Gone Baby Gone — Recovery of Stolen Bitcoins in Mt. Gox Bankruptcy

by JD Supra Perspectives

Because customers did not own identifiable bitcoins themselves due to Mt. Gox’s pooled holdings, customers will face an uphill battle arguing priority to recovered bitcoins over Mt. Gox’s other creditors...

Mt. Gox filed for bankruptcy protection in Japan alleging that nearly all of the exchanges’ 850,000 bitcoins worth half-a-billon dollars had been looted by hackers. Customers were left asking whether any of their bitcoins are recoverable.

Unfortunately, none of the financial regulations applicable to banks and broker-dealers under U.S. or similar law protect bitcoin customers. U.S. securities law requires that brokers keep customers’ securities and cash in segregated accounts apart from those of the broker so that customers’ assets will be safe if the broker fails. Further, the Securities Investor Protection Corporation (SIPC) insures customers’ securities accounts up to $500,000 against theft, fraud or loss. Similarly, while banks pool customers’ deposits to fund loans, the Federal Deposit Insurance Corporation (FDIC) insures cash deposits up to $250,000 per customer.

Most customers were likely aware that their bitcoins were not insured by any governmental agency. But many did not know that Mt. Gox pooled and did not segregate their bitcoins in individual customer accounts. Mt. Gox’s pooling of its customers’ bitcoins, and its failure to hold those bitcoins in “cold storage” offline from its “hot wallet” buying and selling bitcoins in the market, made Mt. Gox susceptible to the massive theft.

With liabilities ($64 million) substantially exceeding assets ($38 million), Mt. Gox’s customers will receive little, if any, payment from the bankruptcy unless stolen bitcoins are recovered. Though somewhat notorious because of its anonymous nature, all bitcoin transactions are, in fact, tracked and become embedded in the bitcoin’s blockchain digital code. Theoretically, Mt. Gox’s stolen bitcoins can be traced and its thieves identified when they cash out through an exchange. While tracing is complicated by laundering efforts to exchange stolen bitcoins with clean ones, sophisticated forensics (regularly employed by bankruptcy professionals of failed financial institutions, LBOs, frauds, and Ponzi schemes) may be capable of tracking down the plundered digital currency. With the filing of a U.S. customer class action lawsuit and the substantial amount at stake, an intensive investigation is likely. If theft of almost 7% of all outstanding bitcoin is unrecoverable, that raises serious questions about the value of bitcoin as a currency going forward.

Because customers did not own identifiable bitcoins themselves due to Mt. Gox’s pooled holdings, customers will face an uphill battle arguing priority to recovered bitcoins over Mt. Gox’s other creditors. Instead, the value of recovered bitcoins is likely to be paid out based on the priorities set forth in Japanese bankruptcy law, including the potentially senior claim of secured lenders and equitable sharing amongst unsecured creditors.

Absent the addition of government regulations to protect customers’ bitcoins similar to those discussed above, a prudent buyer should consider holding their bitcoins directly in an individual wallet or at an exchange that both segregates customers’ bitcoins in individual accounts protected from hackers in cold storage and grants ownership to customers of identifiable bitcoins and wallets through clear contract language.


[Timothy Durken focuses on Bankruptcy & Corporate Restructuring, Finance, Litigation and Transactions at Jager Smith P.C. in Boston and New York. He can be reached at tdurken@jagersmith.com and followed on Twitter at @TDurken.

JD Supra's new Law Matters series asks experts for their quick take on popular news of the day, and specifically how such matters affect people in their personal or professional lives. Stay tuned for other posts in the series.]


Written by:

JD Supra Perspectives

JD Supra Perspectives on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.