The past 18 hours have been a whirlwind for the Bitcoin community. And they certainly have been for me as well. I don’t mind that people have criticized me for fear-mongering, or questioned my motives for leaking the ”Crisis Strategy Draft
" from Mt. Gox, or even outright bashed me on reddit and twitter with ad hominem attacks. I knew those criticisms would come, and skeptics were absolutely correct in questioning the veracity of my claims. No hard feelings.
This post is not a victory lap. Anyone who has interacted with me or read my blog knows that I believe Bitcoin has a moral imperative to succeed and that things which harm the ecosystem hurt me financially. My goal today is to provide a fully transparent review of my motives for releasing the document when I did, my personal investment positions with respect to Bitcoin, and most importantly my suspicions that this rabbit hole may still run much deeper. Motives
This is not how I wanted to make a name for myself within the industry. I started blogging as a means to an end, not with aspirations of being regarded as an investigative journalist, or worse, a gossip reporter. I even took the pseudonym “two-bit idiot” in order to provide myself with air cover in the event that I made mistakes in my posts or wrote incendiary opinions on reddit. But as I continued to write and to meet people within the industry, I recognized that my opinions and network were becoming valuable, and people were willing to pay for my daily writing. So I joined CoinDesk as a freelance contributor in late January.
When the “Crisis Strategy Draft” hit my inbox yesterday, I was confronted with an ethical dilemma. I had in my possession a document which contained market moving information, and a huge potential story. I could have sat on the document, done my behind the scenes research and broken a full-length expose days later, but I truly believed that the document looked and felt authentic, and there were mere hours before Mt. Gox was to go dark, ostensibly in part two of its four step plan in defrauding the broader bitcoin community. To wait in disclosing this document would make me complicit in a massive potential cover-up.
Moreover, this was not the only document that I received from my source. I also received a 27 page business plan, written in 2014, entitled “Business Plan Europe 2014-2017”. That document reads like a more polished investment document, and it is neutered of any references to Mt. Gox’s solvency issues. It too looked and felt authentic.
Whether this business plan proves a willingness on the part of the Mt. Gox team to sell to investors after the full impact of the transaction malleability issues became known or whether this document was circulated before the extent of the damage became clear is irrelevant. Rather, the mere fact that these documents were circulating together seemed suspicious, and coupled with circumstantial evidence I gathered from reliable sources behind the scenes, I felt the broader community had a right to read the executive summary while I verified the authenticity of the actual documents.
Executives at Coinbase, Circle, BitPay, Blockchain, Gyft and the Bitcoin Foundation as well as venture capitalists and main-stream media outlets are regular readers of my “Daily Bit” and my initial email blast to those readers, as well as follow-up posts to my personal blog and reddit, were as much a solicitation for help as they were “breaking news.” Within hours, the question of this document’s authenticity was settled, and I posted the full memo online. Disclosures
As a result of this information, I made a judgment call to sell all of my bitcoin holdings with Coinbase, and have a self-imposed restriction not to buy or sell additional bitcoins for 30 days. I am under no legal obligation to do so, and my sale can hardly be considered “insider” trading given bitcoin’s status as a currency (vs. a security) and my decision to release near-instantly what I felt was market-moving information. I sold my 64.5 bitcoins at an average price of $550. Most recently, the price of Bitcoin has rebounded to $530 on Coinbase. At no point during the selloff did I initiate new positions. Nor do I plan to.
I published this document when I had limited financial incentive to do so. In addition to my personal investment, I also work on two separate bitcoin-related projects full time, both of which are in potential jeopardy due to this news. Not only from a VC funding standpoint, but from an operating standpoint.
I am sure there are people who will accuse me of price manipulation and all sorts of nefarious actions, but the truth is, my conscience is clean and I have nothing to hide in the event of subpoenas.
I am not so sure about others within the industry. Suspicions
The cover-up is almost always worse than the crime. And unfortunately, my instincts and diligence over the past 24 hours have convinced me that the Mt. Gox losses may be the least damaging of the industry’s concerns right now.
Nearly 6% of all bitcoins in circulation have apparently, by virtue of the Mt. Gox leaks, become de facto black market coins. Whether they are ever ultimately traced and the perpetrators of the hack brought to justice are secondary concerns. Instead, the headline risk of such a sustained and devastating attack makes it extremely unlikely that we will see light federal regulations domestically or internationally. One industry executive said simply: “Get ready for bank-level regulations.”
And even bullish investors, such as Lightspeed Ventures Jeremy Liew, have recognized that this scandal has changed the game for Bitcoin. Here is what he told me on record (emphasis mine): "I think a regulatory solution would do more to increase ordinary consumer confidence in Bitcoin and its institutions than one that is purely market driven or industry led. I am well aware of all the challenges that regulatory solutions have, but if Bitcoin is to become a mass market product, then it will require a measures to lift confidence from those who will not understand a technology solution that their BTC is safe.
I advocated against new BTC specific regulation at Lawsky’s hearings last month, but I now think that some sort of regulation covering customer funds security may make sense if there is going to be a BitLicence.”
I find it naive to think that the same legislators and regulators who routinely lack the stomach to take a stand on big issues, will somehow rush to the defense of a new technology that is now best know by the mainstream media and consumers for 1) its black market goods exchange, Silk Road, and 2) its “leading” financial exchange, Mt. Gox that actually does reek of gross negligence and possibly even a true ponzi scheme.
But regulations have always been a concern.
What is gravely concerning is that the Mt. Gox “Crisis Strategy Draft” appears to be a calculated attempt to continue to defraud the company’s stakeholders, and that this draft appears to have been circulated to external parties. Who drafted this document remains unclear. Who knew about this document and when they knew about it seems unclear, but as or more important.
Despite repeated requests for comment, executives at the Bitcoin Foundation, SecondMarket and Blockchain have refused to speak publicly about whether they had conversations with executives Mt. Gox leading up to this leak, and if so, what those conversations entailed. I have been pursuing claims from various sources that suggest these organizations had information about the magnitude of the problem before this leak was made public, and am working hard to verify their legitimacy.
Let me be clear: I am not accusing any executives of impropriety at this time
, but at the very least, there is evidence that makes it appear as if no one blew the whistle on damning insider information in a timely manner. Instead, it looks as if concerted efforts were made by both Mt. Gox and their potential white knight investors to contain the fallout from this scandal. There may have been third-parties who acted to cover-up the magnitude of the Mt. Gox losses.
One reliable industry source with a direct line of communication to Mark Karpeles told me: “Mark had buyers about to close that knew about this situation
. However, with this leak, not sure if they will proceed.”
This is a damning claim which, if true, points to a much larger fraud with potential criminal implications. The Mt. Gox “Crisis Strategy Draft” outlines in black and white a scheme in which the company planned to cover-up its losses “using arbitrage / injecting new coins to erase them from the books, [and] informing and asking selected Bitcoin main players to ask for their help
. The MtGox price is low making it possible to erase a significant portion of the debt, but it needs to be done quickly.
At this time, I have suspicions, but not proof, that improprieties took place with respect to a Mt. Gox cover-up. And depending on the parties involved, this is much worse than the actual crime. SecondMarket will go through regulatory scrutiny with respect to its formation of a US-based bitcoin exchange. The Bitcoin Foundation must be expected to offer transparency with respect to this situation given its standing in the industry. And Blockchain must take the lead as the leading wallet service provider to clarify its involvement with Mt. Gox. The truth will come to light at some point, whether through other journalistic “scoops”, subpoenas or statements from the parties involved themselves.
I just sincerely hope that all of these organizations and their executives make unequivocal statements very soon, which distance themselves from a potential cover-up. The sooner the better. For all of us.
I wish I had better news, and I truly hope that my suspicions are 100% wrong. As I said yesterday, I fear they are not.