Mt. Gox was Bitcoin's ugliest success story

By Russell Brandom

The bitcoin exchange is bankrupt and its founder is in jail. What did it mean?

This weekend, Mt. Gox founder Mark Karpeles was arrested in Tokyo, bringing years of confusion and paranoia to an end. Starting in 2010, Karpeles ran the largest and most powerful bitcoin exchange, but the site went offline in February 2014 after it was discovered that $400 million in bitcoin had gone missing from the company's accounts. The official explanation was an obscure "transaction malleability" bug, exploited expertly over the course of years, but insiders have long suspected something more sinister was at work, and this weekend's arrests only lend credence to their suspicions.

As Karpeles heads to jail, his former employees are speaking up. In a blistering AMA Friday night, former CEO Ashley Barr laid into Karpeles, detailing just how ugly the site was behind the scenes, including evidence of price manipulation, bizarre coding missteps, and outright embezzlement. In one particularly alarming detail, there seems to have been no separation between Gox's deposits and Karpeles' personal account. According to Barr, when you sent a deposit to MtGox, the money ended up in Karpeles' personal bitcoin wallet. It's worth reading through in its entirety, but the upshot is that Gox was designed with criminal negligence and Karpeles was genuinely indifferent to the catastrophe he was causing. Even after the arrest, Barr is genuinely angry at Karpeles, saying she and the other employees "plan to eat pizza in front of Mark while he is in prison."

"WE PLAN TO EAT PIZZA IN FRONT OF MARK WHILE HE IS IN PRISON."

It's the end of one of the web's strangest stories, and one of Bitcoin's most powerful origin myths. Account-holders lost a lot of money when Gox shut down, and this is the first explanation they're getting of where that money really went. The answer, for the most part, appears to be Karpeles' pocket. But Mt. Gox's failures weren't random. They grew out of disruption and decentralization — the same qualities that drew people to Bitcoin in the first place. Bitcoin created a financial system free of central banks, incumbent interests, and state power, removing the same checks that could have stopped Gox early. As a result, Karpeles ran wild, creating a cautionary tale for anyone with dreams of unregulated digital finance.

To state the obvious, it would be impossible for a conventional money service to fail this way. Even newcomers like Venmo are subject to intense regulation, and problems like Karpeles' single account would have been spotted immediately. But Bitcoin meant escaping those systems, and there was nothing to replace them. Mt. Gox presented itself as a scrappy startup, which allowed for many of the warning signs to pass as simple glitches. For Bitcoin's early adherents, glitches were part of the experience. They were still discovering the quirks of the blockchain, and the downtime came hand-in-hand with wild price swings, which made many early adopters a lot of money. As long as you came out ahead, why complain?

THE NET RESULT WAS SILENCE

Even when the problems were discovered, the decentralized nature of Bitcoin made it difficult to drive them home. For years before the shutdown, insiders had known Mt. Gox had serious problems, and Barr seems to have openly warned investors about problems on the horizon — but no one said anything. It’s not clear why, but airing the problems openly would have been a public embarrassment for Bitcoin. More than that, there's no guarantee it would have had any effect, since there were no institutions to hold Karpeles accountable. The net result was silence.

The marketplace alone couldn't fix Mt. Gox. There weren't the institutions for it, or a healthy enough sense of transparency. Consumers didn't know what to look for, and the people who knew didn't sound the alarm bells. In the end, Gox's customers didn't know how badly they'd been taken until state power intervened.

If you're one of Bitcoin's true believers, you might see all this as good riddance, the end of Bitcoin's early growing pains. We know the problems now, and we can learn from them. We can demand better accounting and find sturdier institutions to put our trust in. There will be less outright robbery this time around, fewer drug markets. Players like Coinbase and Barry Silbert are already charting this course, headed toward a more controlled version of Bitcoin that will be safe enough for public consumption. By now, feds have learned how to track criminals through the blockchain, so you won't have to worry about any Silk Roads distorting the marketplace. Financial groups are already figuring out how to bring the Bitcoin protocol in line with anti-money-laundering laws, squeezing out the last drops of anonymity.

KARPELES WAS THE PERFECT REPRESENTATION OF WHAT BITCOIN MEANT

Without the chaos, Bitcoin feels a lot less fun. Suddenly you can't get rich off price swings, can't buy drugs, and can't use your graphics card to destabilize global finance. In exchange, you get cheap digital transfers and Overstock.com. It's easy to see why VCs still like the system — they're disrupting finance, carving out a piece of a trillion-dollar industry — but why do the rest of us care? There's no guarantee the grown-up version of Bitcoin will generate the same excitement it did when it was younger, wilder, and less competent. It's just regular money now, only a little bit faster and a little bit easier to steal.

If you aren't a true believer, then you might think we've already seen Bitcoin's peak. In that case, Karpeles starts to look like one of the most important players in the whole drama, the perfect representation of what Bitcoin meant for those years while the world still cared about it. There was no point of principle here, as with Ulbricht's anti-drug war crusade. This was pure naïveté, leveraging marginal coding skills into a position at the vanguard of a growing movement, then using sleight of hand to keep the charade alive as long as possible. It fit the Bitcoin dream perfectly, rewarding good timing and libertarian principles with unimaginable wealth. Of course, the dream ended up costing Gox’s customers a lot of money, but that only makes it more important. Anyone can lose a few million on today's web, but losing 400 million takes vision.