Mt.Gox, the world's largest bitcoin exchange, seeks legal status

As the world's largest bitcoin trading platform, Japanese company Mt.Gox accounts for 70% of the global bitcoin trading volume, with more than 500,000 registered users. In May this year, its trading volume reached 132 million US dollars, and the exchange rate of bitcoin to US dollars once soared to a peak of 1 to 266 US dollars.

Mark Karpeles, CEO of Tibanne, told China Business Weekly that Mt. Gox is eyeing

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• ICBC

Its previous success lies in word-of-mouth accumulation - it is one of the earliest Bitcoin trading platforms; its upgraded security measures after the hacker attack currently look good; it has been seeking the legitimacy of transactions; and it has expanded the payment scope of Bitcoin.

TIBANNE is the parent company of Mt.Gox. Karpeles bought Mt.Gox from Jed McCaleb, the "father of eMule". At that time, it was still a trading platform with a personal homepage status. Before acquiring Mt.Gox, TIBANNE mainly engaged in domain name and hosting business. TIBANNE's office is located in the fashionable and young Shibuya district in Japan. The entire company's 15 employees basically serve Mt.Gox. Mt.Gox charges a handling fee ranging from 0.6% to 0.25% for each transaction, which contributes 99% of the company's profits.

Bitcoin was born in November 2008. It was originally an electronic currency discussed and used by a small group of cryptographers and programmers. At first, these geeks used computers to run special mathematical algorithms to obtain Bitcoins, a method called "mining." The value of Bitcoin was also pitifully low. Early transaction records showed that 10,000 Bitcoins could only buy two Papa John's pizzas.

"Bitcoin's popularity has come from large sites like WordPress (a free online information publishing platform) and Reddit (a social news site focused on user-generated news links) starting to accept Bitcoin payments," Karpeles said.

WordPress and Reddit started supporting Bitcoin payments in November last year and February this year, respectively. February to April this year were the three months with the fastest user growth for Mt.Gox, with the number of users increasing by 20,000, 70,000 and 100,000 respectively. The regions with the largest and most active users were the United States and the United Kingdom.

This is what Karpeles started to do slowly a year ago. He hopes to expand the scope of Bitcoin payments to attract new users to participate in Bitcoin transactions. He let Mt.Gox support payments on these websites.

Karpeles also considered opening a physical store, but based on the difficulty of operation, he chose to start online.

While negotiating with these websites, Karpeles is developing offline payment business. He hopes that Bitcoin will eventually become like a Japanese transportation card called "Suica", which can not only be used to take trams and Shinkansen, but also to buy books in bookstores and swipe cards when buying things in convenience stores.

"We are not considering transportation for now, but we hope to use it in stores like 'Suica', such as convenience stores. We are currently in talks with some Japanese companies and the results will be announced in about two months," said Karpeles.

Karpeles is a French expatriate to Japan who founded Mt. Gox’s parent company, Tibanne, in 2009.

At first, Mark Karpeles didn’t know Jed.McCaleb and his Mt.Gox, but they came into Karpeles’ sight by chance in September 2010. At that time, Karpeles’ clients wanted to pay the corresponding fees with Bitcoin. At that time, Karpeles had an idea: Bitcoin trading might become a profitable business, and there were very few companies that really engaged in Bitcoin and real currency exchange at that time, so he began to contact Jed.McCaleb.

After about four months of negotiations, Karpeles bought Mt. Gox in March 2011. When he took over, Mt. Gox's trading volume in February was only 360,000 bitcoins, which was only $329,000 at the exchange rate at the time.

Karpeles didn't expect Mt. Gox to reach its current scale at the time. He just thought it might be a profit growth point, so he wanted to give it a try.

In order to make Mt.Gox more like a professional trading platform, Karpeles immediately transformed it after taking over. In the first phase, he rewrote the system's kernel, changing the range of currencies supported by transactions from only accepting US dollars to supporting more than 10 currencies such as US dollars, euros, Canadian dollars, and Australian dollars. Then, he designed a new website page because the original personal homepage-like page was too simple and crude.

These two stages did not take up too much of his energy and time, and it took only about four months to complete. In almost the same period of time, Bitcoin appreciated sharply. On February 9 of the same year, the price of Bitcoin exceeded $1; it continued to soar, and on June 8 of the same year, the price of 1 Bitcoin on Mt.Gox reached as high as $31.91.

Hackers then began to target Bitcoin trading platforms for attack, and Mt.Gox was no exception. The hacker attack really scared Karpeles. In mid-June 2011, hackers obtained user data from Mt.Gox and generated a large number of orders with an exchange price of $0.01 (the exchange price at the time was around $17), "dumping" Bitcoins in other people's accounts, and then using their own accounts to accept orders.

Mark Karpeles hurriedly shut down the exchange after discovering the attack. Fortunately, he only lost 2,000 bitcoins. But several other trading platforms were not so lucky. MyBitcoin also lost $2 million worth of bitcoins due to the attack. Another well-known platform, Bitcoinica, was eventually shut down after being attacked twice.

Mark Karpeles and his team upgraded the security system, adding a one-time password and supporting the binding of smartphones and computers.

Judging from the current results, this upgrade has been temporarily successful. The platform has not encountered large-scale hacker attacks since then, which is also one of the main reasons why users use the platform.

Although hackers have continued to attack Bitcoin trading platforms, it has not hindered people's enthusiasm for Bitcoin trading.

Bitcoin transactions have many benefits that physical currencies do not. Because the transaction of currency is recorded using a distributed database spread across the entire P2P network nodes, users can trade directly without going through a third party. Because there is no need for a third party, the transaction fee is greatly reduced to only 0.01 Bitcoin. It also allows both parties to trade anonymously. However, this benefit remains only in theory.

Bitcoin seems to be a product of libertarianism. Traders trust mathematical algorithms rather than central banks. They believe that their Bitcoin assets will not be unexpectedly devalued due to the over-issuance of currency by third parties such as central banks to save the market.

This does not mean that Bitcoin will definitely appreciate. It does not have any credibility or value guarantee, such as being linked to gold. The current rise comes from the market's trust in the algorithm and the media's attention, but this trust needs to be tested. In the summer of 2011, Bitcoin fluctuated violently. Under the media's attention, its exchange rate reached $31.91, and then fell below $2.

However, it is because of the anonymity of Bitcoin that it is easy to attract regulation. Last month, the U.S. Department of Homeland Security seized Mt.Gox's Dwolla account because Karpeles failed to register in the correct way. Mt.Gox announced on June 20 that it would suspend its U.S. dollar withdrawal service in the next two weeks because it is currently under investigation by the U.S. Department of Homeland Security.

Before investigating Mt. Gox, the Department of Homeland Security had just closed down the virtual currency service Liberty Reserve for suspected money laundering and unlicensed money transmission business. Federal agents found that they could easily launder money or buy drugs through "LR dollars".

Since the end of May this year, Mt.Gox has required user identity verification. In order to prevent money laundering, Mt.Gox stipulates that the daily transaction limit for non-certified users is US$1,000. Registering information at a notary office can increase the limit to US$10,000, and if you have a notarized certificate issued by a notary office, it can be increased to US$100,000.

"I want to be able to run a healthy business," Karpeles said, adding that he hopes Mt. Gox's trading will comply with regulations and have a government-recognized trading identity.

Mt.Gox is no longer a toy for geeks. With the increase in trading volume and new users, it has become a trading platform for ordinary investors. The more websites, companies and countries accept Bitcoin payments, the more it is connected to the real economy. It needs to follow some rules of the real world and is no longer a utopia for a few people.

In the summer of 2011, the Industrial and Commercial Bank of France closed the bank account of the Bitcoin trading platform Mt.Gox, on the grounds that "Macaraja (MtGox's entity in France) is not a bank, but Bitcoin is an electronic currency, and it is illegal for Macaraja to operate electronic currency."

Mt.Gox was determined to challenge this decision and filed an appeal against ICBC, demanding the rights it had to its bank account under French law. Mt.Gox argued that "Bitcoin is not so much an electronic currency as it is an immaterial good, such as software." As a result, because the court could not determine the nature of Bitcoin, MtGox could continue to operate its Bitcoin business in France.

Although he escaped, this incident further strengthened Karpeles' desire to ensure that Mt. Gox transactions were in compliance with regulations.

Karpeles then began to spend more time contacting regulators in various countries to understand the attitudes and views of government agencies. He first contacted the Financial Services Agency of Japan, followed by the Financial Services Authority (FSA) of the UK and the Financial Crimes Enforcement Network (FinCEN) of the US.

The complicated situation is that each country has a different definition of Bitcoin. Germany's Federal Financial Supervisory Authority BaFin defines it as a commodity; the US Financial Crimes Enforcement Agency defines it as a decentralized currency; and the Japanese Financial Services Agency believes that it is not a financial instrument, so it is temporarily safe.

Depending on the laws of different countries, Mt.Gox sometimes needs to pay for a trading license. In the United States, the Financial Crimes Enforcement Agency requires Mt.Gox to register with the government and pay $25 million to obtain a trading license. Karpeles said that the payment will be paid in 2014 at the latest. This license is much cheaper in Europe. Mt.Gox only needs to pay 300,000 euros to the UK Financial Services Authority to obtain an EU general license. Karpeles estimates that it will take another 6 months to complete all the procedures. In Japan, because there are no relevant regulations, the fee is zero.

Karpeles believes that the increasingly standardized transactions are the biggest advantage of Mt.Gox compared to other Bitcoin platforms, and the trading license may become a phased competitive advantage. "Not all startups are willing and able to pay $25 million," Karpeles told CBN Weekly.

Many of these seemingly “tight-handed” competitors have received investment. Last September, well-known Silicon Valley angel investment institutions and individuals including YC, Alexis Ohanian, Trevor Blackwell, etc. invested in the Bitcoin exchange website Coinbase with an investment of about $600,000. A month ago, Coinbase received another $5 million in Series A financing.

"We do not view Mt. Gox as a competitor, nor do we position ourselves as a service tool for speculators who profit from daily price fluctuations in the Bitcoin market. Instead, we create a customer-friendly online wallet for ordinary consumers who want to buy, store and spend Bitcoin." Olaf Carlson-Wee, a Coinbase staff member, responded to "First Financial Weekly".

Interestingly, McCaleb has currently founded a new company to issue a currency called Ripple that is an improvement on Bitcoin. It does not require "mining" and is one of Bitcoin's competitors.

As new gadgets released by Silicon Valley tech giants attract widespread media attention, the range of products and services that accept Bitcoin payments is expanding, and even players have bought Porsche sports cars with Bitcoin. There are more and more "miners" who are "mining", because the algorithm itself currently generates 25 Bitcoins in 10 minutes, which is a pitiful amount for hundreds of thousands of miners. Also because of the limitations of the algorithm, the number of Bitcoins is capped at 21 million, which means that mining is becoming an increasingly difficult way to obtain Bitcoin.

Bitcoin players have no choice but to turn to trading platforms like Mt.Gox that can exchange real currency and use the exchange rate to invest or speculate in Bitcoin.

Karpeles told CBN Weekly that Bitcoin is no longer obtained through "mining", but is traded through platforms like Mt.Gox.

However, if Bitcoin is to be popularized, there are many problems that need to be solved by these platforms. The principle of Bitcoin itself is obscure and difficult to understand. Karpeles had to go to the Financial Services Department several times to make officials understand "why 25 Bitcoins are generated in 10 minutes". This concept is also not easy for ordinary users.

The security of Bitcoin may also scare off ordinary users. Recently, Kingsoft Antivirus Security Center announced that it had intercepted the first Bitcoin mining Trojan in China. The Trojan was disguised as the source of the popular youth inspirational movie "Chinese Partners". Hackers controlled infected computers to create Bitcoin for profit. Others used domain names similar to Mt.Gox (mtgox.com) such as Mtgox.org, mtgox.co.uk, and mtgox.net to create phishing websites.

Karpeles remains confident in Bitcoin. "We are building a bridge between the current monetary system and Bitcoin," he said.