Gox said in the letter.
Related: JPMorgan Slams Bitcoin as Exchanges Halt Withdrawals
The popular Bitcoin storage and trading platform, once the largest, is slowly rebounding from being rocked last week by a “massive and concerted” denial-of-service attack. Two days later a similar attack halted customer withdrawals at Slovenia-based Bitstamp, which is now the world’s biggest Bitcoin exchange. Bitstamp has since restored withdrawals.
Meanwhile, frustrated Mt. Gox customers, including a handful of protesters who picketed outside the company’s headquarters, continue to demand answers as to how the exchange safeguards their funds.
Earlier today, Bitcoin was trading at almost $250, according to Mt. Gox. It dipped down to $220.29 from a high of $540. However, on the Bitstamp exchange, the virtual currency is still riding as high as $643.99.
After Alberta’s Flexcoin, Mt. Gox hacked, bitcoin businesses face sting of free-wheeling ways
YOSHIKAZU TSUNO/AFP/Getty ImagesBitcoin
enthusiasts, and academics, say the latest snafus don't mark the end of
the cryptocurrency itself, but will accelerate a move towards some sort
of regulation and better practices.
It
took less than two days for an otherwise thriving Alberta-based bitcoin
bank to be robbed of roughly $654,000 worth of the crypto currency,
shut down due to the loss, and leave its users with no recourse.
Flexcoin looked to law enforcement to investigate the hack, but apparently to no avail.
“My attempts to file a police report were laughed at, I was advised #bitcoin is a scam,” according to a tweet posted by the Flexcoin Twitter account Wednesday. “Thanks for the help @edmontonpolice.”
The latest bitcoin hacking casualty highlights the grey area in which these entrepreneurs operate. It’s an unregulated space, there’s mounting evidence that it needs the checks and balances — and protections — of a financial institution dealing in real dollars. Bitcoin enthusiasts, and academics, say the latest snafus don’t mark the end of the cryptocurrency itself, but will accelerate a move towards some sort of regulation and better practices.
“It will probably require the bitcoin [entrepreneurs] to rethink how they’re doing things, and come up with things that are a little more secure,” said Gordon Sick, professor of finance at the Haskayne School of Business at the University of Calgary. “Things that look a lot more like a bank runs.”
Flexcoin announced on its website it was shutting down after 896 bitcoins were stolen from its “hot wallet”, an electronic wallet connected to the Internet, a day earlier.
“As Flexcoin does not have the resources, assets, or otherwise to come back from this loss, we are closing our doors immediately,” the company said in a statement on their website Tuesday.
Flexcoin later posted an update on its site saying that the attack “exploited a flaw in the code” which allows transfers between users, slamming the platform with multiple requests to move coins between accounts.
This comes after Tokyo-based bitcoin exchange, Mt. Gox, said it may have lost some 850,000 bitcoins due to hacking and has filed for bankruptcy protection in Japan.
Anthony Di Iorio, co-founder of the Bitcoin Alliance of Canada, says while these are bad marks on the cryptocurrency’s record, it won’t have any long-term impact.
“The system is fine. It was that bank that had a problem,” he said. “It’s not the bitcoin protocol or the network that was insecure or had an error or had a bug as the reason why people lost their bitcoins.”
However, he does anticipate a move among bitcoin businesses towards more protective measures and standards — whether regulated by government or by the industry — such as insurance.
“We’re only five years into this experiment, and those are things that are going to start coming out,” he said.
The Calgary-based Canadian Virtual Exchange, or Virtex, has proactively tried to follow government regulations and sought out registration or licensing when possible, said its chief executive Joseph David.
This includes registering as a money-services business (MSB) with the Financial Transactions and Reports Analysis Centre of Canada (FinTRAC), a government agency collecting and disclosing information on suspected money laundering and terrorist financing.
He says it has helped ease worries of some Canadian banks which were reluctant to deal with them.
However, FinTRAC and the Department of Finance told the Financial Post that under current law, a virtual currency exchange isn’t considered to be an activity that qualifies them as an MSB. The desgination would cover any activities such as foreign exchange or remittance of funds, for which Virtex has been registered for, in legal currency but not bitcoin, said Peter Lamey, spokesperson for FinTRAC.
Mr. David said while being registered for an MSB licence doesn’t cover its bitcoin activities, foreign exchange and remittance of funds were the next closest categories available.
“It’s simply a foreign exchange MSB licence. However, this is part of my proactive stance,” he said. “Because the more foreign exchange we do, and the more bitcoin exchange we do, and the more remittance and compliance we do, the more that they will accept that bitcoin does fall under some new category. And the lines of communication are now open.”
As announced in the federal budget last month, the department of finance is proposing to introduce anti-money laundering and anti-terrorist financing regulation for virtual currencies such as Bitcoin.
This includes extending the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) requirements for money service businesses (MSBs) to entities in the business of dealing in virtual currencies, a finance official said in an e-mail to the Financial Post.
“These requirements include customer identification, recordkeeping, registration and reporting to FINTRAC. The regulations would aim to cover entities such as virtual currency exchanges, not individuals or ordinary businesses that use virtual currencies for buying and selling goods or services.”
Mr. Sick says in addition to some kind of regulatory authority, bitcoin businesses could shore up credibility by being more transparent with financial statements and auditing standards.
But Joshua Gans, a professor at the University of Toronto who has done research in virtual currencies, argues that companies like Flexcoin are more like a storage warehouse than banks and may need to be treated under consumer protection regulations instead.
Governments have to decide how best to handle these pure digital goods, and how they fall under normal regulatory expectations, he said.
“With bitcoin, the money is actually still owned by the individuals,” Mr. Gans said. “It literally can be the case that they come in and steal your money… They are effectively safe holding this new money. But of course, some safes are more easily cracked than others.”
Flexcoin looked to law enforcement to investigate the hack, but apparently to no avail.
“My attempts to file a police report were laughed at, I was advised #bitcoin is a scam,” according to a tweet posted by the Flexcoin Twitter account Wednesday. “Thanks for the help @edmontonpolice.”
The latest bitcoin hacking casualty highlights the grey area in which these entrepreneurs operate. It’s an unregulated space, there’s mounting evidence that it needs the checks and balances — and protections — of a financial institution dealing in real dollars. Bitcoin enthusiasts, and academics, say the latest snafus don’t mark the end of the cryptocurrency itself, but will accelerate a move towards some sort of regulation and better practices.
“It will probably require the bitcoin [entrepreneurs] to rethink how they’re doing things, and come up with things that are a little more secure,” said Gordon Sick, professor of finance at the Haskayne School of Business at the University of Calgary. “Things that look a lot more like a bank runs.”
Flexcoin announced on its website it was shutting down after 896 bitcoins were stolen from its “hot wallet”, an electronic wallet connected to the Internet, a day earlier.
“As Flexcoin does not have the resources, assets, or otherwise to come back from this loss, we are closing our doors immediately,” the company said in a statement on their website Tuesday.
Flexcoin later posted an update on its site saying that the attack “exploited a flaw in the code” which allows transfers between users, slamming the platform with multiple requests to move coins between accounts.
This comes after Tokyo-based bitcoin exchange, Mt. Gox, said it may have lost some 850,000 bitcoins due to hacking and has filed for bankruptcy protection in Japan.
Anthony Di Iorio, co-founder of the Bitcoin Alliance of Canada, says while these are bad marks on the cryptocurrency’s record, it won’t have any long-term impact.
“The system is fine. It was that bank that had a problem,” he said. “It’s not the bitcoin protocol or the network that was insecure or had an error or had a bug as the reason why people lost their bitcoins.”
However, he does anticipate a move among bitcoin businesses towards more protective measures and standards — whether regulated by government or by the industry — such as insurance.
“We’re only five years into this experiment, and those are things that are going to start coming out,” he said.
The Calgary-based Canadian Virtual Exchange, or Virtex, has proactively tried to follow government regulations and sought out registration or licensing when possible, said its chief executive Joseph David.
This includes registering as a money-services business (MSB) with the Financial Transactions and Reports Analysis Centre of Canada (FinTRAC), a government agency collecting and disclosing information on suspected money laundering and terrorist financing.
He says it has helped ease worries of some Canadian banks which were reluctant to deal with them.
It will probably require the bitcoin [entrepreneurs] to rethink how they’re doing things, and come up with things that are a little more secure“They are willing to do business, they are willing to process payments for us now,” Mr. David said.
However, FinTRAC and the Department of Finance told the Financial Post that under current law, a virtual currency exchange isn’t considered to be an activity that qualifies them as an MSB. The desgination would cover any activities such as foreign exchange or remittance of funds, for which Virtex has been registered for, in legal currency but not bitcoin, said Peter Lamey, spokesperson for FinTRAC.
Mr. David said while being registered for an MSB licence doesn’t cover its bitcoin activities, foreign exchange and remittance of funds were the next closest categories available.
“It’s simply a foreign exchange MSB licence. However, this is part of my proactive stance,” he said. “Because the more foreign exchange we do, and the more bitcoin exchange we do, and the more remittance and compliance we do, the more that they will accept that bitcoin does fall under some new category. And the lines of communication are now open.”
As announced in the federal budget last month, the department of finance is proposing to introduce anti-money laundering and anti-terrorist financing regulation for virtual currencies such as Bitcoin.
This includes extending the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) requirements for money service businesses (MSBs) to entities in the business of dealing in virtual currencies, a finance official said in an e-mail to the Financial Post.
“These requirements include customer identification, recordkeeping, registration and reporting to FINTRAC. The regulations would aim to cover entities such as virtual currency exchanges, not individuals or ordinary businesses that use virtual currencies for buying and selling goods or services.”
Mr. Sick says in addition to some kind of regulatory authority, bitcoin businesses could shore up credibility by being more transparent with financial statements and auditing standards.
But Joshua Gans, a professor at the University of Toronto who has done research in virtual currencies, argues that companies like Flexcoin are more like a storage warehouse than banks and may need to be treated under consumer protection regulations instead.
Governments have to decide how best to handle these pure digital goods, and how they fall under normal regulatory expectations, he said.
“With bitcoin, the money is actually still owned by the individuals,” Mr. Gans said. “It literally can be the case that they come in and steal your money… They are effectively safe holding this new money. But of course, some safes are more easily cracked than others.”
The Inside Story of Mt. Gox, Bitcoin’s $460 Million Disaster
Mark
Karpeles, the chief executive officer of bitcoin exchange Mt. Gox,
center, is escorted as he leaves the Tokyo District Court this past
Friday. Photo: Tomohiro Ohsumi/Bloomberg via Getty Images
Its collapse into bankruptcy last week — and the disappearance of $460 million, apparently stolen by hackers, and another $27.4 million missing from its bank accounts — came as little surprise to people who had knowledge of the Tokyo-based company’s inner workings. The company, these insiders say, was largely a reflection of its CEO and majority stake holder, Mark Karpeles, a man who was more of a computer coder than a chief executive and yet was sometimes distracted even from his technical duties when they were most needed. “Mark liked the idea of being CEO, but the day-to-day reality bored him,” says one Mt. Gox insider, who spoke on condition of anonymity.
Last week, after a leaked corporate document said that hackers had raided the Mt. Gox exchange, Karpeles confirmed that a huge portion of the money controlled by the company was gone. “We had weaknesses in our system, and our bitcoins vanished. We’ve caused trouble and inconvenience to many people, and I feel deeply sorry for what has happened,” Karpeles said, speaking at a Tokyo press conference called to announce the company’s bankruptcy. This would be the second time the exchange was hacked. In June 2011, attackers lifted the equivalent of $8.75 million.
Bitcoin promises to give a bank account to anyone with a mobile phone, no ID required. It’s clearly an amazing and potentially world-changing technology — the first viable, decentralized, reliable form of digital cash. It could democratize international finance. But it’s also a technology that was pushed forward by a community of people who were unprepared or unwilling to deal with even the basics of everyday business. A new wave of entrepreneurs may bring the digital currency a new level of respectability, but over its first several years, bitcoin has been driven largely by computer geeks with little experience in the financial world. The most prominent example is Mark Karpeles.
The Mt. Gox offices in Tokyo. Photo: Ariel Zambelich/WIRED
The King of Bitcoin
The 28-year-old Karpeles was born in France, but after spending some time in Israel, he settled down in Japan. There he got married, posted cat videos and became a father. In 2011, he acquired the Mt. Gox exchange in from an American entrepreneur named Jed McCaleb.McCaleb had registered the Mtgox.com web domain in 2007 with the idea of turning it into a trading site for the wildly popular Magic: The Gathering game cards. He never followed through on that idea, but in late 2010, McCaleb decided to repurpose the domain as a bitcoin exchange. The idea was simple: he’d provide a single place to connect bitcoin buyers and sellers. But soon, McCaleb was getting wires for tens of thousands of dollars and, realizing he was in over his head, he sold the site to Karpeles, an avid programmer, foodie, and bitcoin enthusiast who called himself Magicaltux in online forums.
Karpeles soon set about rewriting the site’s back-end software, eventually turning it into the world’s most popular bitcoin exchange. A June 2011 hack took the site offline for several days, and according to bitcoin enthusiasts Jesse Powell and Roger Ver, who helped the company respond to the hack, Karpeles was strangely nonchalant about the crisis. But he and Mt. Gox eventually made good on their obligations, earning a reputation as honest players in the bitcoin community. Other bitcoin companies had been hacked and lost customer funds. Most of the time, they simply folded. But Karpeles and Mt. Gox did not.
“He likes to be praised, and he likes to be called the king of bitcoin”
–Mt. Gox insider
As bitcoin prices took off, jumping from $13 at the start of 2013 to
more than $1,200 at its peak, Karpeles, as Mt. Gox’s largest stake
holder, appeared to become an extremely wealthy man. Mt. Gox did not
offer company equity to employees, and by the time of the most recent
hack, the company had squirreled away more than 100,000 bitcoins, or $50
million. Karpeles owns 88 percent of the company and McCaleb 12
percent, according to a leaked Mt. Gox business plan.–Mt. Gox insider
When Karpeles was interviewed by Reuters in the spring of 2013 — seated, inexplicably, on top of a blue pilates ball — he was a major player in the bitcoin world. He had ponied up 5,000 bitcoins to help kickstart the Bitcoin Foundation, a not-for-profit bitcoin software development and lobbying group, where he was a board member (he has since resigned). And, according to insiders, he thought nothing of dropping the business of the day to order flat screen TVs or $400 lunches for the staff of Gox’s expanded Tokyo headquarters, which now occupies three floors of a modern office building in the city’s Shibuya neighborhood. “He likes to be praised, and he likes to be called the king of bitcoin,” says another insider who spoke on condition of anonymity. “He always talks about how he’s a member of Mensa and has an above-average IQ.”
Citizen Karpeles
But beneath it all, some say, Mt. Gox was a disaster in waiting. Last year, a Tokyo-based software developer sat down in Gox’s first-floor meeting room to talk about working for the company. “I thought it was going to be really awesome,” says the developer, who also spoke on condition of anonymity. Soon, however, there were some serious red flags.Mt. Gox, he says, didn’t use any type of version control software — a standard tool in any professional software development environment. This meant that any coder could accidentally overwrite a colleague’s code if they happened to be working on the same file. According to this developer, the world’s largest bitcoin exchange had only recently introduced a test environment, meaning that, previously, untested software changes were pushed out to the exchanges customers — not the kind of thing you’d see on a professionally run financial services website. And, he says, there was only one person who could approve changes to the site’s source code: Mark Karpeles. That meant that some bug fixes — even security fixes — could languish for weeks, waiting for Karpeles to get to the code. “The source code was a complete mess,” says one insider.
The unfinished site of the Bitcoin Cafe.
But Karpeles was obsessed with a new project: The Bitcoin Cafe. Inspired by a French bistro, it would be a stylish hang-out located in the same building as the Mt. Gox offices, a very-new-looking building of metal and glass within walking distance of Tokyo’s largest train station. You could drop by for a beer or some wine, and — using a cash register proudly hacked by Mark Karpeles — you could buy it all with bitcoin. When WIRED tried to meet with Karpeles and Mt. Gox at their offices this past October — and a company representative turned us away, saying that legal reasons prevented Mt. Gox from talking to the press — the placard in the lobby of the building already identified the cafe. This company representative said it would open by the end of the year. It never did.
One insider says that Mt. Gox spent the equivalent of $1 million on the cafe venture, renovating Mt. Gox’s office building to Karepeles’ specifications. At a time when Gox’s business was falling apart, this insider says, the project was a major distraction. “[Karpeles] was super-proud of being able to use his hacked cash register with the code he wrote,” this insider says.
Says another insider: “Aside from the cafe, he liked to spend time fixing servers, setting up networks and installing gadgets… probably distracting himself from dealing with the real issues that the company was up against.”
Then, in February, the company’s fortunes took another turn. Mt. Gox stopped paying out customers in bitcoins, citing a flaw in the digital currency, and after days of silence from the company, protesters turned up outside its offices, asking whether it was insolvent.
Years-Long Hack
According to a leaked Mt. Gox document that hit the web last week, hackers had been skimming money from the company for years. The company now says that it’s out a total of 850,000 bitcoins, more than $460 million at Friday’s bitcoin exchange rates. When bitcoin enthusiast Jesse Powell heard this, he was reminded of June 2011.After Mt. Gox was hacked for the first time in summer of 2011, a friend asked Powell to help out, and soon, the San Francisco entrepreneur found himself on a plane to Tokyo. After landing, he rushed to Shibuya station, where he was met by his friend, Roger Ver, one of the world’s biggest bitcoin supporters who just happened to live across the street from Mt. Gox. Without bothering to drop off Powell’s bags, the two rushed to the Mt. Gox offices to see what they could do. They worked through the week with Karpeles, other employees, and a handful of other bitcoin enthusiasts. They answered support inquires, did troubleshooting on the site, and tried to support the tiny company in any way they could. At one point, Powell rushed to the Apple store and came back with $5,000 worth of computers that could support the cause. But two days later, the site was still offline.
Ver and Powell were set to work through the weekend, but when they arrived at the company’s tiny office that Saturday, there was a surprise. Mark Karpeles had decided to take the weekend off. The two volunteers were flabbergasted. “I thought that was completely insane and demoralizing for the rest of the team,” Powell remembers. On Monday, Powell says, Karpeles did return to work, but he spent part of the day stuffing envelopes. “I was like: ‘Dude why are you doing this? You can do this anytime. The site is offline. You need to get the site online.’”
Powell last met with Karpeles in January, before news of the latest hack broke. He now runs a competitor to Mt. Gox called Kraken. They had lunch in Tokyo, and Karpeles seemed unworried about Gox’s future. He was excited about his Bitcoin Cafe. “It was probably some light for them in a very dark world of dealing with banks and customer complaints all day,” Powell says. “I’m sure that Mark has been very stressed for a long time and probably the Bitcoin Cafe was a fun project.” But now that world is even darker.
Alberta bitcoin bank Flexcoin shuts down after hackers stole all of its online coins
Associated PressCanadian
firm said its security repelled thousands of attacks over the past few
years, 'but in the end, this was simply not enough.'
Flexcoin said in a message on its website that all 896 bitcoins stored online were stolen on Sunday. Its collapse came after Mt. Gox, once the world’s dominant bitcoin exchange, filed for bankruptcy protection in Japan and said it may have lost some 850,000 bitcoins due to hacking.
“As Flexcoin does not have the resources, assets, or otherwise to come back from this loss, we are closing our doors immediately,” Flexcoin said.
It later posted an update on its site saying that the attack exploited a flaw in its code on transfers between users and involved inundating the system with simultaneous requests to move coins between accounts.
“Flexcoin has made every attempt to keep our servers as secure as possible, including regular testing,” it said, adding it had repelled thousands of attacks over the past few years. “But in the end, this was simply not enough.”
The Alberta, Canada-based firm, which said it is working with law enforcement agencies to trace the source of the hack, said it would return bitcoins stored offline, or in “cold storage”, to users.
Cold storage coins are held in computers not connected to the internet and therefore cannot be hacked.
Flexcoin said on Feb. 25 it was not affected by Mt. Gox’s closure. “While the Mt. Gox closure is unfortunate, we at Flexcoin have not lost anything,” it had tweeted then.
Bitcoin is a digital currency that, unlike conventional money, is bought and sold on a peer-to-peer network independent of central control. Its value soared last year, and the total worth of bitcoins minted is now about $7 billion.
According to Bitstamp, one of the largest exchanges for trading bitcoins, a bitcoin was valued at about $658 on Wednesday.
Mystery of the missing bitcoins: Fate of $365M unknown after major exchange closes
Kiyoshi Ota/BloombergKolin
Burges, a Mt. Gox customer, holds a placard while protesting outside a
building housing the headquarters of Mt. Gox in Tokyo, Japan, on
Tuesday.
Kolin Burges, a self-styled “crypto-currency trader,” certainly believes he is out more than $300,000 after Mt. Gox, a Tokyo-based bitcoin exchange, went dark Tuesday.
“I’m very angry,” said the former software engineer who travelled to Tokyo from London for answers after the company failed to tell him what had happened to his bitcoins which at one point were worth $342,000.
“It looks like that’s disappeared,” said Mr. Burges, one of six protesters outside the Mt. Gox office.
Some of them carried signs saying, “Mt. Gox, where’s our money?” and “Mt. Gox, are you solvent?”
Mr. Burges said he had 285 bitcoins with Mt. Gox meaning they were worth $342,000 when the currency was trading at $1,200 a unit last year. Although, if he held them earlier in the year when they were trading at $12, they were worth only $3,420.
Mt. Gox halted withdrawals this month after detecting “unusual activity.” Sunday, Mark Karpeles, its chief executive, resigned from the board of the Bitcoin Foundation, the digital currency’s trade group.
A document circulating Tuesday said unidentified thieves stole 744,408 bitcoins from the exchange — about $365-million at current rates — and the theft “went unnoticed for several years.”
But, as Mr. Karpeles said last year, bitcoins were a “high-risk investment … If you buy bitcoins, you should buy keeping in mind that the value could be zero the day after.”
Some financial analysts said the “virtual vanishing” of the Mt. Gox bitcoins could spell the end for the digital currency, rendering the stolen 744,408 bitcoins worthless.
“A lot of economists had been predicting that bitcoins days are numbered,” said Lisa Kramer at the Rotman School of Management, University of Toronto.
Since its creation in 2009, the virtual currency has become popular among tech enthusiasts, libertarians and adventurous investors because it allows them to make one-to-one transactions, buy goods and services, and exchange money across borders without involving banks, credit card issuers or other third parties. Criminals like bitcoin for the same reasons.
Tuesday, Mt. Gox went offline and its website was returning a blank page.
A document posted online that appeared to be an internal strategy paper said, “The reality is that Mt. Gox can go bankrupt at any moment, and certainly deserves to as a company.”
The document, which outlined plans for leadership changes, re-branding and a possible move to Singapore, was posted by blogger Ryan Galt. A person briefed on the situation at Mt. Gox, who asked to remain anonymous because the document was private, said he believed it was authentic.
The internal document said 744,408 bitcoins from the exchange had been stolen.
Mt. Gox said this month it identified a bug that enabled people to withdraw the same bitcoins more than once, leaving it vulnerable to hackers.
Central banks across the globe have been hesitant to recognize bitcoins as a legitimate form of money.
Mt. Gox “reminds us of the downside of decentralized, unregulated currencies. There is no Federal Reserve or [International Monetary Fund] to come to the rescue. There is no deposit insurance,” said Campbell Harvey, a professor at Duke University’s Fuqua School of Business who specializes in financial markets and global risk management.
This is not the first major bitcoin heist.
Last October, the Federal Bureau of Investigation shut down Silk Road, an underground website that trafficked in illegal drugs and traded in bitcoins. Most of its operations moved to a new “drug shop,” Sheep Marketplace.
But in December Sheep Marketplace also closed, saying hackers had stolen 5,400 bitcoins. There were other reports the site may have been a “darknet” scam and had absconded with 39,000 bitcoins worth up to $44-million.
Meanwhile, Silk Road 2 — set up to replace Silk Road — said this month it had been hacked using “transaction malleability,”the same bug that afflicted Mt. Gox.
Nicholas Weaver, a researcher at the Berkeley, Calif.-based International Computer Science Institute, estimated the theft at 4,400 coins worth $2.6-million.
Events concerning Mt. Gox are still confused, with Mr. Karpeles telling Reuters news agency the company was at a “turning point” but giving no details.
Joseph David, chief executive of the Canadian Virtual Exchange, a Calgary-based bitcoin exchange, said he was skeptical about the theft from Mt. Gox.
He said each bitcoin was tracked — a blockchain — so it could be determined where they went.
Either Mt. Gox had the supposed missing bitcoins, which could be established by showing the blockchain, or it was not willing to show its hand, Mr. David said.
“We don’t know which scenario is real or not,” he said.
“We don’t know if they have the bitcoins, or if they don’t have the bitcoins. We have no idea, no one knows.”
National Post, with files from The Associated Press, Reuters, The Canadian Press and Armina Ligaya
Bitcoin Exchange Mt. Gox Apologizes About Crippling Hack, Says Withdrawals to Resume Soon
The statement, released on the Mt. Gox website, noted that the company has rolled out a solution for the recent Bitcoin software transaction malleability woes that will allow withdrawals to resume. Exactly how soon, though, is anyone’s guess at the moment.
The company also announced that it has added a new login system that notifies customers by email when they successfully access their accounts. “This is an additional security layer, but as always we strongly encourage our customers to use the 2-step authorization options available in our Security Center," Mt. Gox said in the letter.
Related: JPMorgan Slams Bitcoin as Exchanges Halt Withdrawals
The popular Bitcoin storage and trading platform, once the largest, is slowly rebounding from being rocked last week by a “massive and concerted” denial-of-service attack. Two days later a similar attack halted customer withdrawals at Slovenia-based Bitstamp, which is now the world’s biggest Bitcoin exchange. Bitstamp has since restored withdrawals.
Meanwhile, frustrated Mt. Gox customers, including a handful of protesters who picketed outside the company’s headquarters, continue to demand answers as to how the exchange safeguards their funds.
Earlier today, Bitcoin was trading at almost $250, according to Mt. Gox. It dipped down to $220.29 from a high of $540. However, on the Bitstamp exchange, the virtual currency is still riding as high as $643.99.
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