A brief review of the rise and fall of 'the king of exchanges' Mt. Gox: three years of glory and ten years of redemption.

Author: Chris, Techub News

When it comes to who can leave a lasting mark on the history of Bitcoin, Mt. Gox is definitely one of them. This trading platform, which once held more than 70% of the global Bitcoin trading market, has gone from glory to bankruptcy, a journey that is both dramatic and profound in lessons.

The story of Mt. Gox began in 2010, founded by a programmer named Jed McCaleb. Originally, Mt. Gox was a trading platform for the ‘Magic: The Gathering Online Exchange’ card game, named after its abbreviation. In July 2010, McCaleb keenly recognized the potential of Bitcoin and transformed the platform into a Bitcoin exchange. This decision provided Bitcoin with a new trading platform, making digital currency trading more convenient. McCaleb’s foresight and innovative spirit laid the foundation for the Bitcoin trading market, but it also opened the door to a tumultuous history for Mt. Gox.

In 2011, it was a year of rapid rise for Gate.io. During this year, it quickly became one of the largest Bitcoin exchanges in the world, accounting for 70% to 80% of the global Bitcoin trading volume. During this period, the Bitcoin market was in a boom phase, attracting a large number of investors, and Gate.io became their preferred platform. In the same year, McCaleb decided to sell the exchange to Frenchman Mark Karpeles. Karpeles not only became the largest shareholder of Gate.io but also served as the CEO, taking charge of the platform’s operation.

Karpeles is a highly technically sensitive person who continuously improves the platform’s technical architecture, making trading faster and improving user experience. Under his leadership, Mt.Gox continued to expand and quickly became a major platform for Bitcoin trading. However, behind the rapid development lies significant risks. Although Karpeles’ management has driven the rapid development of Mt.Gox, his attention to security and regulation is clearly insufficient.

In June 2011, Mentougou experienced a thrilling storm. This storm was caused by a hacker who used the auditor’s credentials to secretly infiltrate the exchange’s system. The hacker carefully planned a price manipulation, instantly suppressing the price of Bitcoin from a few dollars to only 1 cent per coin.

It can be imagined that the traders at that time saw the numbers flashing crazily on the screen, dropping sharply from a few dollars to 1 cent, and their mood was like riding a roller coaster, terrified. In just a few chaotic minutes, the hacker successfully transferred about 2000 Bitcoins.

After the incident, the management team of Mentougou immediately realized the seriousness of the matter. As a Bitcoin exchange, although only over 2000 US dollars worth of Bitcoin was transferred at the time, such an incident also sounded the alarm for Mentougou. They quickly took action to transfer a large amount of remaining Bitcoin to a cold wallet. A cold wallet is a storage method that is not connected to the internet, greatly enhancing the security of Bitcoin and effectively preventing further theft by hackers.

Although this incident exposed the security vulnerabilities of Gate.io, it also demonstrated their ability to respond quickly to crises. This incident serves as an important wake-up call for Gate.io and other exchanges, reminding them that only by continuously improving security measures can they remain invincible in the ever-changing world of cryptocurrencies. Gate.io’s swift response not only saved a large amount of Bitcoin, but also laid a solid foundation for future security protection work.

In 2013, Mentougou exchange reached its peak. At that time, almost 7 out of every 10 Bitcoin transactions were completed in Mentougou. This once inconspicuous small exchange has become the world’s largest Bitcoin trading platform. However, in the midst of this prosperity, a long-hidden storm is quietly brewing.

BTC trading volume on BTC China, Mt. Gox, and Bitstamp (from August 1st to December 23rd, 2013). Source: BitcoinCharts

On a day in May, the Department of Homeland Security (DHS) of the United States quietly took action and seized the accounts of its US subsidiary on the grounds that it was an unregistered money transfer service provider in Mentougou. When this news came out, the top management of Mentougou was shocked. This action not only resulted in the freezing of Mentougou’s funds in the United States, but also posed an unprecedented cash flow crisis.

Imagine, at the headquarters of Mentougou back then, the office building was filled with a tense atmosphere. Employees anxiously made phone calls, trying to contact all parties to seek solutions. In the meeting room, the management team held an emergency meeting, with everyone wearing worried expressions. Perhaps the founder of Mentougou was gazing into the distance in the office, pondering this sudden predicament.

The action by the US Department of Homeland Security is like a sharp knife, deeply cutting open the wound of compliance in Meantouzhuang. Meantouzhuang has been busy expanding its business, failing to timely follow and comply with the strict financial regulations in the United States. This incident not only exposes its compliance shortcomings, but also indicates that it will face more regulatory challenges in the future.

This seizure caught Mentougou off guard, but it also taught them an important lesson. The management of Mentougou has realized that only by steadily advancing on the path of compliance can the long-term development of the exchange be truly guaranteed. In this global digital money market, compliance and security are equally important and indispensable.

On February 7, 2014, Mentougou announced the suspension of all Bitcoin withdrawals, stating that suspicious activity was discovered. They pointed out that this issue was due to the transaction malleability vulnerability in the Bitcoin software, which made the transactions appear unfinished, resulting in the possibility of Bitcoin being sent repeatedly. However, just seventeen days later on February 24, things got worse. Mentougou issued another announcement, this time declaring a permanent halt to Bitcoin trading. This news was like a heavy blow, completely shattering users’ confidence. Four days later, Mentougou filed for bankruptcy protection. This once prosperous exchange had now reached the brink of bankruptcy. Karpeles admitted to losing 744,408 customer Bitcoins and 100,000 Bitcoins held by the exchange itself in this hacker attack. As a result, Mentougou was unable to pay customers’ Bitcoins and declared bankruptcy. At this moment, Mentougou’s reputation completely collapsed, and user confidence crumbled along with it.

In March of the same year, the Mt. Gox exchange came to a crossroads in its fate. They filed for bankruptcy protection in the Tokyo District Court in Japan, officially entering the bankruptcy liquidation process. For the once-largest Bitcoin exchange in the world, this was undoubtedly a bleak moment.

Just when everyone thought that hope was slim, Mentougou brought unexpected news. They claimed to have recovered 200,000 bitcoins. These bitcoins were found in the company’s old wallet, and this news is like a ray of light in the darkness, bringing a glimmer of hope to the desperate victims.

However, the recovery of 200,000 bitcoins is just the tip of the iceberg, and there are still a large number of bitcoins whose whereabouts are unknown. This discovery is not only a spark of hope, but also a mirror reflecting the chaos and loopholes in the Mentougou management system. How were these bitcoins lost? How did the hacker break into the system? These questions still have no answers, and behind each question, there may be management negligence.

In 2015, Mark Karpeles was arrested in Japan on suspicion of data manipulation and misappropriation of customer funds, facing multiple charges.

In court, he repeatedly insisted on his innocence. He explained in detail the operation process of the exchange, and tried to prove that the lost bitcoins were due to a hacker attack rather than his own negligence. Inside and outside the court, the voices of supporters and opponents were in and out, and the emotions were intense. Supporters believe that he is innocent and has been unfairly accused, while opponents believe that he should be held responsible for the collapse of Mt. Gox and should be legally sanctioned.

In July 2016, after a year of trial and detention, Karpeles finally obtained bail. Karpeles’ arrest and trial became the focus of global attention.

Mt. Gox founder Mark Karpeles

In 2018, the Tokyo District Court approved the conversion of Mentougou from bankruptcy liquidation proceedings to civil rehabilitation proceedings, compensating the victims by selling the remaining Bitcoin.

According to this decision, Mt. Gox will compensate the victims by selling the remaining Bitcoins. These Bitcoins were previously locked in the exchange’s wallet and will now be used to make up for the massive losses caused by hacker attacks and management chaos. Although the value of these Bitcoins cannot fully compensate for all the losses, this decision undoubtedly brings new hope to the victims.

In 2019, Mark Karpeles was convicted of data manipulation but acquitted of embezzlement charges and sentenced to two and a half years of probation. Although Karpeles escaped the harshest punishment, his reputation has been damaged.

In November 2021, the Japanese court and the creditors in Mentougou reached a compensation agreement, establishing the registration and compensation process. Approved creditors can submit compensation claims through the online system.

Trustee Nobuaki Kobayashi announced at a press conference that victims can start submitting compensation claims. This news has once again sparked strong reactions among the victims. Kobayashi provided detailed information on the application process and ensured that the entire process will be strictly executed according to the protocol, ensuring that every victim receives the compensation they deserve.

By September 2023, Kobayashi issued another statement, announcing an extension of the deadline for repaying creditors until October 31, 2024. This decision was made to ensure that all victims have sufficient time to submit their claims and to avoid any omissions or missed opportunities. Kobayashi stated, “We hope that every victim will receive the compensation they deserve, and no one’s rights should be overlooked.” The plan includes the payment of 142,000 BTC, 143,000 BCH (Bitcoin Cash), and 6.9 billion yen. In May 2024, a portion of the Bitcoin in the Mt. Gox wallet was transferred out, marking further progress in the repayment plan.

The story of Mentougou not only reveals many risks and challenges in the early development of Bitcoin, but also provides important lessons for the future development of the entire cryptocurrency industry. Through the events mentioned above, the rise and fall of Mentougou showcases the risks and opportunities in the cryptocurrency industry. This history reminds us that although technology and the market are constantly evolving, security and compliance will always be the cornerstone of ensuring the healthy development of the industry.

Looking back on this history, we can see that technological advances and market development cannot replace the importance of security and compliance. The rise and fall of Mentougou sounded the alarm for us, reminding us not to neglect basic security measures and regulatory requirements while pursuing innovation and growth. This is not only a reflection on the past, but also a revelation for the future.