
Fraudulent trading activity at Mt. Gox - pmorici
http://willyreport.wordpress.com/2014/05/25/the-willy-report-proof-of-massive-fraudulent-trading-activity-at-mt-gox-and-how-it-has-affected-the-price-of-bitcoin/
======
sillysaurus3
The reason I'm inclined to believe this report's implications about Karpeles
is because I spent a long time in Mt. Gox's IRC support channel talking with
support reps, and they were paid to lie. They didn't know they were being paid
to lie, but they were instructed by management to say "don't worry, all user
coins are safe" right up until the day the Mt. Gox crisis report was leaked.
They could have said "we are investigating the extent of the problem," but no,
Karpeles was paying them to say "nothing is wrong," even while Karpeles was
crafting his crisis report to investors about how all the coins were gone.

Karpeles seems to have a history of lying. He was caught in a lie by his
employer in 2004: [http://newslines.org/mt-gox/joins-linux-
cyberjoueurs/](http://newslines.org/mt-gox/joins-linux-cyberjoueurs/)

From a game theory point of view, it's interesting that the price at every
major exchange depends on every other major exchange. For example, when Mt.
Gox was active, if its price went up, BTC-e, Bitstamp, etc would
simultaneously go up. It's a natural phenomenon which has rather grim
implications: if an exchange is conducting fraudulent activity, then the
entire bitcoin trading ecosystem is affected. And since bitcoin is completely
unregulated, there's nothing really stopping anyone from manipulating the
market. For example, no one knows who's behind BTC-e, but it has a lot of
trade volume. What if they're engaging in fraudulent trading as well? There's
every incentive to.

The inevitable conclusion seems to be: you can try to come up with a bunch of
logical reasons about why the price of bitcoin is going up or down, but you
can't ever rule out "the price is due to large-scale fraudulent behavior,"
i.e. it's a bubble. Bad behavior from one exchange will always affect all the
others.

As Karpeles has probably shown, you can become a millionaire by manipulating
the market and then escape all consequences by letting your company go
bankrupt.

~~~
olalonde
I agree with pretty much everything you said but is it true that regulations
would have prevented someone like Karpeles from doing the same with say, gold?
What regulations prevent this? I'm asking genuinely because I have no idea
what regulations exist in that world and I keep hearing that argument from
smart people so I guess it's probably true.

~~~
ryanjshaw
My day job involves regulatory reporting of OTC and ETD products, although I
deal with the technical aspects not the business side so my comments contain
some speculation (but the other responses to your question here seem better at
that addressing those aspects).

A number of new regulations have come into place in the past few years to help
prevent recurrences of recent financial scandals and meltdowns, and to
ultimately bring stability to the markets, e.g. the Dodd-Frank Act (DFA) for
US parties and MiFID/EMIR (and in the future MiFIR) for EU parties.

These regulations provide for e.g. daily and in some cases semi-realtime
(30min) reporting of trading activities. Reports can also go to the
counterparties who can dispute or verify trading activities.

Other countries, e.g. Russia, Singapore, Hong Kong, even South Africa are
enacting similar pieces of legislation.

In some cases, the trade repositories (companies who accept trade reports)
satisfy multiple supervisory bodies e.g. the DTCC will accept reporting under
DFA, EMIR, MAS (Singapore), HKMA (Hong Kong) legislation.

Here is the speculative part: You can imagine this gives authorities a pretty
good idea of who is trading what, what their exposure is and to who, etc.
Because all parties are required to be registered with the appropriate
regulatory bodies, I would think the alleged fraud at MtGox would have _at
least_ two obvious problems if they were subject to similar regulatory
oversight:

(1) MtGox would be registered as brokers and wouldn't be trading parties, so
at minimum it'd be very suspicious (and more likely illegal) to see them
taking the other side of a trade (they couldn't report using a non-existent
party for their side of the trade like they do here as that submission would
be rejected since the party would be invalid, and they can't just not report
because the counterparty buying the BTC will identify MtGox as the seller in
_its_ submissions; they also can't use a random real counterparty because
_that_ real party will dispute the trade took place)

(2) even if they legitimately took the other side of the trade (e.g. Mark
registers as a trader) while cooking the books, I'd imagine they'd have to
reconcile their audited books/bank accounts with their reported trading
history, which would reveal fraud (by controlling the trading history they can
claim anything; with a regulator, they can't control the trading history).

In effect, regulation of this sort would force all trading claims to balance
out across all parties - where they don't, there would be an investigation.

~~~
opendais
Eh. The regulations are improved but when this happens:
[http://www.ft.com/cms/s/0/08cafa70-e24f-11e3-a829-00144feabd...](http://www.ft.com/cms/s/0/08cafa70-e24f-11e3-a829-00144feabdc0.html#axzz32m5tZQdg)
"The UK’s Financial Conduct Authority fined the British bank £26m on Friday
and reprimanded it for nine years of lax controls for its failure to rein in
an options trader who in 2012 drove the gold price lower to avoid paying £2.3m
to one of the lender’s clients."

They were caught once in 2012, but its pretty clear the fact it took two years
to catch them at it means they probably got away with it for as long as Mt Gox
did, given the environment that enabled it lasted 9 years.

That doesn't count LIBOR, etc. When the incentives to break the system exist,
it will get broken from time to time even with regulation. Regulation just
reduces the frequency and generally requires multiple bad actors to truly
manipulate the entire system.

And when 'breaking the system', basically gets you fined [not put in jail for
5+ years], you can generally calculate the degree of risk you are taking and
effectively have a chance of just breaking even if you get caught...:/

Mt. Gox wouldn't happen, but the type of people that ran it would have found a
different way to 'cheat'.

~~~
phillmv
Libor is an example of lack of regulation, though. There was no oversight
involved; some dude at Reuters called up some handfuls of banks and then
averaged out the responses, and it was self-regulated via an industry group.

Regulations are about shifting incentives and in the case of Libor the banks
involved were both investment and commercial banks and thus had enormous
temptation.

Anyhow, you can't eliminate bad actors and thus reducing their frequency and
intensity is the whole point. These crises have negative costs to everyone,
and for most of these the inefficiency cost of regulations is utterly dwarfed
by the cost of big crises.

Won't argue against how much easier the justice system is on you if you're
rich.

~~~
opendais
It was why I wasn't using Libor as the primary example. ;) But ya, it would
have been stronger if I hadn't noted it at all I suppose.

Anywho, best of luck :)

------
kolev
The fraud continues today in China. Those exchanges were caught several times
faking volume and placing phantom orders. I think the game now is: fake price
hike in China, sell coins for real money on Bitstamp, buy cheaper, repeat.
Just look at the recent hike - no news, no reason for 30% jump from $440 to
$580 in a week.

~~~
panarky
Right now the exchange rate on Bitstamp is USD 576 and the rate on Huobi is
RMB 3578. Converted, those prices are within one-half of one percent of each
other.

If there are fake price hikes in China, wouldn't Huobi prices be higher? And
how would buying coins for real money on Bitstamp allow you to buy for cheaper
anywhere else?

~~~
kolev
Maybe I wasn't clear, but I wasn't talking about arbitraging. I'm talking
about faking demand to hike prices and extend profit margin 10-fold. You can
do this two ways - you can sell and buy cheaper, but then there's a risk that
the price will stay low, so, you have more bitcoins, but less fiat. With this
trick, you don't risk anything, and you make both more coins and more fiat.

Having Bitstamp and BTC-e copy the direction that Huobi takes without
questioning makes them puppets in the hands of those who control Huobi and the
likes. I think it's clear that Bitcoin market is predominantly amateur
investors from the trigger-happy kind and the smart crooks can do with the
market whatever they want with just a few hundred coins.

As recently the crypto wasn't profitable (the stock market performed way
better) and people started to lose patience, some of those crooks had to do
something to revive the market and keep doing what they've been doing so far.
It's much easier to manipulate Bitcoin than the stock market, Forex, Gold,
etc., so, those crooks didn't want to use their unique opportunity.

When you see "to the moon" everywhere, you know the game is back on, and many
are gonna get taken advantage of pretty soon.

------
antonius
Further proof that the absurd run-up in November when bitcoin reached $1,200
was illegitimate.

~~~
drcode
Unfortunately this is plausible: The only reliable way to trigger a run-up in
a commodity is to expend a lot of capital to acquire that asset at inflated
prices- You'd have to "burn through" a lot of money to get this to happen.

...so, then where was this cache of money that was destroyed to inflate the
price? It would have to be a pretty large quantity to have such a drastic
impact.

Occam's Razor to me suggests the answer is obvious: The vaporized deposits of
MtGox users are the most obvious large cache of money, large enough to cause
such a run up.

The next question is, who would do this, and why? The answer suggested by
Occam's razor would be "Someone who could modify the MtGox database to create
nonexistent fiat currency, but could not (or did not want to) create fake
MtGox bitcoin holdings." This is because a person with this power would have
reason to trade the "fake fiat" with legitimate bitcoin holders to generate
bitcoins that can be leeched out of the site, and this would certainly cause
the price to rise.

This doesn't answer however whether it was an inside or external party, I
could imagine scenarios both with or without inside actors that would lead to
this kind of activity. (Though I'd put my bet on internal fraud, based on the
fact that so much effort was put into hiding the fraud and extending it over a
long period, as opposed to going for quick profit.)

~~~
qnr
Doesn't seem obvious to me at all. As a result of bankruptcy proceedings we
know that Mtgox has lost primarily __BTC __deposits, not fiat (on mobile now,
but IIRC only $27 million USD was lost which is peanuts compared to the value
of lost BTC)

In other words, the situation at Mtgox was the opposite of what you describe:
it had a lot of FakeBTC, bit its USD reserves were mostly real.

------
joliv
Permalink at [http://willyreport.wordpress.com/2014/05/25/the-willy-
report...](http://willyreport.wordpress.com/2014/05/25/the-willy-report-proof-
of-massive-fraudulent-trading-activity-at-mt-gox-and-how-it-has-affected-the-
price-of-bitcoin/)

~~~
dang
Thanks; changed.

------
jackgavigan
The ironic thing about this is that the nature of Bitcoin (specifically, the
fact that all transactions are recorded in the blockchain) means that auditing
a Bitcoin exchange is an eminently solvable problem. To my mind, given the
ease with which Bitcoin wallets can be created, any exchange that commingles
its clients' Bitcoins should be viewed with suspicion.

Yes, it's easier to dump everything into a few wallets, instead of maintaining
individual wallets for every client. However, if the team behind an exchange
isn't capable of dealing with the complexity of individual, segregated
wallets, you have to wonder whether they're competent enough to run an
exchange in the first place.

~~~
nwh
Segregated wallets doesn't work, that would mean every single trade would be a
transaction on the block chain. It would absolutely flood the network and
result in massive fees. It literally can't be done that way.

~~~
jackgavigan
And that inherent inefficiency is just _one_ of the reasons Bitcoin is _not_
the future of finance.

~~~
zymhan
So you went from " if the team behind an exchange isn't capable of dealing
with the complexity of individual, segregated wallets, you have to wonder
whether they're competent enough to run an exchange in the first place" to
"that inherent inefficiency"? Which is it, an inherent flaw in BTC, or
ineptitude on the part of the exchangers?

~~~
jackgavigan
Both.

------
PhasmaFelis
I'm a fan of RationalWiki's Bitcoin article:
[http://rationalwiki.org/wiki/Bitcoin](http://rationalwiki.org/wiki/Bitcoin)

> _This is the sort of thing that gets bitcoins called "Dunning-Krugerrands."_

~~~
VMG
A shockingly one-sided article. Probably colored by their aversion to
Libertarianism.

~~~
sillysaurus3
Which sentences from the article do you disagree with?

~~~
pseud0r
The following is presented as indisputable facts in the article:

 _Bitcoin is a scam

Bitcoin is a Ponzi scheme

There is zero chance that bitcoin will ever be mainstream

Bitcoin does not have a single advantage over fiat currency

Bitcoin will never be useful for online shopping

None of the problems with bitcoin can be fixed

All bitcoin users and developers are incompetent, does not know anything about
economics, does not understand people at all and has no understanding on how
to build reliable financial computing infrastructure_

Looks pretty one-sided to me.

~~~
sillysaurus3
The reason I asked "Which sentences from the article do you disagree with?"
was to have you quote a sentence and then write a rebuttal. We strive to do
better on HN than write strawman arguments, and we try to make our critique
substantive and thorough. (A handy test: if I can't find a specific sentence
to disagree with, I might be arguing a strawman position, so I try doubly hard
to be thoughtful in that circumstance.)

Also, on HN, a line in italics usually means "this is a direct quote," so it's
generally taboo to put things in italics which you didn't copy-paste from some
source. For example, the word "mainstream" never appears in the article, so it
shouldn't be in an italicized line.

~~~
pseud0r
Actually most individual sentences aren't all that bad, it's more that the
overall tone of the article seeks to portray bitcoin as something bad, though
it does funnily enough seem to be somewhat pro-dogecoin.

Thanks for letting me know about italics, it was meant as a list and not a
quote. I'll make sure to remember for next time :)

------
EGreg
This is another example of centralization runing things. Once you have a
"trusted" exchange, accounts can do shenanigans like buy bitcoins internally
for no fiat money, whether through hacking or collusion.

An actual bitcoin exchange should just set up parties to do a 2-of-3 trade. It
would be slower, but better for the stability of the currency!

------
emrehan
Discussion on r/Bitcoin:
[http://www.reddit.com/r/Bitcoin/comments/26g46e/the_willy_re...](http://www.reddit.com/r/Bitcoin/comments/26g46e/the_willy_report_proof_of_massive_fraudulent/)

------
spacefight
Well researched findings there. Imagine a world, where the same logs would be
public of what and by whom happens on the stock exchanges where all the high
frequency trading is happening these days...

~~~
grkvlt
So, the world we live in _right now_ then? All trade data, even HFT sourced,
is available from exchanges. The only possible exception is dark pools or
other crossing networks, but in general it is quite possible to know who
bought what from whom, when and for how much.

~~~
shutupalready
> _All trade data, even HFT sourced, is available from exchanges._

You mean it's available to government regulators, but not to the general
public, correct?

If stock and option trades are part of the _public_ record, there are lots of
questions I'd like to answer for myself. Otherwise, we're just taking the word
of other people (the regulators).

Here's one question: I'd like to know who specifically was behind the huge
volume in put options on United and American Airlines stock immediately before
the 9/11 attack. Someone was essentially shorting those two airlines, and only
those two. (For example, Bloomberg data showed that on 6 September 2001, the
Thursday before the attack, the put-option volume in UAL stock was nearly 100
times higher than normal: 2,000 options versus 27 on the previous day.) The
9/11 Commission report concluded that, "A single U.S.-based institutional
investor with no conceivable ties to al Qaeda purchased 95 percent of the UAL
puts on September 6 as part of a trading strategy", but they refused to
identify who it was.

Everything is not so transparent unless there's some public repository for all
this information that I'm not aware of.

~~~
fabulist
This is chilling.

What are the odds that this wasn't "insider trading" with the attackers?

~~~
mikeyouse
> What are the odds that this wasn't "insider trading" with the attackers?

Extremely high.

[http://www.snopes.com/rumors/putcall.asp](http://www.snopes.com/rumors/putcall.asp)

------
panarky
Step 1: create USD out of thin air.

Step 2: buy BTC at $1200.

Step 3: sell BTC at $200.

Step 4: profit!

~~~
drcode
Yes, this is exactly right, but you should clarify:

Step 1: create USD_FAKE out of thin air.

Step 2: buy BTC at 1200 USD_FAKE on MtGox.

Step 3: sell BTC at 1100 USD_REAL on Bitstamp.

Step 4: profit!

~~~
panarky
Whoever sold you BTC in Step 2 isn't going to accept USD_FAKE for their coins.
Doesn't this scam fall apart right there?

There's something like $600M missing. Were people really leaving that much
fiat on account at Gox?

~~~
patio11
Mt. Gox didn't let you withdraw real currencies other than JPY, most
interestingly the dollar, from approximately last August. This meant that when
you were selling BTC for USD, you were actually accepting a USD liability of
Gox -- Bitcoiners sometimes called them GoxBux or GoxUSD. It's a number in a
database and now, apparently, something which you'll eventually be allowed to
assert as a claim in their liquidation, but it is not actually a dollar.

The failure to allow withdraws in currencies they supported is why many people
were speculating that Mt. Gox was insolvent, for much of the year prior to
them admitting insolvency. As it turns out, we were probably right.

------
sciguy77
As one of the many people who lost money in the Gox implosion, this is
nauseating to read. On a less related note, I heard they recovered 1/5 of the
missing bitcoins awhile ago. Anyone know what will happen to that 1/5?

~~~
sillysaurus3
I've got your back:
[https://news.ycombinator.com/item?id=7777831](https://news.ycombinator.com/item?id=7777831)

Our money was lost the moment we decided to transfer it to a third party. That
1/5 probably won't recover very much of it, if any of it, for reasons explored
in that thread.

Whether it's Mt. Gox or Coinbase, money we put into a webwallet is no longer
ours. It's the legal entity's. If they go bankrupt, which can happen for a
variety of reasons, sometimes unfair ones, then that money is gone. Best magic
trick ever.

Try to be at peace with the loss. Easier said than done; it was difficult for
me. If you need someone to talk to, please feel free to shoot me an email.

~~~
sciguy77
Thanks for the information and advice. I figured as much, my hopes weren't too
high. I don't think I'm going to be investing in anything like Bitcoin for a
long time. Best of luck.

~~~
bodski
Don't forget, 'real' bank accounts work like this as well. The money is no
longer yours once you deposit into an account. The bank represents it as a
liability on its balance sheet. As an account holder you are an 'unsecured
creditor' of the bank. I have a feeling a lot more of us will be aware of this
arrangement within a year or two, once the bail-ins begin.

~~~
lrm242
US banks have FDIC insurance to protect deposits up to $250,000 [1]. To the
extent that you trust the US government you can trust that your money is safe
in a US bank up to the stated FDIC limits. Banks fail all the time. There have
been 8 failures in 2014 so far and not a single penny of depositor money has
been lost. You can see a list of every bank failure and the outcome here [2].

The simple and incontrovertible fact is that the US banking system is as close
to 100% safe as you can get. Bitcoin isn't anywhere close.

[1]:
[http://www.fdic.gov/deposit/index.html](http://www.fdic.gov/deposit/index.html)
[2]:
[http://www.fdic.gov/bank/individual/failed/index.html](http://www.fdic.gov/bank/individual/failed/index.html)

~~~
stevewilhelm
Be careful regarding FDIC insurance. Most investment instruments: stock, bond,
mutual funds are not covered by FDIC protections. [1]

[1]
[http://www.fdic.gov/consumers/consumer/information/fdiciorn....](http://www.fdic.gov/consumers/consumer/information/fdiciorn.html)

------
kristianp
The buy-bot has been speculated about since January at least:
[http://www.reddit.com/r/BitcoinMarkets/comments/1uosly/daily...](http://www.reddit.com/r/BitcoinMarkets/comments/1uosly/daily_discussion_wednesday_january_08_2014/cekcq05)

Is this the first article that links the leaked data to the "buy-bot"?

------
Tycho
How does this fake_usd demand driving up the price of Bitcoin tenfold compare
with the New York Fed's _ex nihilo_ asset purchase program?

~~~
nroets
(I assume you're referring to QE1, QE2 and QE3)

It's say a supermarket advertises bread for $1. Anyone who reads the ad, will
consciously or unconsciously believe that the dollar has value. Now multiply
this effect by all the similar advertising over many years and you'll see that
the dollar is the strongest brand ever.

When the financial crisis hit in 2008, the public starting saving and they
choose the most stable brand they could find (the dollar) and the brand was
well on it's way to get even stronger.

The way to counter act it was by flooding the market with money (lowering
interest rates and later printing money).

Bitcount does not derive it's value in the same way and printing bitcoins is
fixed by the block chain rules.

~~~
judk
And to close the point, the US Government doesn't go bankrupt, because they
never actually get called out to show their accounts of (fake) money. Their
new money is as good as the rest, meaning that their actions dilute all
dollars equally, instead of only wiping out accountholders at one institution.

~~~
Tycho
I wasn't really talking about the dollar, I was talking about the effect on
the assets being purchased (MBS securities, and indirectly other assets on the
financial markets). Notice how much the stock market and house prices have
gone up in the last few years.

------
endriju
It is indeed unfortunate when people like Karpeles manipulate such perspective
technology-based market as btc was. The trust is irreplaceable, and the bitter
taste which users of mtgox experience each time they hear about btc has
already had almost devastating effects on bitcoin economy. Lesson learned.

------
flurpitude
Did anyone grab a mirror before the site disappeared?

"willyreport.wordpress.com is no longer available. This blog has been archived
or suspended for a violation of our Terms of Service."

~~~
yaluen
Here's google's snapshot:
[http://webcache.googleusercontent.com/search?q=cache:http%3A...](http://webcache.googleusercontent.com/search?q=cache:http%3A%2F%2Fwillyreport.wordpress.com%2F2014%2F05%2F25%2Fthe-
willy-report-proof-of-massive-fraudulent-trading-activity-at-mt-gox-and-how-
it-has-affected-the-price-of-bitcoin%2F)

------
christianbryant
Exactly the reason why technology must be open and transparent. Sadly,
decision makers that define economic policy and allow organizations to reach
this level of misuse (or misconduct) know little to nothing about what these
technologies are capable of, or to what extent they can be compromised and
manipulated. Kudos to the tech makers and users who do understand for
maintaining a watchful eye and not hesitating to report wrong-doing, or the
suspicion of wrong-doing. How can we get these guys in office instead of the
people that are currently holding back good technology while letting loose the
bad?

~~~
nl
Isn't this almost exactly the opposite of the problem here?

What appears to have happened here is something completely unrelated to the
technology. The same thing could have happened in any financial exchange.

There were two difference that made it possible here: 1) the investors may
have been technical experts but were financially naive and dramatically
underpriced the risk, and 2) the market was completely unregulated, so the
financially naive investors had no protection from those who weren't so naive.

~~~
judk
MtGox customers surely ate not technical experts. Technical experts would hold
their own wallet instead of handing it over to some guy in Japan who was
publicly known to be unable of running a secure website, let alone a financial
exchange.

~~~
nwh
One of the core developers lost over 330 BTC to Mt Gox. Tell me they are not
technical experts.

------
iancarroll
It would be interesting to see what exchanges had higher prices during the
climb to see who started it.

------
oznathan
I don't think the bot is responsible for either bubble.

But, if it was, the bitcoin world owes everything to Mark Karpeles. Because of
the price surges it got all the media attention, VC investments, hundreds of
companies popping up, millions of users...

~~~
sillysaurus3
... and hundreds of thousands of people losing everything they had in Mt. Gox
(at best) and straight into Karpeles' pocket (at worst).

Are you sure we owe him?

~~~
oznathan
I lost some money there too, I've been their customer since 2011.

But if the main reason for the April and November bubbles is Willy, than the
current (amazing) state of bitcoin is thanks to him.

------
etchalon
Bitcoin - The economy of WoW, writ large.

~~~
rasz_pl
WoW has real economy? please

This is classical EVE Online ponzi scam.

[http://www.tentonhammer.com/eve/news/eve-online-ponzi-
scheme...](http://www.tentonhammer.com/eve/news/eve-online-ponzi-scheme-
claims-over-1-trillion-isk-from-players)

[http://massively.joystiq.com/2011/08/12/biggest-eve-
online-s...](http://massively.joystiq.com/2011/08/12/biggest-eve-online-scam-
ever-recorded-nets-over-a-trillion-isk/)

[http://www.lockergnome.com/news/2011/08/18/how-two-people-
sc...](http://www.lockergnome.com/news/2011/08/18/how-two-people-scammed-
thousands-on-eve-online/)

------
stellabpenida
blog_nutella

