MtGox’s bankruptcy should have been a rather boring and long process. Long, because there are many creditors (24750 people submitted claims as MtGox customers) and because some people are trying to get a part of the cake despite having been rejected by the trustee (CoinLab).
Now, far from being boring, this bankruptcy is setting a new kind of precedent. Indeed, the assets held by MtGox when it entered liquidation bankruptcy included some 202,000 BTC, which now have a worth at today’s rate much higher than the sum of all non-erroneous claims filed against MtGox.
Normally this shouldn’t be an issue. Bankruptcy repays all creditors in full, and we’re done. In this specific case, however, many of the claims are based on Bitcoin value held by MtGox customers at the time the bankruptcy started, and while for most the claimed amount would cover all money spent on purchasing said bitcoins (in some case it would add a hefty bonus), most Bitcoin creditors assert capital gains from said bitcoins should be paid to them.
In most bankruptcy cases it is the way things happens since anyway capital gains would usually not allow covering all claims, yet here we are in a rather unique case, and the current estimation of assets is much higher than accepted liabilities.
First I’d like to say that nobody could have predicted things would go that way, and that this direction is the result of a number of factors including:
- Multiple MtGox customers filing with the court repeatedly after MtGox filed for civil rehabilitation on Feb 28th 2014 arguing MtGox should be in liquidation bankruptcy, and not civil rehabilitation, with the court eventually putting MtGox in liquidation less than 2 months later - whereas there is now a trend within creditors wishing for civil rehabilitation to be back
- CoinLab filing a very large claim against MtGox following a US lawsuit most sane person would say is merit-less - and trying again and again to get their hands on some 75 million USD from MtGox - this claim assessment has been lasting for over a year and even if assessment somehow completes, it is very likely to be brought to a court and fought again and again as long as appeals are possible, which means it could very well take another 2~10 years
There are a few issues with what creditors are asking for in this bankruptcy which means as things are right now, it would be impossible:
- Said capital gains haven’t been realized yet. Considering Bitcoin’s volatility, the 202,000 BTC held by MtGox could very much be worth 10 times more or 10 times less tomorrow. Also, depending on the way the liquidator sells the MtGox bitcoins, it could have an effect on the market and push the price down, and in the end fetch only a fraction of the current market value (actually, managing to sell that kind of amount at current market value would be some kind of miracle).
The trustee, I would guess aware of this fact, has been careful to never include Bitcoins value in company assets, always listing these as a separate entry (as well as Bitcoin Cash, as of last creditors meeting).
- Bankruptcy law does not recognize post-bankruptcy capital gains by the bankrupt as a liability. The claims are calculated from liabilities as of start of bankruptcy, and all converted to JPY. From there, claims are static to allow the liquidator to perform a distribution while creditors can have a continued accurate image of how much of their claim can be paid.
As of last creditors meeting, the expected repayment rate is 2.66% (assets/claims), but is subject to change pending realization of profits from the bitcoins held, and depending on still being assessed claims.
So, what can be done in this situation?
The most obvious goal would be to have Bitcoins distributed pro-rata to creditors. Easier said than done.
Before anything can be done there are a few things that will need to be cleared:
- The CoinLab lawsuit. As things are right now, CoinLab asserts a 75 million USD claim against MtGox, and will act against anything that can hurt their claim. The court will give them the benefit of the doubt until the lawsuit ends.
- MtGox creditors would need to cooperate more. Right now most are working in different directions, and one even went as far as openly declaring this a “war”.
At this point there is little hope for anything to be actually accomplished, and I have been pondering how to proceed should I want to solve this matter myself - which sounds better than being the object of hate of thousands of people for the rest of my days (it seems I already am anyway, yet sometimes some people send me nice messages, that keeps me going).
Despite the case being fairly complex, one of the solution I’ve been investigating seems to be getting more and more actually realizable.
Bringing MtGox up through japanese civil rehabilitation under a new management and ownership sounds actually more and more easily done than before. This could work, joined with a solution similar to what Bitfinex did, where liabilities are covered with tokens issued to creditors, and can be cashed out anytime based on current liabilities status while said status progressively improves over time as MtGox makes money and/or coins are recovered (could take years just to maybe see Vinnik get his ticket to the USA, so no need to hold your breath there).
This also offers the advantage of allowing people who failed to file a claim to still get something, which I believe is important.
As things are right now, MtGox would only need a new management team (ideally 3 directors, at least one Japanese with strong business and finance experience) and 245 million USD. I wouldn’t have anything to do with MtGox anymore, which I guess most people would agree is a basic requirement.
Why 245 million USD? I know what you are thinking, but no, the goal would be only for needed expenses. I’ve made an estimate (with some leeway because I know these kind of things will always come with unexpected costs) but here’s the breakdown of that estimate:
- 175 million USD to put aside as security for uncooperative creditors. Until their claims can be disputed the funds would be held by the court as security, and could be returned later
- 20 million USD operating expenses for one year (based on MtGox last year of operating expenses of around 15 million USD to which we add extra costs such as buying new computers, servers, etc)
- 10 million USD toward compliance in the US, which could take months to be accomplished, but would cost at least that much
- 1 million USD toward compliance in Europe & Japan (estimated less than 6 months to be live)
- 35 million USD as cash flow, either to allow better negotiations with financial entities and serve as emergency cash for the second year and onward
- 4 million USD toward campaigning to creditors to actually accomplish all of this, including legal costs and others
Of course if we could cut the first part, we’d be down to 70 million USD, or less than 1/3rd of the total.
Some people may think “why not just use part of the 202,000 BTC held by MtGox?”, and I’ll stop you right there. A plan where those assets are used would never get through all the loops it needs to go through to be approved, so that’s definitely out of question. The idea would be to keep the trustee around to have those assets secured (what we call non-DIP civil rehabilitation, DIP meaning “debtor in possession”, basically that means the debtor, MtGox, is not in possession of the assets), or have MtGox form a trust for the purpose of managing the assets backing the GoxCoins (might be cheaper on the long run).
Where to raise such an amount?
I was hoping you, dear reader, could help. Two solutions come to mind:
- Offer right to MtGox shares. The legalities of this are a bit complex, but basically I would be selling MtGox in exchange for its revival. Of course most of the money would go into MtGox, but it’d revive the exchange.
I’m guessing at this point most people would think “hey, I’m buying MtGox shares for $250 million, why can’t I get a share of the 202,000 BTC?” Actually some people asked me, and if you’re thinking that, you’re missing the point. Creditors share goes to creditors, that’s all. Just some numbers, on the last year (11 months actually), MtGox had total spendings of some 15 million USD, for revenue of around 40 million USD. That’s a net profit of 25 million USD on one year, which isn’t bad. Now that was MtGox's last year without proper banking (lost banking in the US two months in), things right now would look much better, because not only costs are lower, since compliance requirements are now more defined (most of the cost at the time were legal), and the bitcoin economy as a whole is much larger, which means a correctly run exchange would make much more money. MtGox comes with a pre-existing customer base and will be issued GoxCoins which are to be made tradable on the exchange, and if you have doubts I’d be happy to discuss this further.
- Launch an ICO to raise money to hypothetically revive MtGox. This sounds more challenging, both legally and because there is no guarantee of raising enough to revive MtGox. In case there is not enough raised it could still be locked to be distributed to creditors, which would be better than nothing. Updated on Nov 20th: after discussing with lawyers it has been confirmed this option is not practical (mostly due to compliance issues).
Should anyone have 245 million USD sitting around and want to purchase MtGox, just drop me an email.