When Mt. Gox, the world’s largest bitcoin exchange, collapsed in Tokyo last year with some 850,000 bitcoins – then worth $500m – missing, it blamed the loss on external hackers. But Japanese investigators aren’t entirely convinced, says the FT. Last week, they arrested the company’s former head, Mark Karpeles, on suspicion of falsifying records in the system to inflate his own bank account by $1m. And once arrested, the list of allegations against him ballooned.
Within a day, Japan’s state broadcaster was reporting police suspicions that, “at its heart, the Mt. Gox affair was essentially another giant Ponzi scheme”. This isn’t the first time that French-born Karpeles, 30, has been accused of being a cybercriminal mastermind, says Wired. Long before the US Department of Homeland Security set its sights on nailing Ross Ulbricht as the creator of the illegal online drugs emporium Silk Road, they had Karpeles in their sights.
For a while, they were convinced that he “secretly administered the Silk Road to boost the price of bitcoin, and with it his own substantial cryptocurrency fortune”. That allegation didn’t stick (Ulbricht has since been convicted), but a whiff of intrigue has surrounded Karpeles ever since. It sits oddly with his alternative profile as a cat-loving luxury seeker with “a passion for baking apple pies”, who, according to an interview in PC World last year, seemed “more comfortable discussing where to find the best croissants in Tokyo than what happened to Mt. Gox”.
But you know you’re in trouble when your long-lost mother comes out of the woodwork to tell the world all about you – and that’s what happened to Karpeles, “a self-proclaimed geek so uncomfortable in his native France” that he “hasn’t been back for years”, says Reuters. His mother, Anne, describes him as the kind of child with “a tendency to let himself get taken for a ride by others”.
People “took advantage of him and asked him to do their homework”. Although admitted to Mensa as a teenager, he “shuffled from school to school” and didn’t go to university. After trying to set up a server company in Israel, he joined a software distribution firm and in 2009 was offered a post in Japan. “For him, it was the doorway to his dream, he adored Japan.”
Karpeles first became interested in bitcoin when a client wanted to pay in the virtual currency. That led him to Mt. Gox, which began as a site for Magic: The Gathering playing cards, but morphed into a bitcoin exchange, says theverge.com. Karpeles was so enthused that he bought the company in 2011. There followed a roller-coaster journey as the site grew in line with bitcoin’s value (see below). But by the end of 2013, when bitcoin hit a $1,100 high, rumours were circulating that Mt. Gox was chaotically managed and that its owner was out of his depth. Weeks later it collapsed. Karpeles had risen from nowhere to become the ‘Baron of Bitcoin’. His fall was equally swift.
Mastermind or inept middleman?
When Takashi Mochizuki and Eleanor Warnock of The Wall Street Journal asked Karpeles last year whether he regretted buying Mt. Gox, he couldn’t make up his mind. “Half-yes. I learned a lot,” he said. “But I lost a lot.” That must include his peace of mind.
From the start, he had to deal with constant cyberattacks. Shortly after he took over in 2011, a hacker attempted to sell off more than $7m worth of bitcoins, driving the price nearly to zero and forcing a panicked Karpeles to shut the exchange. The office suffered physical break-ins too and Karpeles claimed the constant anxiety gave him sleepless nights. “If anyone wants to start a bitcoin exchange, I would say, ‘Be sure to have 24-hour security guards’.”
One reason why Mt. Gox grew so fast was deft PR, which established its role as “a pillar in the fragmented, highly anonymous bitcoin community”, says Adrianne Jefferies on theverge.com. Seen as a “reliable middleman” facilitating trades between users, Gox became a bridge between the “neo-cypherpunk” bitcoin community and the authorities. “We are the leader,” it boasted in 2013. “We have a huge responsibility to do things by the book.”
Given later events, that boast is laughable. But investigators are still in the dark about what happened, says Leo Lewis in the FT. Karpeles’ former colleague, Ashley Barr, says he didn’t have the skills to ask for help. “I felt that Mt. Gox was [a game] to Mark.” Another source told PC World that Gox’s code was a “spaghetti mess”, riven with vulnerabilities, and theft may have been ongoing for years.
Even Karpeles, who has denied all allegations of wrongdoing, has said he was in over his head. But that, of course, is convenient for anybody wanting to plead their innocence – and is at odds with police claims that Karpeles illegally siphoned off about ¥1.1bn of customer deposits. Was he as much as victim as anybody else, or was his ineptitude just an elaborate smokescreen? The investigation continues.