Following MtGox’s shutdown today, an anonymous document has surfaced detailing the company’s woes and future plans. Posted by bitcoin entrepreneur Ryan Selkis on his Tumblr blog “The Two-Bit Idiot”, the leaked document titled “MtGox Situation: Crisis Strategy Draft” is attributed to MtGox insiders about the company’s financial position and future. In a follow up post, Selkis added that sources close to the company confirmed to him figures in the document.
According to the document, 744,408 are missing due to transaction malleability theft that had gone unnoticed for several years. The paper than explains that based on the losses, it was proposed to:
1 – Immediately reduce liabilities as much as possible with partners
2 – Switch off the MtGox exchange temporarily and announce restructuring to the name ‘Gox’ (domain purchased this week), and posting a letter of current CEO Mark Karpeles stepping down
3 – Push new branding
4 – Set up a new competent team and redesign the service and codebase
The document then provides a summary of current assets and liabilities as well as a timeline of implementing their strategy, with the first date today and culminating in the relaunch as just ‘Gox’ in April or later this year.
Included in the document is a breakdown of Assets and Liabilities showing liabilities of over $80. However, a projected business plan of what a rebranded ‘Gox’ would achieve was also posted showing projected income of $39 million by 2016 if the restructuring takes place.
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According to Selkis, the document is authentic. However, even if it were to have been created by members of the MtGox executive team that are aiming to receive new funding to keep the operation going, the details may not be authentic and could be the continued cover up of insider theft.
Three items that appear very suspicious to our eyes:
Community connection: In describing their insolvency, the document reads “The reality is that MtGox can go bankrupt at any moment and certainly deserves to as a company”. It then goes on to explain that the damage to bitcoins in the public eye “could put it back 5-10 years and cause governments to react swiftly and harshly.” The paper continues that “We believe in the value of bitcoin…we care about our customers… and other bitcoin related business.” As such, they conclude that this isn’t as much about saving MtGox but of stabilizing the entire community; thus “we believe that the benefits of keeping MtGox stable and running outweigh the risks”.
This description borders on apologetic and arrogance as the writer is aiming to keep their company alive by connecting themselves to the entire community. As such, it can be construed as a pseudo ‘black mailing’ of the entire bitcoin community, that it is best to keep MtGox/Gox. The connection to the overall community is similar to when MtGox first announced the transaction malleability problems and stated that they were doing a service to all firms by bringing it to the attention of other exchanges (it can be said that this was a disservice since many believe that the operators of Silk Road 2 used this excuse to steal customer funds).
Cold Storage Theft??: The item we are having the hardest time understanding is the statement that “The cold storage has been wiped out due to a leak in the hot wallet”. This statement seems dubious as it implies a connection between cold and hot wallets that would allow an automatic refill of the hot wallet from cold storage when the hot wallet was empty. The entire rationale behind using cold storage is to move spare bitcoins offline (which are typically the majority of customer holdings). Even if kept online, cold storage would be protected with increased forms of encryption to limit any automatic transactions. As such, the above statement infers that MtGox a) didn’t monitor balances of its cold storage and b) allowed for automatic transactions to be available. In terms of b, it is possible that this was the case, as they may have wanted to ensure minimum delays in processing bitcoin withdrawals. However, such an automatic procedure contrasts from policies at other major firms. For example, in an interview with Kevin Rose, Coinbase CEO Tim Armstrong explained how his company used cold storage to increase security measures and manual requirements necessary for implementing transactions. But, even were there to be an automatic connection between the wallets, it is difficult to understand how such theft was taking place with no accounting of balances for over two years.
Karpeles blame: Last, the blame on CEO Mark Karpeles seems limited as the proposed letter of his resignation reads “Admitting his errors and expressing desire to fix the situation by stepping back as CEO of MtGox.” Again, the language is focused on him ‘doing everyone a favor’ rather than being blamed for failure of allowing massive theft to occur.
Therefore, while the document may be authentic it has aspects of a massive ‘cover-up’ job. As far as the public knows, there has been no proof that insiders haven’t stolen the coins. On the contrary, signs of the case point towards misappropriation and a Ponzi like scheme. This includes:
- Withholding fiat currency withdrawals
- Expanding to bitcoin withdrawal delays
- Blaming bitcoin delays on third parties; initially due to investigations of Bitinstant and then the transaction malleability
- Following up with updates of more delays
- No updates on financials or direct CEO statements to the public, other than through an interview to Forbes
- Announcing they were moving their headquarters
- Closing website and erasing Twitter feeds, followed by ‘leaked’ document
On their own, each point could be traced to rationale explanations, however together they follow the typical plans seen numerous times by financial companies involved with fraud.
(Image courtesy of Deviantart)