The End of the Mt.Gox Saga: What Mark Karpeles' Arrest Means for the Future of Bitcoin Exchanges

On Saturday morning, Mt.Gox founder Mark Karpeles was arrested by the Tokyo Metropolitan Police for allegedly stealing around $1 million worth of bitcoins during his tenure as the company’s CEO. His arrest marks the conclusion of a scandal that began in February 2014, when Mt.Gox (then the largest bitcoin exchange) disappeared from the internet, declaring bankruptcy and the mysterious loss of $390 million worth of bitcoins.
When it declared bankruptcy, Mt.Gox claimed that it had lost 75,000 of its customers’ bitcoins, in addition to 100,000 of its own, due to a “transaction malleability” bug. However, the bitcoin community has long suspected that something more sinister took place. During a Reddit AMA on Friday night, Ashley Barr, the first Mt.Gox employee and its initial CEO, revealed many of the corrupt dealings that occurred at Mt.Gox prior to its bankruptcy. For example, he said the company had only one bank account, which was shared with Mt.Gox customer funds. That suggests that there was no real distinction between Karpeles’ personal bitcoin wallet and the assets of the company’s customers.
The Verge attributes this soap opera of corruption, theft and greed to “disruption and decentralization — the same qualities that drew people to Bitcoin in the first place. Bitcoin created a financial system free of central banks, incumbent interests, and state power, removing the same checks that could have stopped Gox early.” Therefore, it seems like Karpeles’ arrest marks the end of an era in bitcoin history. Gone is the Wild West mentality that characterized the cryptocurrency’s early days, in favor of a more moderate and regulated approach to bitcoin exchanges.

A new era of bitcoin exchange regulation

Case in point: twins Cameron and Tyler Winklevoss have been working on creating a NASDAQ-listed bitcoin ETF under the the ticker symbol COIN. They have also been making strides at establishing a new bitcoin exchange called Gemini. This project made major progress at the end of July, when the twins filed an application with the New York State Department of Financial Services for the exchange to operate as a trust company. Under New York law, a trust holds many of the same privileges as a bank, including taking deposits (an essential aspect of a bitcoin exchange).
Should this application be accepted, Gemini will join Coinbase and itBit Trust as part of the increasingly regulated landscape of US bitcoin exchanges. Coinbase launched an exchange in January, and is gradually acquiring money transmitter licences in each state. itBit, on the other hand, took the route that the Winklevoss brothers are hoping to take.
Essentially, itBit was granted a trust company charter at the start of May, giving it a degree of protection and security heretofore unseen in the bitcoin industry. That includes being subject to state audits, maintaining a mandatory amount of available capital and providing FDIC insurance on customers’ accounts. itBit CEO Charles Cascarilla told the Los Angeles Times, “so far, bitcoin hasn’t approached regulation in a constructive way to allow mainstream use. We made the commitment not to take customers until we could do it on a really holistic and nationwide basis.”
These bitcoin exchanges represent the future of bitcoin, as it moves away from radical deregulation towards a more secure and stable method of currency. The era of the Mt.Gox exchange is finally at a close, as investors look towards an increasingly regulated future for the cryptocurrency.

Securities Disclosure: I, Morag McGreevey, hold no direct investment interest in any company mentioned in this article.