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.
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.
> Karpeles seems to have a history of lying. He was caught in a lie by his employer in 2004
Everybody "has a history of lying", because everybody lies. One incident of lying to an employer about IM'ing (or using Facebook or HN while at work, which almost every HN user has likely done) does not a future fraud make.
Lying is universal - we all do it. Therefore, the wise thing is for us diligently to train ourselves to lie thoughtfully, judiciously; to lie with a good object, and not an evil one; to lie for others' advantage,
and not our own; to lie healingly, charitably, humanely, not cruelly, hurtfully, maliciously; to lie gracefully and graciously, not awkwardly and clumsily; to lie firmly, frankly, squarely, with head erect, not haltingly, tortuously, with pusillanimous mien, as being ashamed of our high calling. - Mark Twain
This is what we call "projection". You may lie sometimes, and so you assume other people do as well.
Some of us don't. Personally, I don't have the room in my head for it; there far more important thing to try and remember, and trying to keep track of lies would eat up way to much wetware.
I make no claims as to frequency of non-lying - it be a rare trait. I have met a couple others, though, so "everybody" is incorrect.
>Some of us don't. Personally, I don't have the room in my head for it; there far more important thing to try and remember, and trying to keep track of lies would eat up way to much wetware.
You must have a, ah, very narrow conception of what a lie is.
I mean, sure, most of us don't build a complex and self-consistent web of deception where we maintain several different self-consistent models of reality at once.
But that's not the only sort of lie.
The most common substantive lie, I think, is the "tell them what they want to hear" lie.
E.g. "are you working?" alt-tab "Yeah, I'm working"
Or even more commonly, checking personal email, facebook, or a webcomic on work time, and still putting that '8' on your timesheet.
For me? I don't do this on things that matter, and for me, work matters. e.g. if you ask if I'm working, but I'm on HN? I say, "No, I'm screwing off" If I'm having a hard time focusing, say, and I spend time on HN, my timesheet will have very few hours on it.
But, if you ask "how are you?" Quite often, I will say "fine" even if it is a lie. I excuse this lie by explaining it away as a greeting, but really? I don't want to spend time with a non-standard but more truthful answer, most of the time.
But a lot of people give the expected answer, even when the answer is a little bit important. This is the sort of lie that most people tell.
> You must have a, ah, very narrow conception of what a lie is.
I'm quite aware of all the various types of lies people tell.
> The most common substantive lie, I think, is the "tell them what they want to hear" lie.
No, I don't tell that kind of lie either.
> "how are you?" Quite often, I will say "fine" even if it is a lie.
These really annoy me, because it's a waste of time. It conveys no information. Worse, it can encourage burring problems under a facade of being "fine".
Again, I understand that most people habitually tell "little white lies". That doesn't mean everybody does.
I think you missed my point: the OP had linked to an accusation by an employer that Mr. Karpeles had been using IM software while claiming to be working.
If such an innocuous "lie" was any evidence that someone could commit fraud, then we are in big trouble. Because that sort of lie isn't merely rare, ~everyone does so at some point.
They don't necessarily do it to be deceitful, rather because it's easier than the alternative. I don't think it has any moral or ethical quality to it. For instance, say I was having trouble with my girlfriend and couldn't concentrate at work. So I instead was diddle-dallying around and browsing HN.
I don't have the time or desire to explain to my boss the personal reasons why I was on HN, so instead I might say I was "refactoring" or doing code review. The next day, I'm fine and work extra hard to compensate .. no harm, no foul. I think most people would find that to be a reasonable "white lie".
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.
Regulations on financial institutions break down into several categories:
1) Identifying operators and users, so if fraud happens, the right people can be found and held accountable
2) Requiring paperwork documenting what is happening, again, so if there is a fraud of some kind it can be detected and the responsible parties found
3) Actually trying to prevent fraud, usually this means mandatory audits of some kind
I can't point you to what rules govern a currency exchange in Japan exactly, but the above is how it usually seems to break down.
Gox was AFAIK never audited. How much of a paper trail exists is unclear. The relevant people's identities are known, however.
One other thing I think we should clear up: these rules are usually pretty vague and general. It's not like regulation is something that people opt into or out of depending on their personal preferences. Whatever regulations applied to exchanges and markets in Japan would likely have also applied to Mt Gox.
The problem with trying to argue that the fix is "regulation" in the abstract is "regulation" isn't some singular silver bullet. It's a big pile of rules and people who try to enforce those rules, but often those rules aren't doing what you think they're doing, or they exist to allow punishment rather than prevention, or they're somewhat theoretical because they aren't reliably enforced. This is why lots of people would dearly love to find a way to build a decentralised exchange: in theory it could be more reliable than a regulated institution.
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.
Eh. The regulations are improved but when this happens:
http://www.ft.com/cms/s/0/08cafa70-e24f-11e3-a829-00144feabd...
"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'.
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.
Sure it would. He might have still been able to commit fraud to some extent the way, say, Madoff did (eg by thoroughly falsifying his trail and meticulously avoiding any alarm-raising cash/securities move); but definitely he would not have been able to corner the market with phantom bot accounts with no transaction fees with such ease.
For instance, if the exchange had been regulated as a Designated Contract Maker (DCM) by the US CFTC [1] (which by the way will most likely never happen), it would had been subject to very specific and strict disclosure/auditing, price discovery, capital, risk and monitoring requirements --including for instance strict limits on account aggregation, hard position limits for very large accounts, 'surprise' audits and automated 'alerts' to regulators [2].
Furthermore, if people's complaints or whistleblowers were to persuade CFTC they had a case, they would had had the authority to investigate them, prosecute them, pre-emptively close them down and freeze their assets, and even piercing the corporate veil (eg target Karpeles' individual assets, or even criminal liability) under their broad anti-market manipulation authority [3,4]. At the very least the prospect of harsh prosecution --as opposed to simply wash your hands by declaring bankruptcy and moving on-- should have affected his cost-benefit calculus.
Again this is not to say of course the regulations would have precluded any form of massive fraud or market manipulation (which happens all the time regardless; cf the recent Libor scandal), but definitely it would have made this particular scheme essentially unfeasible.
>phantom bot accounts with no transaction fees with such ease.
Never mind the criminally dumb omission of the transaction fees. Gox could have bought a valid trading identity on one of the various websites that sell them, and included the fees (which end up in their pocket anyways) in the transaction.
The important thing to remember is that while there maybe more specific laws against what happened on Gox in other markets that doesn't mean that what Gox did was some how ok in the eyes of the law. A fraud is a fraud customer money _is_ missing.
On the topic of price manipulation in other markets if you follow financial news at all there have been a rash of cases of banks paying large fines and even pleading guilty to manipulation of at least the libor rate and gold prices and there are supposedly more on going investigations into price manipulation.
One example of laws is insider trading. If you ran Bitcoin exchange, there is nothing preventing owners to exploit information that only they have. It's huge blind spot.
In reality, however, you don't need elaborate specific regulations. Most fraud prevention laws appears to be specific on surface but they always have one subjective caveat that if company knowingly acted in bad faith, the executives could be on trial.
So once a law is enacted saying X is regulated, it just means that enforcement authorities can come after you even if there is a wide spread suspicion of fraud. Then its just matter of invading company's internal documents, emails, databases to find that it acted in some bad faith and broke some law. Outcomes in top cases is typically dectated by public anger, events like proximity of next elections and lobby politics. Law is usually flexible enough to achieve that outcome.
I'm not an expert, but I suspect the clearing mechanism is what would prevent these sorts of manipulations outlined in the post. I'd start your search there.
I don't know about "escaping all consequences," unless his idea of "escaping all consequences" is having to watch his back for the rest of his life. Seems like a pretty dumb way to make a few million bucks, IMHO.
Especially since he could have been a legitimate multi-millionaire just by doing things correctly. The market lead MtGox had is something people dream about.
I worked for a clever, clever, stupid bastard like that once. He could have made legitimate millions but chose instead to cook the books, embezzle a few hundred thousand, set up patsy directors to take the blame, flee the state with his wife and kids, and live under an assumed name.
Either that or, now that it occurs to me, we might have been a front for drug laundering. That would also have fit the evidence. Huh.
> Many modern reliable systems grew out of shaky or illicit foundations.
Arguably, those systems became reliable because of the adoption of standards of practice, insurance and regulation. Even the mafia has rules (and a means of enforcing them.)
Mt Gox is not the foundation of bitcoin. Bear-Stearns and Lehman Brothers are not the foundation of the dollar. Yet some bitcoiners seem quite happy to ignore the former, while insisting upon the inevitability of the latter. If the crime and corruption of regulated systems are a valid argument for cryptocurrencies, then surely Mt Gox is a valid argument against them.
I don't know about "escaping all consequences,"
unless his idea of "escaping all consequences"
is having to watch his back for the rest of his
life.
If I had stolen a few hundred million dollars from mtgox users and disappeared, my policy would be simple: Anyone who tracks me down and puts a gun in my mouth can have ten times their losses refunded, if they tell me how they found me. Twice their losses up front, eight times after they let me get safely away. The guy with the gun chooses the address to send the refund to.
I doubt more than 5% of mtgox investors have the losses, the stomach and the connections to get me murdered. So I'd still have 50% of the money left over at the end.
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/
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.