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BitCon: The Naked Truth About Bitcoin – Jeffrey Robinson’s Teardown of World’s Biggest Cryptocurrency

BitCon - The Naked Truth About Bitcoin by Jeffrey Robinson

Jeffrey Robinson has written extensively about financial crime. His 1995 book on money laundering,The Laundrymen, was a best seller; in other books he has flagged up the sort of financial risk-taking that led to the financial crash more than a decade before it happened.

It’s a pedigree that steers his focus toward the alleged scheming, manipulation and criminal intent that have been attached to bitcoin during its short, turbulent history.

Near the beginning of his exposition, Robinson admits the blockchain technology behind bitcoin “happens to be brilliant”. Apparently he has a soft spot for Satoshi Nakamoto (he lays into Newsweek at some length for its “shoddy” attempt to reveal the bitcoin founder’s identity).

But the main thread of his book is a sustained stream of argument and invective directed at what he calls the bitcoin “Faithful”.

Messianic fervour

These are people who are as pro-bitcoin as they are anti-establishment; they don’t understand the laws behind currencies or commodities, or are so blinded by messianic fervour that they now ignore rational argument.

And there are those who have a vested interest in seeing bitcoin inflate. These types are not mutually exclusive, quite the opposite.

Mark Karpeles Mt Gox

Mt Gox’s CEO Mark Karpeles comes in for ridicule and distain from Robinson(Reuters)

Robinson also sets out a rogue’s gallery of bitcoin miscreants, the star players of which are Ross Ulbricht, the alleged operator of Silk Road and Mt Gox’s Mark Karpeles (right), set against a backdrop of the dreaded dark web and the murky world of anonymous mining cartels.

The Winklevoss twins could also be added to this unpleasant subset. “There is a rule. If the Winklevoss twins are talking about it, it’s got to be opportunistic,” notes one academic speaking to the author.

Neither currency nor commodity

In the first few chapters Robinson sets out to establish that bitcoin is neither a currency nor a commodity. All the bitcoins there could possibly be, trading in the best of all possible worlds at $1000-plus, would still comprise an infinitesimal fraction of the dollars in circulation.

On top of this he adds that people who own bitcoins tend to hoard them rather than actually using them for transactions – how are they ever going to usurp corrupt governments and make central bakers obsolete when nobody actually uses them, Robinson asks.

As the number of merchants tripled during the course of 2013-2014, the number of transactions stayed the same, meaning the bitcoin economy is stagnant.

Commodities, he argues, have an underlying function – coal, copper, wheat etc – but bitcoin is a useless nothingness with zero intrinsic value. Former Fed leader Alan Greenspan is invoked in this regard: “You have to really stretch your imagination to infer what the intrinsic value of biotcoin is. I haven’t been able to do it.”

“Naturally occurring Ponzi scheme”

Robinson feels bitcoin bears way too much of a resemblance to a Ponzi scheme not to mention it. Even if it lacks the essential feature of a middle man, siphoning off value, the likeness is uncanny he says.

In the end he settles for dubbing it a “naturally occurring Ponzi scheme”. Like the tulip craze that seized Holland in the 1630s, bitcoin is a berserk speculative bubble – the analogy is Warren Buffett’s.

In addition to the seismic events in bitcoin’s existence – Silk Road being closed, Mt Gox’s collapse,bitcoin value breaking $1000 – Robinson examines a wide range of quotidian occurrences; stuff that was big, big news at the time.

Indeed another of his pet hates is bitcoin media hype.

He seems to have been pulling his hair out over reports that bitcoin is taking off in India (45 attendees at a conference out of a country of one billion people); or a pizzeria in Dubai that accepts bitcoin described as “another milestone”.

In January 2014 the Wall Street Journal reported that half of techies would welcome being paid in bitcoin. After a bit of digging Robinson reveals that out of 18,000 techies canvassed only 847 actually responded, so that really adds up to 2.4%.

Character assassination

However, there are moments when he verges into personal attacks and rather dwells on salacious detail.

For instance, his character assassination of Mark Karpeles points out that had no friends, liked to stay in his room and read comics, referred to his “jpeg girlfriends”, and put pictures of his cat on Facebook. What has this got to do with price of bitcoins?

We begin to see that Robinson’s vehement distrust of libertarians espousing a bitcoin-led revolt, makes him sound a bit like Edmund Burke warning about the dangers of revolution.

Robinson’s aim is to make a connection between Mt Gox collapsing and the abrupt end of China’s bitcoin fever, the latter having driven the price up to $1240, until Beijing cracked down and the price crashed. Around the same time (coincidentally) Mt Gox collapsed; Robinson’s terrier-like financial crime super-sense is on high alert.

Robinson also attacks Ulbricht, who is currently awaiting trial for allegedly operating the Silk Road website, but Robinson dispenses with legal caution branding Ulbricht a drug and arms dealer as well as alleging he took contracts out on the lives of anyone who got in his way – paid for in bitcoin naturally.

And after quoting bitcoin evangelist Roger Ver as saying “all value is subjective”, Robinson claims the entrepreneur moved to St Kitts to sell passports to tax exiles in turn for real estate investments.

True blue Conservative

We begin to see that Robinson’s vehement distrust of libertarians espousing a bitcoin-led revolt, makes him sound a bit like Edmund Burke warning about the dangers of revolution.

Laying down the law like a true blue Conservative, at one point he states: “Intrinsic value of the dollar comes from the full faith and credit of the US government standing behind it, the fact that you must use it to pay your taxes – and the Federal Reserve promises to buy back dollars under certain conditions … etc, etc.”

There have in fact been some interesting experiments involving decentralised cash. Between 1932 and 1933, the small Austrian town of Wörgl issued 5000 “Free Schillings” (i.e. interest-free schillings). These were used in co-operative fashion to built utilities and accepted around a town’s community.

Within one year the 5000 Free Schillings circulated 463 times; when other communities in Austria wanted to adopt this model, the Austrian National Bank saw its own monopoly was endangered and prevented the experiment continuing, taking the town’s council to the Austrian Supreme Court.

It’s also worth remembering that today’s fiat currencies were also unlikely pretenders at one point. Back when the Bank of England was the only trusted regulator of money “the dollar sucked as a currency”, as Robinson’s analysis says.

Blockchain’s potential

Further back in time, the church used to be as powerful as banks are today; it saw money as inherently evil and unworkable because of its tendency to generate interest (usury). That money is the root of all evils is an idea that persists within revealed religions, and usury is still banned for Muslims.

Robinson does touch on this fact: bitcoin could show potential when it comes to funding Islamic terror groups thanks to its compliance with sharia law, he muses.

The point concerns the very long view which must be taken regarding technologies, and also how these make users of them evolve and change. There is a long term ethical argument which falls outside the scope of Robinson’s criminal investigations.

The last few chapters include an interesting discussion of competing electronic money options and e-wallet innovation players, followed by the setting of bitcoin licences for the state of New York, overseen by the formidable Benjamin Lawsky.

Regarding blockchain – which the “Faithful” would rather see destroyed than separated from bitcoin – he echoes Marc Andresen, who states he is not a utopian on this topic, but is interested only in “practical capabilities that matter to real people”.

These could include things like enforceable contracts, logging and updating all manner of records, signatures, medical files and so on. Hoards of venture capitalists are looking at the technology to create new businesses taking advantage of platforms that eliminate transactional risk.

West Coast pseudo-libertarians

It’s clear that Robinson’s gripe is with bitcoin in particular and its West Coast pseudo-libertarian roots. He mentions Ripple towards the end of the book, but largely ignores the growing universe of altcoins with putative dollar values.

But whether he is right about penning bitcoin’s obituary, this doesn’t change the fact it is a reaction to a deep mistrust in the financial system and the governments that were called to prop that system up in 2008.

And the same way that technology like social media helped overthrow governing regimes in the Arab world, so technologically-enabled revolt in the developed world, currently in the form of bitcoin, will persist one way or another.

It is a leap of faith argument; but then we are living through a technological revolution.

It seems unlikely the co-operative of developers, miners and enthusiasts behind bitcoin will give up that dream, or at least allow it to be scammed and manipulated into the world of vice and crime envisaged by Robinson.

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U.S. Government Nastygram Shuts Down One-Man Bitcoin Mint

Mike Caldwell spent years turning digital currency into physical coins. That may sound like a paradox. But it’s true. He takes bitcoins — the world’s most popular digital currency — and then he mints them here in the physical world. If you added up all the bitcoins Caldwell has minted on behalf his customers, they would be worth about $82 million.

Basically, these physical bitcoins are novelty items. But by moving the digital currency into the physical realm, he also prevents hackers from stealing the stuff via an online attack. Or at least he did. His run as the premiere bitcoin minter may be at an end. Caldwell has been put on notice by the feds.

Just before Thanksgiving, he says, he received a letter from the Financial Crimes Enforcement Network, or FINCEN, the arm of the Treasury Department that dictates how the nation’s anti-money-laundering and financial crime regulations are interpreted. According to FINCEN, Caldwell needs to rethink his business. “They considered my activity to be money transmitting,” Caldwell says. And if you want to transmit money, you must first jump through a lot of state and federal regulatory hoops Caldwell hasn’t jumped through.

Because the process is so complicated, Caldwell has stopped taking orders for his popular Casascius bitcoins — which have become one of the most recognizable images of the thoroughly intangible digital currency. In recent months, the feds have cracked down on many other bitcoin operations in similar ways, including Mt. Gox, the most prominent online bitcoin exchange. But Caldwell’s case is a little different. He doesn’t think he transmits money.

Caldwell doesn’t accept U.S. dollars or any type of fiat currency. You send him bitcoins via the internet, and he sends you back metal coins via the U.S. Postal Service. To spend bitcoins, you need a secret digital key — a string of numbers and letters — and when Caldwell makes the coins, he hides this key behind a tamper-resistant strip.

So long as you can keep your Casascius bitcoins safe, nobody can learn the key. To date, Caldwell has minted nearly 90,000 bitcoins in various denominations. That’s worth about $82 million at today’s exchange rate.

Caldwell takes a fee of about $50 on each coin he mints, but he argues that sending the coins through the mail is not a way of transmitting money. He thinks the coins should be viewed as collectibles.

But, clearly, that’s not how the federal government sees things. If he doesn’t verify or have a way of knowing whether the owner of the bitcoins is the same person he’s sending the coins to, that’s a problem, says Faisal Islam, the director of compliance advisory services with Centra Payments Solutions, a company that advises corporations on financial compliance.

Running afoul of FINCEN is a risky proposition. In the spring, the Department of Homeland Security seized two bank accounts belonging to Mt. Gox. The reasoning behind the $5 million seizure: Mt. Gox, like Caldwell, hadn’t registered itself as a money transmission business. FINCEN did not return a message left by WIRED on Wednesday, but according to the letter it sent to Caldwell, dated Nov. 15, the agency believes that Caldwell’s business is a “money services business,” that must be registered with FINCEN.

Because he runs a bitcoin-only business, Caldwell says there’s no Casascius bank account for authorities to seize. But he adds that he has no desire to anger the feds, whether he agrees with them or not. So he’s cranking out his last few orders and talking to his lawyer. He says this may spell the end of Casascius coins. “It’s possible. I haven’t come to a final conclusion,” he says.

Caldwell isn’t the only person who makes physical versions of bitcoins. You can also buy bitcoins that look like dollar bills or tickets or even other types of metal coins similar to Casascius.

Noah Luis, another virtual currency coin-maker who produces metal litecoins as well as bitcoins, says he has talked to Caldwell and is carefully watching his case. Luis and his company, Lealana, isn’t registered as a money services provider — like Caldwell, he doesn’t believe that swapping bitcoins for bitcoins qualifies — but he says he’d probably follow Caldwell’s lead if he receives a similar letter. “I’d probably stop production and sales, just to be safe,” he says.

Minting digital currency has been lucrative for Caldwell, but it’s not without its stresses. For one thing, as the value of bitcoins has soared, the value of Caldwell’s inventory has gone up too, making theft and fraud a bigger concern. “When the coins are worth $1,000 apiece, that’s a ridiculous amount of money,” he says. They might be worth even more now, as collectibles, should Caldwell get out of the business.

On Monday, someone forwarded him a photograph of tamper-resistant hologram labels made to look like the ones used on Casascius bitcoins. They were fakes. But now Caldwell is worried that someone may be out there counterfeiting his bitcoins.

And with his operations suspended, Caldwell is going to be taking a revenue hit, just as the holidays approach. He wouldn’t say how much he has made from his bitcoin business, but things really took off in 2013, he says. “It’s good money, but I went and spent $5,000 in lawyer bills in two weeks.”

Lots Of Major Bitcoin Exchanges Are Under A ‘Concerted And Massive Attack’

nyse new york stock exchange trader

Andreas Antonopolous is chief security officer at Blockchain.info, a popular Bitcoin wallet service, and he tells CoinDesk that numerous Bitcoin exchanges are experiencing a “massive and concerted” denial of service attack right now.

This is a type of attack on one’s digital real estate in which nefarious hackers bombard servers with junk requests over and over until they become useless. It’s akin to filling a glass of water until it overflows.

In Antonopolous’ words: “As [Bitcoin] transactions are being created, malformed/parallel transactions are also being created so as to create a fog of confusion over the entire network, which then affects almost every single implementation out there.”

In other (simpler) words: this attack may cause Bitcoin to behave weirdly.

He added that no money has actually been lost, as exchanges halt withdrawals as needed in order to keep everything synchronized. One exchange affected by the attack, Bitstamp, sent an email to its customers to that effect.

Antonopolous predicts things will be operating normally in between one and three days.

The attacks come on the heels of popular Bitcoin exchange Mt. Gox having to halt a number of its exchanges as customers withdraw their money and even go so far as to protest outside the company’s offices in Japan. Bitcoin’s price has taken a big dip since.

Bitcoin is currently sitting at ~$670.

Bitcoins Have Never Been More Valuable Than Right Now

Bitcoins Have Never Been More Valuable Than Right Now

bitcoin

NEW YORK, Nov 27 (Reuters) – The price of the digital currency bitcoin soared above $1,000 for the first time on Wednesday, extending a surge this month after a U.S. Senate hearing on virtual currencies.

Bitcoin hit a high of $1,073 on Tokyo-based exchange Mt. Gox, the best-known operator of a bitcoin digital marketplace, compared with just below $900 the previous day.

Bitcoin cracks $1,000 (Maybe Iceland should adopt the virtual currency)

Bitcoin cracks $1,000 (Maybe Iceland should adopt the virtual currency)

Bitcoin cracked the $1,000 mark today, reportedly driven by speculators amid widespread publicity and rising credibility for the virtual currency.

But amid these sharp gains – it’s gaining credence in China and among some powerful players in the U.S., for example – some observers warn that there’s no telling where it all ends.

As in, a poker game might work just as well.

“If you can guess where the crowd is going to go tomorrow, you can have some fun gambling here,” Professor Jim Angel of Georgetown University told The Financial Times.

The professor’s comments came as the value of one bitcoin topped $1,000 on the Mt. Gox online exchange, hitting a record $1,073, though they later slipped back.

“That it is increasingly correlating with global equity markets and as such suggests that we have a similar crowd operating in both markets, one being deeply liquid and the one built to have a deeply restricted supply,” said Sébastien Galy, part of the foreign exchange team at Société Générale.

Hack attacks force wider Bitcoin halts

Bitcoins bitcoinHacking attacks have forced two of the leading Bitcoin exchanges to halt withdrawals, in a development that will further damage the prospects of the virtual currency winning mainstream acceptance.

Bitstamp, an exchange based in Slovenia, said it had suspended withdrawals after a denial of service attack – when hackers disable a website by flooding it with information requests.

BTC-e, based in Bulgaria, warned of a similar attack that could lead to delays in crediting users with transactions.

The problems emerged only a day after Mt Gox, one of the earliest companies to offer Bitcoin trading, also suspended withdrawals, because of a software bug that it said could affect “all transactions where Bitcoins are being sent to a third party”.

The Bitcoin Foundation, which promotes the virtual currency, played down the issue at the time, saying that although the bug should be eliminated, the problem lay primarily with Mt Gox’s own procedures and customised software.

On Tuesday, however, it admitted that the same issue – known as “transaction malleability” – was also plaguing Mt Gox’s peers, effectively shutting down much of the infrastructure for trading Bitcoin.

The design flaw, known for some time in the Bitcoin community, makes it possible for a user to change some of the details used to identify a Bitcoin transaction. This could simply lead to unintentional book keeping accidents, but it could also allow people to defraud an exchange by claiming a transaction had not gone through.

Danny Bradbury, writing on the website CoinDesk, explains that it is also possible to “cause wider problems for the Bitcoin network by deliberately launching transaction malleability attacks on multiple exchanges at once” – in a “concerted attack” of the kind that appears to have happened this week.

Supporters of Bitcoin maintain that this is not a fundamental problem with the currency, but simply an issue that exchanges will have to manage by adapting their processes for confirming transactions.

Gavin Andresen, chief scientist for the Bitcoin Foundation, said core developers were working with the exchanges to find ways around the problem.

Bitstamp underlined that “no funds have been lost and no funds are at risk”, even though many users will be unable to withdraw their money temporarily.

However, the shutdown will further damage perceptions of Bitcoin, coming as regulators around the world step up their scrutiny.

Even those critical of bitcoin’s potential to replace fiat currencies have acknowledged its technical virtuosity, but the latest incident shows the fragility of the infrastructure surrounding it.

“The choice of a reliable exchange remains the largest obstacle for bitcoin buyers,” wrote analysts at Commerzbank.

Bitcoin enthusiasts are ready to fill the gap. SecondMarket, a New York based trading platform that made its name offering a private market for Facebook shares, took the opportunity of Mt Gox’s shutdown to announce a pilot in bitcoin market-making.

But as John Normand, currency strategist at JPMorgan, points out, “many market participants would prefer the accountability of known but fallible entities to one based on a mathematical code. He adds: “Query: who does one call when there is a problem with bitcoin?”

The Inside Story of Mt. Gox, Bitcoin’s $460 Million Disaster

Mark Karpeles, chief executive officer of Mt. Gox, center, is escorted as he leaves the Tokyo District Court on Friday, Feb. 28, 2014. Photo: Tomohiro Ohsumi/Bloomberg via Getty ImagesMark Karpeles, the chief executive officer of bitcoin exchange Mt. Gox, center, is escorted as he leaves the Tokyo District Court this past Friday

From a distance, the world’s largest bitcoin exchange looked like a towering example of renegade entrepreneurism. But on the inside, according to some who were there, Mt. Gox was a messy combination of poor management, neglect, and raw inexperience.

Its collapse into bankruptcy last week — and the disappearance of $460 million, apparently stolen by hackers, and another $27.4 million missing from its bank accounts — came as little surprise to people who had knowledge of the Tokyo-based company’s inner workings. The company, these insiders say, was largely a reflection of its CEO and majority stake holder, Mark Karpeles, a man who was more of a computer coder than a chief executive and yet was sometimes distracted even from his technical duties when they were most needed. “Mark liked the idea of being CEO, but the day-to-day reality bored him,” says one Mt. Gox insider, who spoke on condition of anonymity.

Last week, after a leaked corporate document said that hackers had raided the Mt. Gox exchange, Karpeles confirmed that a huge portion of the money controlled by the company was gone. “We had weaknesses in our system, and our bitcoins vanished. We’ve caused trouble and inconvenience to many people, and I feel deeply sorry for what has happened,” Karpeles said, speaking at a Tokyo press conference called to announce the company’s bankruptcy. This would be the second time the exchange was hacked. In June 2011, attackers lifted the equivalent of $8.75 million.

Bitcoin promises to give a bank account to anyone with a mobile phone, no ID required. It’s clearly an amazing and potentially world-changing technology — the first viable, decentralized, reliable form of digital cash. It could democratize international finance. But it’s also a technology that was pushed forward by a community of people who were unprepared or unwilling to deal with even the basics of everyday business. A new wave of entrepreneurs may bring the digital currency a new level of respectability, but over its first several years, bitcoin has been driven largely by computer geeks with little experience in the financial world. The most prominent example is Mark Karpeles.

The Mt. Gox offices in Tokyo. The site of the proposed Bitcoin Cafe would be in the far right space in the photo above. Photo: Ariel Zambelich/WIRED

The Mt. Gox offices in Tokyo. Photo: Ariel Zambelich/WIRED

The King of Bitcoin

The 28-year-old Karpeles was born in France, but after spending some time in Israel, he settled down in Japan. There he got married, posted cat videos and became a father. In 2011, he acquired the Mt. Gox exchange in from an American entrepreneur named Jed McCaleb.

McCaleb had registered the Mtgox.com web domain in 2007 with the idea of turning it into a trading site for the wildly popular Magic: The Gathering game cards. He never followed through on that idea, but in late 2010, McCaleb decided to repurpose the domain as a bitcoin exchange. The idea was simple: he’d provide a single place to connect bitcoin buyers and sellers. But soon, McCaleb was getting wires for tens of thousands of dollars and, realizing he was in over his head, he sold the site to Karpeles, an avid programmer, foodie, and bitcoin enthusiast who called himself Magicaltux in online forums.

Karpeles soon set about rewriting the site’s back-end software, eventually turning it into the world’s most popular bitcoin exchange. A June 2011 hack took the site offline for several days, and according to bitcoin enthusiasts Jesse Powell and Roger Ver, who helped the company respond to the hack, Karpeles was strangely nonchalant about the crisis. But he and Mt. Gox eventually made good on their obligations, earning a reputation as honest players in the bitcoin community. Other bitcoin companies had been hacked and lost customer funds. Most of the time, they simply folded. But Karpeles and Mt. Gox did not.

“He likes to be praised, and he likes to be called the king of bitcoin”
–Mt. Gox insider

As bitcoin prices took off, jumping from $13 at the start of 2013 to more than $1,200 at its peak, Karpeles, as Mt. Gox’s largest stake holder, appeared to become an extremely wealthy man. Mt. Gox did not offer company equity to employees, and by the time of the most recent hack, the company had squirreled away more than 100,000 bitcoins, or $50 million. Karpeles owns 88 percent of the company and McCaleb 12 percent, according to a leaked Mt. Gox business plan.

When Karpeles was interviewed by Reuters in the spring of 2013 — seated, inexplicably, on top of a blue pilates ball — he was a major player in the bitcoin world. He had ponied up 5,000 bitcoins to help kickstart the Bitcoin Foundation, a not-for-profit bitcoin software development and lobbying group, where he was a board member (he has since resigned). And, according to insiders, he thought nothing of dropping the business of the day to order flat screen TVs or $400 lunches for the staff of Gox’s expanded Tokyo headquarters, which now occupies three floors of a modern office building in the city’s Shibuya neighborhood. “He likes to be praised, and he likes to be called the king of bitcoin,” says another insider who spoke on condition of anonymity. “He always talks about how he’s a member of Mensa and has an above-average IQ.”

Citizen Karpeles

But beneath it all, some say, Mt. Gox was a disaster in waiting. Last year, a Tokyo-based software developer sat down in Gox’s first-floor meeting room to talk about working for the company. “I thought it was going to be really awesome,” says the developer, who also spoke on condition of anonymity. Soon, however, there were some serious red flags.

Mt. Gox, he says, didn’t use any type of version control software — a standard tool in any professional software development environment. This meant that any coder could accidentally overwrite a colleague’s code if they happened to be working on the same file. According to this developer, the world’s largest bitcoin exchange had only recently introduced a test environment, meaning that, previously, untested software changes were pushed out to the exchanges customers — not the kind of thing you’d see on a professionally run financial services website. And, he says, there was only one person who could approve changes to the site’s source code: Mark Karpeles. That meant that some bug fixes — even security fixes — could languish for weeks, waiting for Karpeles to get to the code. “The source code was a complete mess,” says one insider.

The unfinished site of the Bitcoin Cafe. Photo: Name Withheld

The unfinished site of the Bitcoin Cafe.

By the fall of 2013, Mt. Gox’s business was also a mess. Federal agents had seized $5 million from the company’s U.S. bank account, because the company had not registered with the government as a money transmitter, and Mt. Gox was being sued for $75 million by a former business partner called CoinLab. U.S. customers complained of months-long delays withdrawing dollars from the exchange, and Mt. Gox had tumbled from the world’s number one bitcoin exchange to position number three.

But Karpeles was obsessed with a new project:The Bitcoin Cafe. Inspired by a French bistro, it would be a stylish hang-out located in the same building as the Mt. Gox offices, a very-new-looking building of metal and glass within walking distance of Tokyo’s largest train station. You could drop by for a beer or some wine, and — using a cash register proudly hacked by Mark Karpeles — you could buy it all with bitcoin. When WIRED tried to meet with Karpeles and Mt. Gox at their offices this past October — and a company representative turned us away, saying that legal reasons prevented Mt. Gox from talking to the press — the placard in the lobby of the building already identified the cafe. This company representative said it would open by the end of the year. It never did.

One insider says that Mt. Gox spent the equivalent of $1 million on the cafe venture, renovating Mt. Gox’s office building to Karepeles’ specifications. At a time when Gox’s business was falling apart, this insider says, the project was a major distraction. “[Karpeles] was super-proud of being able to use his hacked cash register with the code he wrote,” this insider says.

Says another insider: “Aside from the cafe, he liked to spend time fixing servers, setting up networks and installing gadgets… probably distracting himself from dealing with the real issues that the company was up against.”

Then, in February, the company’s fortunes took another turn. Mt. Gox stopped paying out customers in bitcoins, citing a flaw in the digital currency, and after days of silence from the company, protesters turned up outside its offices, asking whether it was insolvent.

Years-Long Hack

According to a leaked Mt. Gox document that hit the web last week, hackers had been skimming money from the company for years. The company now says that it’s out a total of 850,000 bitcoins, more than $460 million at Friday’s bitcoin exchange rates. When bitcoin enthusiast Jesse Powell heard this, he was reminded of June 2011.

After Mt. Gox was hacked for the first time in summer of 2011, a friend asked Powell to help out, and soon, the San Francisco entrepreneur found himself on a plane to Tokyo. After landing, he rushed to Shibuya station, where he was met by his friend, Roger Ver, one of the world’s biggest bitcoin supporters who just happened to live across the street from Mt. Gox. Without bothering to drop off Powell’s bags, the two rushed to the Mt. Gox offices to see what they could do. They worked through the week with Karpeles, other employees, and a handful of other bitcoin enthusiasts. They answered support inquires, did troubleshooting on the site, and tried to support the tiny company in any way they could. At one point, Powell rushed to the Apple store and came back with $5,000 worth of computers that could support the cause. But two days later, the site was still offline.

Ver and Powell were set to work through the weekend, but when they arrived at the company’s tiny office that Saturday, there was a surprise. Mark Karpeles had decided to take the weekend off. The two volunteers were flabbergasted. “I thought that was completely insane and demoralizing for the rest of the team,” Powell remembers. On Monday, Powell says, Karpeles did return to work, but he spent part of the day stuffing envelopes. “I was like: ‘Dude why are you doing this? You can do this anytime. The site is offline. You need to get the site online.’”

Powell last met with Karpeles in January, before news of the latest hack broke. He now runs a competitor to Mt. Gox called Kraken. They had lunch in Tokyo, and Karpeles seemed unworried about Gox’s future. He was excited about his Bitcoin Cafe. “It was probably some light for them in a very dark world of dealing with banks and customer complaints all day,” Powell says. “I’m sure that Mark has been very stressed for a long time and probably the Bitcoin Cafe was a fun project.” But now that world is even darker.

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