How Mt. Gox’s “Happily Never After” Could Reach a Fairy Tale Conclusion

KEY TAKEAWAYS

  • Mt. Gox’s rehabilitation hearing delayed until October 2020, following disputed claims by Coinlab and Tibanne
  • Asset Management firm Fortress submits offer of $1,300 per claim at a recovery rate of 25%, taking advantage of the complexity of the rehabilitation process
  • Evidence indicates that Mt. Gox’s final submission of the rehabilitation process is at the final stage with the next hearing expected in October

Once upon a time on the web far, far away, lived a small Bitcoin exchange called Mt. Gox. As one of the first Bitcoin exchanges in what would become a highly competitive market, Mt. Gox had an early mover advantage, and the Tokyo headquartered exchange scaled at rapid pace. At its peak, it accounted for over 70% of all Bitcoin transactions. So it seemed, at least to the outside world, that the company was living out its own Cinderella story. However its tale doesn’t conclude with a fairy tale ending. 

The speed in which the company experienced its meteoric rise in the crypto world would eventually be overshadowed by the rate in which it spectacularly fell. In February 2014, the exchange suspended withdrawals after claiming to have found suspicious activity in its digital wallets, resulting in the price of Bitcoin plunging by more than 20%. It subsequently discovered that it had been hacked and “lost” over 850,000 Bitcoins, valued at almost half a billion dollars, representing over 6% of Bitcoins in circulation at the time. Though it’s been able to locate 200,000 Bitcoins, the missing 650,000 Bitcoins had a profoundly destabilizing effect on the market at the time. 

Mt. Gox eventually filed for bankruptcy with the Tokyo District Court and was ordered to liquidate less than two months after the fatal hack. However, six years later, Mt. Gox’s fate is yet to be determined. Its collapse has affected nearly 24,000 creditors — there are still a number of lawsuits pending, alleging fraud as part of the company’s attempts to find the hackers and resuscitate the exchange. With the drastic increase in the price of BTC, the stakes are raised, adding further complexities to the case. In addition, the company was in operation at a time when cryptocurrencies were new and unregulated investments. 

Source: Bloomberg

In 2018, Japan’s Tokyo District Court ruled in favor of Mt. Gox’ creditors, that the company should return the loss in BTC instead of fiat currency; even though the company claimed to have enough assets to pay off its debts at the time. Mt. Gox’s rehabilitation trustee, Nobuaki Kobayashi held 141,686 BTC, 142,846 BCH from the hard fork in July 2017, and around $649 million worth of Japanese yen, an amount that’s hardly changed since then. 

Source: Mt Gox

Mt. Gox’s loss of 850,000 BTC is constantly thrust into the spotlight, and continues to garner attention from the BTC community. The value of the claims against Mt. Gox is determined by the trustee (Kobayashi) in accordance with exchange-related rehabilitation claims. From his report, we can see that the exchange-related claims amount to 1,085,334 BTC. However, only a fraction of the total claims, approximately 802,522 BTC, have been approved to date. 

Source: Mt. Gox

Galaxy Digital invested around $9 million in Mt. Gox’s Investment Fund in 2020 Q1. But the question on everybody’s mind is, what exactly does Mt. Gox’s Investment Fund do, and how is it linked to the defunct exchange?

Softbank-owned Fortress, the US asset management firm with $41.5 billion of assets under management, launched the Mt. Gox Investment Fund in 2019 with a focus on buying creditor’s claims against Mt. Gox. 

In a letter to the creditors, the Managing Director of Fortress, Michael Hourigan, allegedly claimed that his company had made a “discount offer” based on the “likely timeline (three to five years)” and the “financial risks of the ongoing litigations,” amid the legal proceedings involving the current Mt. Gox trustee. The offer price started at $600 per claim, then increased to $900, only to be pulled back to $755, and raised again to $1,300 per claim in February 2020. Considering every claim is priced at around 25% of the amount lost, an offer of $1,300 per claim is equivalent to an exchange rate of $5,200 per BTC. 

Who would be willing to sell their Bitcoins at a fraction of the market value, currently at around the $10200 mark, with immense potential to soar even higher? 

One of the hurdles facing creditors is the complexity of the rehabilitation process due to non-exchange related claims by Coinlab and Tibanne, the latter controlled by Mark Karpeles, the imprisoned former CEO of Mt. GOX. The disputes over non-exchange related claims are likely to have caused numerous delays throughout the process. 

As for Coinlab, the company was once appointed as Mt.Gox’s sole marketer in North America. According to Mt. Gox, Coinlab had failed to fulfill its responsibilities on multiple occasions. Meanwhile, Coinlab sued Mt. Gox for breach of contract in what seems to be a bit of a tit-for-tat spat, and even went as far as increasing its claims from the initial $75 million to $16 billion. 

On August 30, 2019, the Japanese courts ruled $4 million in compensation to be awarded to Coinlab. Kobayashi also warned that Coinlab could follow up with an appeal against the court ruling, just as Tribanne did. From his own report, we can see that he approved a small percentage of the non-exchange related claims. Despite being a mere fraction of the value, these claims are the primary reason behind multiple delays in the arduous journey towards rehabilitation. As a result, it is understandable that some creditors lost patience and sold their claims to Mt. Gox’s Investment Fund. 

Source: Mt. Gox

So just how far along the process are we now? Well, it’s still a little ambiguous, however there’s a lot that can be assumed from Kobayashi’s tone and language. 

In October 2019, he released a statement claiming, “A large amount of rehabilitation claims fully or partially disapproved remains undetermined for being subject to claim assessment procedures and appeals against a decision on a petition for claim assessment. It is not possible at this moment to make appropriate provisions in a rehabilitation plan on modifications of the rights of the rehabilitation claims, repayment methods, and appropriate measures for the undetermined rehabilitation claims, and, accordingly, it is not practically possible to have meaningful discussions with relevant parties about repayment methods.”

However, in March, and again in July 2020, Kobayashi claimed that he was still in the process of formulating the rehabilitation plan, but as there are matters that required closer examination, it had become necessary to extend the submission deadline for the rehabilitation plan.

A civil rehabilitation process like that of Mt. Gox would usually take a maximum of six years to settle in Japan. However, given the nature of the issue, this is no ordinary rehabilitation case. This isn’t just breaking new ground in Japan, it’s also unprecedented the world over.  We’ve already passed the six year mark since the collapse of the exchange, and based on the trustee’s statements, can conclude, though not unequivocally, that he is slowly and surely making progress. 

Previously, the extensions were granted in six month increments, however in July, the court only offered a three month extension. Come October, we could finally see how the story plays out with all signs pointing to the submission of the rehabilitation plan to be shared then.