
Peter R’s Theory on the Collapse of Mt. Gox - passepartout
https://bitcointalk.org/index.php?topic=497289.0
======
joe_the_user
Well,

Regardless of how exactly it happened, I think the big thing is that anything
that operates as "just an exchange" has the potential to operate as a
fractional reserve bank instead (IE, just operate with enough money to cover
day-to-day transactions and not-have/use-for-something the remaining funds
people think you have in your vault).

So basically, trusting any unregulated entity that claims to have stuff in its
vaults is an inherently dangerous thing since such entities inherently tend to
fail all at once when they fail (because they can mask either a series of
small failures or a failure large enough to bankrupt the company but still not
large enough to clean out the customers - yet).

~~~
gpcz
It also shows what happens in an environment without insurance. If Mt.Gox was
insured, this catastrophe would have been avoided for the customer by either
the insurance company paying out or by Mt.Gox never getting hacked due to the
security controls that the insurance company would have demanded.

This, of course, raises the questions of "who insures the Bitcoin insurance
company" and "how do the insurance companies protect their Bitcoin now that
they are a target?"

~~~
patio11
Mt. Gox tried to secure insurance of customer deposits. Japanese insurance
companies asked them about the specifics of their business and then said, to
paraphrase, "Oh HELL no." One of the issues was that they were awaiting
guidance from the Financial Services Authority, because insurance companies
hate uncontrolled regulatory risk. The other issues were the sort of thing
which will get your Errors and Omissions insurance application circular filed
regardless of whether you're running an exchange or running a web development
shop.

E&O insurance is surprisingly simple to understand. You fill out a 5ish page
application, which asks you about the character of your business, your tech
infrastructure, and your procedures/policies/etc regarding particular risks.
The underwriter reads your application then asks some drilldown questions. The
two I got were "Confirm Mr. McKenzie has 5+ years of professional experience
in system administration" and "Confirm that the use of Appointment Reminder in
a hospital is for the hospital's business administration or the convenience of
patients, rather than for treatment/diagnosis/etc of a medical condition."
(Translation: If it breaks, does anyone die? If so, we will probably not write
this policy.)

~~~
pktgen
I'm curious if this is due to Mt. Gox not trying hard enough. Recently a
Bitcoin startup was able to obtain insurance from Lloyd's:
[http://arstechnica.com/business/2014/01/backed-by-lloyds-
of-...](http://arstechnica.com/business/2014/01/backed-by-lloyds-of-london-
new-uk-startup-offers-insured-bitcoin-vault/).

If this theory is true, presumably Karpeles would not have done this after the
2011 hack, because that would be insurance fraud (falsely obtaining insurance
on the theft of coins that have already been stolen). It's possible that it
would have been more difficult at that point because of Bitcoin being less
mature.

~~~
hangonhn
But isn't Lloyd's famous for insuring what most other companies won't insure?

~~~
hnal943
Yes. But from what I understand, this is because Lloyd's is a marketplace and
not a traditional insurance company. They put wealthy entities in contact with
people with peculiar insurance needs and let them work it out.

~~~
stcredzero
That's the classic move: outsource the risk to other people's money, and
pocket some fees. Lloyd's seems a little like a bookie.

------
sqs
The risk that something like this is what happened is why Bitcoin companies
(and other companies that deal with money) should have mandatory vacation
policies for employees. With a mandatory vacation policy, it's much harder to
a single person to commit fraud, since keeping up a fraudulent scheme requires
daily attention to create fake books and records.

[https://sourcegraph.com/blog/mandatory-
vacation](https://sourcegraph.com/blog/mandatory-vacation)

~~~
GigabyteCoin
That's an interesting idea.

A mandatory vacation sure would have put a stop to "Brian Molony"'s systemic
theft from CIBC much earlier. iyww Biran Molony was the real life person
behing the movie "Owning Mahowny".

~~~
rodgerd
It's not just an interesting idea - it's very much the norm in much of the
banking industry in my neck of the woods. It's generally considered one of the
best ways of picking up internal fraud.

One example that springs to mind from Australia was a branch staffer who had
managed to rack up A$5 million dollars in fake mortgages. Went on holiday, the
stand-in noticed dozens of mortgages to the same PO Box, did some digging...

------
tlrobinson
tl;dr: Mt Gox had a lot of coins stolen in 2011 and has been running a
fractional reserve ever since. Mark tried to delay the inevitable insolvency
by creating a bot to manipulate the price, and eventually tried to cover it
all up by blaming "transaction malleability" attacks.

One of many plausible explanations. It's going to be really interesting seeing
how this actually plays out.

~~~
joering2
Im sorry but what is there to "play out"? The show is over. There is a
bankrupcy filed protection that will decide what to give to whom but thats
about it. We will never find out the truth. Even after extensive
investigation, if any, you dealing with anonymous wallets over period of years
that been sicking coins out of gox. Definite answer who did it, who knew it,
even how they did it, will never come.

~~~
tempestn
There's likely still a whole criminal investigation to come. Plenty of people
to interview, records to review, pieces to put together. I think it's pretty
likely that more information will come out.

~~~
ahlatimer
I was watching Freakonomics the other day (well, part of it, anyway), and they
were talking about how the Japanese police will only really investigate crimes
when they have a clear chance of getting a conviction. Take that as you will,
but it seems to be that even if there's an investigation, that doesn't mean
that anything will necessarily come out of it.

~~~
MertsA
That and the Japanese police also will try to get a conviction even if it
means convicting someone with little evidence. Combined with their seeming
incompetence at investigating cyber crime this does not bode well for the
MtGox investigation. The Japanese police have a 99% conviction rate with
prosecutors being fired for threatening to kill suspects if they don't
confess. The Japanese system of "Justice" strives for convictions, not
justice.

[http://www.bbc.com/news/magazine-20810572](http://www.bbc.com/news/magazine-20810572)

Summary: Police arrest 4 separate suspects and get confessions from 2 for
having a virus on their computer.

------
wpietri
What I like about this story is how consistent it is with decades of stories
from financial fraud. E.g., the downfall of Nick Leeson and Barings Bank:

[http://en.wikipedia.org/wiki/Nick_Leeson](http://en.wikipedia.org/wiki/Nick_Leeson)

Poor internal controls, greed, arrogance, and snowballing losses that lead to
greater and greater risks. And then disaster, at least in the cases we hear
about.

------
dangrossman
Of all the speculative explanations so far, this one would make the best plot
for a movie script.

~~~
GigabyteCoin
He's certainly a great writer. The thing that was lacking were the sources.

~~~
laichzeit0
If you've been in the bitcoin world since at least before the first MtGox
"crash" at $40 then it would be obvious which events he's talking about.

Granted it's being being turned into a narrative but the history is spot on. I
wouldn't have bothered putting in sources if I were him either, it's time
consuming and those who know the history of the events wouldn't need it.

~~~
thenmar
Tone down the superior attitude. Sources benefit everyone.

~~~
laichzeit0
It's not about being superior he's posting on bitcointalk the audience would
be very familiar about the sequence of events. It's posted in "speculation"
I.e. It's a hypothesis based on what everyone in the bitcoin world observed
and he created a plausible yet possibly completely fictional technical
hypothesis for what happened behind the scenes. There's no "sources" to back
it up.

It's like when HN goes offline. It's an observable fact. Writing what you
"think" happened to explain this fact is the speculation part.

------
Spooky23
This shouldn't be surprising. The same sort of things would happen back in the
good old days when we were on the gold standard.

Usually the catalyst in those days was some sort of financial stress at moment
of weakness for the bank. In the 19th century, Typically this was in the fall
before the receipts from the harvest came in. Small banks would have minimal
reserves, and failures could easily cascade.

I'm surprised with all of the rhetoric about fiat money that nobody figured
this out sooner.

~~~
leoc
> I'm surprised with all of the rhetoric about fiat money that nobody figured
> this out sooner.

My experience has been that goldbugs usually just don't want to be told about
or think about this, so I'd expect things to be the same among Bitcoin
supporters. And presumably a number of the clever boys will quietly reason
that even if, later on, Bitcoin goes the way of all money, the people who were
in on the ground floor will still have made their killing.

------
rheide
Assuming that MtGox (let's say MtGox, not Mark) did indeed introduce
transaction malleability as a feature, that should be very easy to prove with
source control commit logs. But if the malleability vulnerability was already
there to begin with, it would be very hard to prove indeed that MtGox was
taking advantage of it.

Edit: I should also add that Mark in particular has not proven himself smart
enough in my eyes to pull something like this off. In terms of technical
skill, yes, but this requires a very human approach to deception which I,
based on the conversations I've seen him have, do not think he possesses.

~~~
mkonecny
MtGox didn't use source code control.

~~~
bdcravens
rheide was talking about the Bitcoin source control.

~~~
rheide
No actually, I meant the MtGox source code that deals with transactions. The
malleability issue was known long before MtGox announced the exploit. It's
possible that MtGox initially handled transactions correctly, but later
introduced the malleability issue so they can blame their problems on that.
Like I said before, I don't believe that's the case though.

~~~
meowface
Mark was the CEO, the lead developer, the lead business guy, the lead
operations guy, and nearly everything else you can think of. He likely had
unlimited power to doctor anything he liked, and probably in a way that would
not make it easy for other employees to notice. Even if they did use source
control, he could probably mask those commits.

Honestly I'm not even sure how many other technical employees they had. I
would assume only a few.

~~~
CatMtKing
Would also explain why he never grew the team out more -- would make it more
difficult to control the situtation.

~~~
jnbiche
Wow, this is something that's been bothering me for some time. Why didn't Mark
grow the team? He evidently didn't have _any_ employees, just a handful of
contractors.

This would explain why.

------
dredmorbius
I'm predicting the imminent collapse of Mt. Gox collapse stories, following an
indeterminate period of irrational exuberance.

------
burritofanatic
Someone please work on the screenplay, and please have David Fincher direct.

------
laichzeit0
It's interesting to note that the transaction malleability issue was a known
problem to MtGox at the very latest by November 2013. [1]

I know this first hand because I was on #mtgox at the time speaking to support
staff trying to get some of my own coin out, which I eventually did get. I
personally think that at this point they themselves were "wtf is going on?"
about the issue and couldn't really explain what went wrong.

Between that time and now they surely must have understood the problem well
enough to either use it as a "feature" or try and fix it, which they didn't.

[https://bitcointalk.org/index.php?topic=324918.0](https://bitcointalk.org/index.php?topic=324918.0)

------
TrainedMonkey
This is as plausible as anything else I've heard so far.

------
PhrosTT
What is "GoxBTC" vs "Real BTC" ?

~~~
wiredfool
GoxBTC is BTC that you had in your account at Mt Gox, essentially, an entry in
their database.

RealBTC is what you got when you finally got it out of them, to spend
elsewhere.

------
smoyer
I'm thinking about opening up an exchange for crypto-currencies with a
guarantee that deposited coins are put directly into a cold wallet. The only
drawback I can see is that (so far) I don't see an easy (and secure) way to
make withdrawals instantaneous.

Perhaps my background in hardware systems leads me to solutions that use
physics to solve certain security problems, but to me, sending bitcoins to an
unconnected computer over a unidirectional link seems trivial.

~~~
jamesaguilar
You can't put money directly into a cold wallet, if I understand correctly. If
you can manipulate it directly then it's hot by definition.

~~~
pygy_
Yes, you can, as long as you have an address (Public key). A wallet is just a
private key.

The transaction history, and thus the ballance of an address is held in the
blockchain, in the ether.

To spend the coins, you must have at hand:

* the current blockchain

* the private key

* a connection to the network.

~~~
whyenot
Is that true even if you only spend some of coins and not all the coins? I
seem to remember there being something very tricky about this if you are using
a paper wallet.

~~~
paps
You can add coins to a paper wallet many times.

What is considered risky is spending only a fraction of the paper wallet, for
the following reasons:

\- you just used the private key for creating a transaction, so the chances of
it being compromised increases

\- the client you used might have sent the change to another address while
you're thinking the remaining coins are still in the paper wallet

But if it's done well, yes, it's possible to spend a fraction of a paper
wallet.

------
josh2600
The question for me after all this is simple:

Is it that 'Everything is a Ponzi scheme until it isn't' or is it that
'Nothing is a Ponzi scheme until it is'?

~~~
meowface
I think in the real world, there is a large mix of both. Hard to know the true
percentages of either category, though.

------
TerraHertz
When bitcoin started it was touted as anonymous, reliable and secure against
fraud and theft by central authorities (especially government.)

I had some doubts (and other interests) so didn't bother getting into
bitcoins.

Now we find out that bitcoin definitely isn't secure, and fraud by central
authorities is just as possible as with _any_ complex system of representing
monetary value. I really think it's a universal Law - let there be any kind of
central body involved in a system where there are profits to be made by
dishonesty, and there WILL be dishonesty.

MtGox turns out to be no different to the FED and any other fiat money
authority. No different to the bullion markets, and their empty gold vaults
(gold stolen, due to fractional reserve fraud.)

I think I'll stick to keeping gold and silver pieces in an old sock. The only
true value store is in-your-hand allodial, and never, ever abstracted to ones
and zeros (or paper.)

~~~
etherael
> Now we find out that bitcoin definitely isn't secure

If anything is secure, then bitcoin is. That doesn't mean that it protects
people from their own incompetence when it comes to security, there's no
getting around that at this stage.

> and fraud by central authorities is just as possible as with any complex
> system of representing monetary value.

Only when you actually trust a centralised authority with the private keys in
question, which people should not be doing in the case of businesses like
mtgox which were obviously utterly incompetent right from the start. Plaintext
passwords in http get queries embedded in plaintext emails? Come on, that
would've twigged my "this is a really dumb idea" sense even before I started
software development.

> MtGox turns out to be no different to the FED and any other fiat money
> authority.

Exactly, which is irrelevant to the security of bitcoin itself. It's like
saying a currency itself has a security vulnerability because a security guard
at a bank was incompetent, it doesn't work like that.

> I think I'll stick to keeping gold and silver pieces in an old sock.

Gold and silver are just as vulnerable to centralised betrayal when held by a
third party, and bitcoin is just as invulnerable to centralised betrayal when
you hold it yourself. Your analogy compares two entirely different situations
in order to make one look better than the other.

------
stcredzero
_Mark decided that he would do what he thought was right: he would slowly earn
back the lost bitcoin with MtGox trading fee profits and eventually make his
customers whole again. He still had over 500,000 BTC left—he moved
424242.42424242 BTC between bitcoin addresses and convinced the community that
MtGox was solvent._

So, bitcoin is actually a hybrid fiat+cryptocurrency? Since there is little
transparency, a significant fraction of the BTC market capital might actually
exist as fiat!

Version 2 of a cryptocurrency protocol needs to protect against incompetently
implemented exchanges as well.

EDIT: Apparently, there is a BTC scheme for proving solvency. Making this
mandatory for exchanges would go a long way to improving things.

~~~
dragontamer
Its what economists have been trying to tell the BTC community for years. Some
people get it, some people don't. Think about the money supply.

[http://en.wikipedia.org/wiki/Money_supply](http://en.wikipedia.org/wiki/Money_supply)

There is not only the MB money supply (total number of paper dollars that
exist), there is also the M1 money supply (MB + number of Traveler's Checks,
and other highly liquid bank inventions), and M2 (which includes deposits).

The true size of the monetary base can artificially grow and shrink in ways
completely uncontrollable by the central-authority. This is true with both the
USD and Bitcoins.

The ultimate reminder is... the US implementation of fractional reserve
banking _forces_ banks to do no worse than 10%. In unregulated markets, the
"banks" (ie: MT. Gox) will tend to lie and cheat, and will have ratios at far
far worse rates.

~~~
stcredzero
Yes, but the BTC infrastructure itself provides a cryptographically strong
method of proving reserves. If a large nation decided to implement its own
hybrid fiat/cryptocurrency, it would basically be an unstoppable juggernaut,
assuming no one ever broke the crypto protocols in a widely exploitable way.
(And even then, the fiat currency might survive.)

~~~
dragontamer
Agree'd. Although, to reach this conclusion, you have to first shed the
commonly idiotic notions of anti-government anti-social stupidity, and
recognize the utility of a public-private partnership.

Anyway, I think from a "infrastructure" point of view, BTC is not good enough
yet. I'm finding proof-of-stake systems (peercoin / NXTcoin) far more
technically useful than BTC... in particular, the fact that they're "greener"
and don't waste electricity like the current mining rigs do.

The ideal system probably would be a decentralized proof-of-stake cryptocoin
with regulated exchanges.

------
higherpurpose
P2P crypto-exchanges can't come soon enough. Now the hacker's focus will be on
Bitstamp and Coinbase. Hopefully they'll do everything they can to protect
themselves, but it's probably just a matter of time before they get broken,
too.

------
wizardry90210
I did notice that the owner of a large mining pool was receiving error
notifications from Mt. Gox. This mining pool has tampered with mined blocks to
include religious messages, so they'd definitely be in a position to do
transaction malleability attacks to provide Gox with plausible deniability.

/r/bitcoin thread with sources:
[http://www.reddit.com/r/Bitcoin/comments/1zifxf/why_is_the_a...](http://www.reddit.com/r/Bitcoin/comments/1zifxf/why_is_the_admin_of_the_secondlargest_mining_pool/)

~~~
tlrobinson
I recall hearing Mt. Gox had some sort of deal with Eligius where they'd
include Mt. Gox's transactions for free. I don't know what Eligius got in
return, if anything.

The religious messages thing is a strawman. Miners are allowed to include
whatever they want in the coinbase. It's common among pools, and hardly
considered "tampering".
[https://bitcointalk.org/index.php?topic=38007.0](https://bitcointalk.org/index.php?topic=38007.0)

Edit: more info:
[http://www.reddit.com/r/Bitcoin/comments/1zifxf/why_is_the_a...](http://www.reddit.com/r/Bitcoin/comments/1zifxf/why_is_the_admin_of_the_secondlargest_mining_pool/cfu7y1a)

------
mathattack
Great story. It certainly is a plausible one that changes the culpability of
the owners. (From theft to slippery slope, both still bad)

------
jheriko
i'm just (still) glad i didn't buy into the latest fad because of common
sense.

all stories aside i believe that bitcoin is unsafe - and that this has been
/blatantly/ obvious since i first encountered it as a suggested method to
launder money and fund criminal activity.

don't buy unregulated 'currencies' with a strong history and incentive for
money laundering and facilitating the black market. its violates the spirit of
the law of pretty much every nation on earth.

whilst i genuinely believe that cryptocurrency is possibly the way forward -
certainly a global currency which is independent of such whimsical things as
nation states, politics and commodoties - i also think that it took a
spectacular lack of common sense or 'street smarts' to actually spend money on
bitcoins.

nice story... but i am indifferent to its truth - it doesn't negate the
obvious risk of investing in bitcoin. but then many will say 'the greater the
risk the greater the reward' and they are precisely correct.

NB: i barely trust the bank - i have a bank account 'under duress' as most of
you probably have - that i would like to see my earnings from employment. how
did that happen? why should banks have any involvement in my remuneration for
work. /i would very much rather cash in hand that you can't fuck up for me
because you are _gambling_ it on the stock market under the pretense of
running a business/. its not like we have self inflicted financial crises as a
result or anything at all... :/

~~~
pacofvf
some people, which probably use tin hats, thinks that bitcoin was made by the
government because it makes the flow of money more traceable, since all the
operations are public. The government will never use bitcoin or bitcoin-based
currencies because then they couldn't cover their own traces.

~~~
dublinben
Serious organized crime operations would also never use Bitcoin for the same
reason. Physical cash still offers superior anonymity and obfuscation to BTC.
Also, when you're laundering hundreds of billions of dollars, you can use real
banks and the legitimate world financial system, not some fishy online
currency.

------
easytiger
I very much need a ;TLDR. Not through laziness but through hatred of the
patronising prosaic style which stopped me reading.

~~~
pmccall777
Actually, I'm pretty sure it was laziness.

