Unveiling the True Story Behind Mt. Gox: An Interview with Jake Adelstein

Jake Adelstein has been a journalist in Japan since 1993, covering a wide range of stories: from Japanese subculture, to social issues, and even Japan’s mafia, the yakuza. He recently co-authored a book, Pay the Devil in Bitcoin, which tells the story behind the collapse of popular cryptocurrency exchange, Mt. Gox.

In this interview, we speak to Adelstein to get the inside scoop on the writing of the book, his thoughts on the case against Mark Karpelès and his views on cryptocurrency.

You and co-author Nathalie Stucky were roped into this story when you were sent internal documents pertaining to the Mt. Gox implosion by an anonymous source. What was it like writing a book that drew you into a detective tale of this level of involvement?

For a number of reasons, I suspect the document dump we got came from the police or the prosecution. There were many people who felt that the investigation should be about capturing the hackers who raided Mt. Gox, not the CEO who wasn’t able to prevent it.

But when no one will listen in the system, they know the media will. Imagine if a bank was robbed at night and the bank president was arrested because he should have picked a better quality of safe. That’s essentially what happened with the Mt.Gox case in Japan, Mark Karpelès being the bank president.

We had interviewed Karpelès before and been following the story of Mt. Gox but getting a load of documents was a windfall—because we knew much more than we had before. It supported the theory that Mt. Gox had been hacked, not drained by Mark and what’s more it showed that he had inherited a company rife with security flaws.

Ironically, when Karpelès took over the company, the missing bitcoins weren’t worth much. However, with the sudden explosion in the value of bitcoin due to a Forbes article, the value of those missing coins became close to a million dollars. The more successful the company was, the more Karpelès was in a hole.

You start off the book by saying that as long as human greed exists, there will be a place for bitcoin. Do you think the lofty ideals set out by Nakamoto about bitcoin being a currency to empower common folk is a pipe dream?

I think that Nakamoto’s good intentions are being subverted by big financial firms that see the blockchain as something they can use to save money on staffing, convince people to invest in, and gradually privatize in a sense.

Bitcoin was supposed to liberate currency so that everyone can trade freely but in fact, because of Bitcoin exchanges like Mt. Gox crashing and other similar cases, the Bitcoin exchanges are consolidating and it looks like only the big will survive.

In Japan, Bitflyer is rapidly become the one and only accepted service to pay with and buy Bitcoin. For example, Japan’s mega-consumer electronics and discount store chain, Bic Camera only accepts Bitflyer transactions, although they do say “we accept Bitcoin”.

You do a great job of sketching a vivid picture of the peculiarities that make Mark Karpelès who he is. What is your take on one of the most important figures in bitcoin?

Thank you kindly for saying so. Mark, notice I’m calling him Mark now and not Karpelès, is a complex person. Slightly stoic, not greedy, and philosophical. I think he is both one of the luckiest guys in the world and one of the most unlucky. He came to Japan with nothing but his tech skills, and saw the future of bitcoin when no one else did. He had vision but he also had a little hubris.

Where I think he was unlucky is that not only did he get hacked so badly that the business became insolvent, but someone screwed up his plan to save the company, and then he gets arrested and prosecuted by the Japanese police for basically being a bad businessman.

Mt. Gox collapsed with almost half a billion dollars worth of bitcoin missing. The cyber police couldn’t crack the case. The white collar crimes division seemed to decide that if they arrested Karpelès on any charge, and kept arresting him, that he would confess to having stolen the BTC and they would have solved the case. Instead, he didn’t.

The case has dragged on for years—and the charges he faces have nothing to do with the collapse of Mt. Gox or the missing BTC. They do have a lot to do with sloppy accounting, and the police and prosecutors wanting to save face.

If running a business badly or until it goes under is a crime, then the CEO of MySpace or Friendster should be in jail. Yes, many people lost their shirts when Mt. Gox collapsed and his management and hubris played a part in that—and if they had prosecuted him for breech of trust, that might have made sense.

However, those aren’t the original charges and his prosecution has more to do with saving face than solving a crime. I think as the court case unfurls, we will discover that the police ignored the hack or pursuing the hackers and instead focused on putting Mark in jail, because that would be easiest.

You published an email from Jeb McCaleb to Mark Karapelès, offering suggestions for the case of the missing 80,000 BTC, saying, “Maybe you can just mine it?” This suggests that bitcoin’s early days on the exchange were rife with rather irresponsible individuals who didn’t quite realize the magnitude of the task they had created for themselves of managing other people’s money. Is Bitcoin’s greatest scandal really just a case of sending rookies to do an expert’s job?

Nobody realized the magnitude—because nobody saw the huge rise in value. The missing 80,000 BTC were worth nearly a million dollars a few months after Mt. Gox was up and running.

One thing Mark told me that has always stuck with me was when I was asking him about why he loved Japan. He said he loved how safe it was and how honest most Japanese people were.He said, “Once or twice, I forgot my laptop on a park bench and when I came back, it was still there.” And I thought, “a guy who leaves his laptop with all its data on a park bench, this is not a guy you want to have in charge of your cyber security—especially when you’re handling millions of dollars”.

He was, and is, a great visionary, a genius in his own way, but he needs to have a CFO and cyber security guy working with him to run the day-to-day show. I think he’s definitely matured since all this happened but his fundamentally trusting nature can be a problem in the Bitcoin universe which is populated by shady characters.

You write about Karpelès safeguarding most of the BTC on the exchange in cold storage in safety deposit boxes around Tokyo. “Virtual money was temporarily becoming paper money, and there were masses of it.” In light of the numerous security breaches and hacks not only at Mt. Gox but with other exchanges since, what are your thoughts on cold storage versus storing private keys online?

I’m a great believer that storing anything in a cloud is foolish.Think about the word “cloud”. What happens to all clouds eventually? They vanish or they rain. Clouds leak. Paper lasts for centuries. This is why I still have some books in my library. I have PDF-ed a lot of resource materials, literally thousands of books, but PDF files can be corrupted. Paper stays.

You quote a security advisor as saying that Karpelès “dismissed a multimillion-dollar bug in his software that any decent software engineer would immediately have realized was a major issue.” In your opinion, was this due to technical incompetence, or was it something else?

I think it was a misjudgement. I think he believed that he had it under control but he was wrong. There may be some hubris in that and there is some ignorance – a little of both.

In most articles that refer to Mt. Gox, the reader is led to believe that the Mt. Gox failure was due to a big hack led by some mastermind hacker. Your book, however, details that it’s more due to a series of successive – and seemingly neverending – failures and setbacks. What do you think was the nail in the coffin?

Two nails in the coffin.

The first was the large hack conducted in 2012 or so, one for which a Russian was arrested for his part in laundering the stolen BTC. Mt.Gox didn’t reconcile accounts (a fancy way of making sure the amount of BTC coming in and out matched up) so they didn’t realize the extent [of the hack].

The second was when two corrupt federal agents took revenge on Karpelès for not doing business with them by seizing 5 million dollars of Mt. Gox assets in the US. That’s another example of poor luck. Karpelès cooperated with the federal authorities in the Silk Road investigation because he felt offended seeing Bitcoin used in criminal enterprises and in buying and selling drugs—especially via his company.

And he wasn’t rewarded.In fact, not only did these rogue agents seize Mt. Gox money to cover their tracks and punish Karpelès for not making Carl Force a business partner, they gave his name to the Silk Road operators who then may have tried to have him killed. It’s just appalling.

Yours might be one of the first – if not the only – journalistic accounts where the reporter can lay claim to fame to having once fed the accused’s cats. Can you tell us how that came about?

I know Mark’s lawyer, Ogata Sensei. He represented a friend of mine in a custody case. It’s a pretty fucked-up custody case because not only did his wife steal his son, she hijacked their account at a fertility clinic, and tried to use it to get pregnant with her boyfriend’s sperm. That’s another crazy story.

Anyway, I knew that Ogata was representing him and I knew that the cops were going to arrest him sooner or later. We all pretty much knew. But when I heard from his co-worker that he’d been taken away at 5.00 am suddenly on the day of his arrest, I talked to Ogata and my immediate thought was, “What about his beloved cats?”

And Ogata was very busy.  Of course, he also didn’t want to face a barrage of reporters if he went to Karpelès’ place to feed the cats. So as we talked about what he (Ogata) was going to do, I brought up the cats and pretty much ended up volunteering to go over and do it. I’m really allergic to cats. So eventually I palmed off some of the work to Nathalie Kyoko Stucky, whom I have been writing with many times over the years. She became the cat caretaker eventually—at least until Mark got out.

The book details the peculiarities of the Japanese legal system which, at least to a Western eye, could seem like an astounding lack of justice at times, if not downright inhumane. However, with regards to digital currencies, the Japanese government has been one of the most progressive in terms of regulating it.

Do you feel that the spotlight on Mt. Gox, and the ensuing embezzlement charges against Karpelès contributed to the government seriously deliberating the benefit of cryptocurrency in Japan’s economic future, resulting in proclaiming it a legitimate currency in own right?

Yes, I think the Japanese government realized, “wow, there’s a lot of money to be made in cryptocurrency and for some reason, we are in the middle of being the virtual currency Mecca. But we need this to be stable.” I’m surprised at how innovative Japan has been about it.

But I also think the long-brewing decision to proclaim Bitcoin a legitimate currency also encouraged the arrest and prosecution of Karpelès. I think the powers that be wanted to make a point, or ensure the public that Bitcoin Exchange operators would face serious penalties if the firms fell apart.

Japan has a saying, 一罰百戒 [which means] “one punishment is better than a hundred warnings”. It means more generally that by punishing one guy you warn many more people not do the same. So guess who gets to be the one punishment.

What do you see as Japan’s role or future in Bitcoin?

I think Tokyo, Japan will become the mecca of Bitcoin as China clamps down and other countries as well. It’s where people will come to shop around other cryptocurrency. Bitcoin fanatics and true believers seem to find their way here.Japan is metaphorically the birthplace of Bitcoin.

Satoshi Nakamoto, Japanese or not, is a Japanese name and Mt. Gox was created here and its role in the development of Bitcoin was huge. If Bitcoins were gunpowder, Mt. Gox was the first place to supply the bullets and the guns.

In your acknowledgements, you encourage readers to donate bitcoin if they liked the book, or to try to hack your account if they didn’t. “We have faith in the ability of people we don’t know to put in bitcoin and just as much faith that people we don’t know won’t be able to take the money out.” Does that sum up how you personally feel about bitcoin?

Yes, that’s how I feel about it. If you are using a good Bitcoin exchange, it’s very safe. It’s only as safe as the exchange but then again, I tend to put my BTC into cold storage as much as possible.One of the ironies of the Bitcoin boom is that after two years of writing this book and covering the story, I only had one BTC. It’s because I felt that having more would cloud my objectivity on writing about it.

I do think the current prices are wildly inflated but when you consider that Bitcoin is designed to be capped at a certain number—well, then that future scarcity may give it incredible value. However,  you might have to sit on your BTC for decades to get back what you pay for it now.

And since technology evolves, there may indeed be something that comes along that replaces bitcoin or makes it obsolete—like Confederate currency. There is that risk. I don’t foresee that happening anytime soon.

Between drug sellers on the deep web, hackers, missing millions, hitmen, and corrupt federal agents, Pay the Devil in Bitcoin has all the makings of a Hollywood action-packed thriller. If it were turned into a movie, who would you choose to play the main characters?

Thank you! I think there’s a wonderful mini-series to be made. I think Karpelès should play himself—he’s charismatic in his own way. If he won’t do it, then Jake Gyllenhaal should be Mark. Jeb should be played by Steve Buscemi. Skandar Amin Casper Keynes should play Russ Ulbricht.

The two federal agents could be played by the original cast of Dumb and Dumber but more straight. I’d play myself—I know who I am. And Stucky should play herself or Emma Watson could do it. I’d get Daniel Radcliffe to play the Mt. Gox accountant—that way he and Emma Watson could reunite on screen.

Pay the Devil in Bitcoin is available now in Kindle format on Amazon.