MtGox files for Chapter 15 Bankruptcy | March 9, 2014
MtGox Bankruptcy
MtGox Co., Ltd. (a/k/a MtGox KK) filed for Chapter 15 Bankruptcy in the United States Bankruptcy Court for the Northern District of Texas on March 9, 2014. The case is currently pending before the Honorable Stacey G.C. Jernigan.
What is Chapter 15 Bankruptcy?
Robert Marie Mark Karpeles is the Chief Executive Officer (CEO) of MtGox. He discusses the recent Chapter 15 filing.
“I am Chief Executive Officer and the sole Board Member of MtGox Co., Ltd., a/k/a MtGox KK (the “Debtor” or “MtGox”). As explained below, under the civil rehabilitation proceeding which application has been accepted by the Tokyo District Court, Twentieth Civil Division (the “Tokyo Court”) on February 28, 2014 under Japanese law (the “Japan Proceeding”), I have the powers to act as MtGox’s foreign representative in this Chapter 15 case (the “Petitioner”). Further this appointment has been duly reported to the supervisor/examiner appointed by the Tokyo Court to supervise the Japan Proceeding. … MtGox is a Japanese corporation located in Tokyo, Japan. Until on or around February 25, 2014, it operated an online bitcoin exchange through the website mtgox.com. MtGox has operated this exchange since the summer of 2011. There were times during this period that MtGox was reported to be the largest online bitcoin exchange in the world, but that is no longer the case.
“Bitcoin is a form of digital currency that was first conceived of in 2008 by a person or group going by the name of Satoshi Nakamoto. The first actual bitcoin was created, or “mined” in 2009. There are several ways in which a person can obtain bitcoin, including the following:
“Bitcoins are “created” through a computer software algorithm which, at any point in time, resides on thousands of computers on the Internet. Persons who accept to certify bitcoin transactions over the bitcoin peer-to-peer network are remunerated by the issuance of a fixed number of bitcoins which evolves over time. The certification is done by the solving of an “algorithm” with the use of ever-more powerful computers. These persons are called “miners” and the process of obtaining bitcoin in this fashion is called “mining.”
“A person can also obtain bitcoins that have already been mined by buying them from another. These transactions can consist of “one-to-one” transactions between a buyer and seller. In addition, a person can buy or sell bitcoin through an online exchange, such as the exchange operated by MtGox on the mtgox.com website. In these exchange transactions, the buyer and seller create accounts at the exchange and then fund the account with currency funds, bitcoin or both. The user can then enter a buy or sell order online and the website will match the buy or sell order with one or more sell or buy orders. The buyer receives an increase in bitcoin in his/her account and the seller receives an increase in currency in his/her account. The bitcoin exchange receives a fee or commission for the transaction.
A person can also obtain and use bitcoin through commercial or merchant transactions; that is, a person can use bitcoin in ce1iain circumstances to pay for goods and services.
“Users store bitcoins in a digital “wallet” using either the software provided as part of the bitcoin software or a wallet provided by various providers. MtGox provides a wallet feature. A wallet can be materialized on a piece of paper and bitcoins need not be stored on a computer.
“The MtGox exchange allowed persons with MtGox accounts to buy and sell bitcoin among themselves. In this regard, a person was to first open an account at MtGox and was assigned an account number. Once a user wanted to start buying or selling bitcoin on the MtGox website, he or she would need to “fund” the account with currency, bitcoin, or both. In addition, the account holder would be subject to “anti-money laundering” (“AML”) procedures. Once the account was “funded,” the account holder would have a “currency balance” in the account, corresponding to the amount of currency he or she had a right to withdraw; and, a “bitcoin balance” in the account, corresponding to the amount of bitcoin he or she had a right to withdraw.
MtGox ‘s Capital Structure
“MtGox has approximately ¥6.5 billion ($63.9 million) in liabilities and approximately ¥3.84 billion ($37.7 million) of assets at present. MtGox has no secured debt. Approximately 12% of the equity in MtGox is held by the developer of the initial MtGox software, Jed MacCaleb, with the remaining equity held by Tibanne Co., Ltd., aka Tibanne KK, a Japanese corporation located in Japan.
Business Challenges
“The mtgox.com website has been subject to numerous attempts by persons to breach its security, create denial of service (“DOS”) situations, or to otherwise “hack” the system, and this has been the case since MtGox started operating the website in July 2011. In certain circumstances such attempts have led to the company shutting down the site for periods at a time.
“On February 7, 2014, all bitcoin withdrawals were halted by MtGox due to the theft or disappearance of hundreds of thousands of bitcoins owned by MtGox customers as well as MtGox itself. The cause of the theft or disappearance is the subject of intensive investigation by me and others — as of the present time I believe it was caused or related to a defect or “bug” in the bitcoin software algorithm, which was exploited by one or more persons who had “hacked” the bitcoin network. On February 24, 2014, MtGox suspended all trading after internal investigations discovered a loss of 744,408 bitcoins presumably from this method of theft. These events caused among others MtGox to become insolvent and to file the Japan Proceeding.
MtGox ‘s Japan Proceeding and Civil Rehabilitation under the TCRA
“In order to protect the MtGox business as a going concern and retain its value while MtGox investigates the theft of the bitcoins under its control and addresses security defects in the bitcoin exchange, MtGox filed a petition (the “Japan Petition”) for the commencement of the Japan Proceeding in the Tokyo Court pursuant to Article 21(1) of the JCRA on February 28, 20 I 4, reporting that the company had lost almost 750,000 of its customers’ bitcoins, and around 100,000 of its own bitcoins, totaling around 7% of all bitcoins in the world, and worth around $473 million near the time of the filing. The Japan Proceeding is a civil rehabilitation. The purpose of a civil rehabilitation proceeding is to formulate a rehabilitation plan as consented to by a requisite number of creditors and confirmed by the court, to appropriately coordinate the relationships of rights between creditors and the debtor, with the aim of ensuring rehabilitation of the debtor’s business or economic life. In addition to the petition for commencement, MtGox also filed applications for a temporary restraining order and for a comprehensive prohibition order which were issued by the Tokyo Court on February 28, 2014. At the same time, the Tokyo Court issued orders for the appointment of a supervisor and examiner (collectively, the ‘Tokyo Court Orders”).
“The Tokyo Court appointed Mr. Nobuaki Kobayashi, a Japanese attorney, as MtGox’s supervisor and examiner. Under the Tokyo Court Orders, the Debtor cannot execute any agreement with any third party without the consent of the supervisor and examiner. The Debtor however remains free to initiate or pursue any legal proceeding provided that the costs of these proceedings be approved by the supervisor and examiner. On March 10, 2014, Mr. Kobayashi, pursuant to the powers conferred upon him by the Tokyo Court Orders, issued a consent allowing the Debtor to hire Baker & McKenzie to file this Chapter 15 case as counsel of Debtor, allowing the payment of Baker & McKenzie’s fees and further acknowledging that this consent was granted at the condition that MtGox’s sole Director and Chief Executive Officer, Mr. Karpeles, file this Chapter 15 case as the foreign representative of MtGox.
“Under the current status of the Japan Proceeding, the supervisor/examiner does not have the powers to manage the assets of the Debtor. As a consequence, the current management of MtGox remains in place and is allowed to continue to operate its businesses as a debtor-in-possession. I understand that this is permitted under the JCRA and that MtGox has submitted the evidence legally required for the relief to be granted upon formal commencement.
Goal
“Under the auspices of the Tokyo Court and with the ancillary assistance of this Court, the ultimate goal of the Japan Proceeding is to permit MtGox the breathing room necessary to address technical defects in its processing software, investigate the theft of bitcoins through its exchange, and confirm a rehabilitation plan.
Status
Judge Harlin Hale in Dallas granted temporary bankruptcy protection to Mt. Gox, which had filed for bankruptcy protection in Japan in February. Attorneys for Mt. Gox said without bankruptcy protection the company would be irreparably harmed by a proposed class action in Chicago federal court and a breach of contract case in Seattle federal court.
