​“When you’re guilty, you know you’re guilty.” What will happen to the FTX exchange and its former CEO

On November 29, the former owner of the 2014 bankrupt Mt. Gox crypto exchange Mark Karpeles was a guest on the UpOnly podcast and spoke about the early days of the nascent crypto market, as well as the prospects of the bankrupt FTX and its CEO Sam Bankman-Fried from his experience.

UpOnly is one of the most popular podcasts in the English-speaking crypto community, hosted by Jordan “Cobie” Fish and Brian “Ledger” Krogsgard. The hosts have hosted almost every big name in the industry, including Michael Saylor, Vitalik Buterin, Mark Cuban, Changpeng Zhao, Justin Sun, and many representatives of blockchain projects.

Karpeles became one of the pioneers of the crypto market and owner of the Mt. Gox exchange, which went bankrupt in 2014 after a major hacking and theft by hackers of hundreds of thousands of bitcoins of its users. There is still no official version of the hack, and affected traders have been waiting years for compensation, claiming 137 891 BTC, the existence of which was officially confirmed in the exchange’s reserves in 2020. Karpeles went through arrest, bankruptcy, and numerous courts. We recount the most interesting part of the two-hour interview.

About Mt. Gox

Karpeles bought his first bitcoin in 2010, when the community consisted of only a few hundred people. He learned about the first Mt. Gox exchange, which was founded by Jed McCaleb. He later co-founded the Ripple and Stellar projects and became one of the richest members of the crypto industry. McCaleb sold Mt. Gox to Karpeles, who became its new CEO. At the time of the purchase, according to Karpeles, the exchange had about 30 clients, but within a few months, the number of registered accounts exceeded 60 000. A few years later, the exchange crossed the one-million-user mark.

After a series of hacks that repeatedly led to the first recorded major collapses in bitcoin price, scandals and reorganization, in 2014 Mt. Gox officially declared bankruptcy, confirming the total debt to users of 650 000 BTC. The procedure to begin paying compensation to affected traders who left claims is scheduled for 2023. Payments will be made in Japanese yen, bitcoin, and Bitcoin Cash (BCH) coins.

About FTX’s bankruptcy

Asked whether affected FTX users will also wait years for compensation, Karpeles said that in FTX’s case, the bankruptcy procedure will be different. The fact that FTX filed for Chapter 11 bankruptcy in the United States is legally relevant only to the United States. Other entities in the FTX Group “will fight to get bankruptcy jurisdiction.”

In his opinion, being able to make last-minute withdrawals from FTX for residents of the Bahamas, where the parent company was incorporated, was “a good play” for Bankman-Fried. Local users will obviously go to court, and bankruptcy proceedings “as it turns out, bankruptcy helps a lot in protecting against lawsuits. I mean, it’s made for it.”

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That Bankman-Fried does not admit that his company, Alameda Research, embezzled billions of dollars belonging to FTX’s customers and publicly denies malice, according to Karpeles, also seems like “a good strategy if its on purpose.” “When you’re guilty you know you’re guilty,” he said later, discussing how access to big money breeds corruption. At this point, podcast participants recalled the story of US government agent Carl Force, who was arrested in 2015 for trying to launder through Mt. Gox bitcoins he stole from administrators of the first dark web marketplace, Silk Road.

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Returning to FTX, Karpeles reasons that he does not understand how a company with a $30 billion valuation did not have a full-time accountant and its reporting was done in Excel and internal chats. He noted that FTX’s new CEO, John J. Ray, who headed the exchange’s bankruptcy proceedings, though he gets paid quite a bit of money, has to take on a huge amount of work. “It’s a very long process so the complexity is not going to help at all,” Karpeles says.

Shortly before the broadcast began, Karpeles publicly offered to talk to Bankman-Fried, citing his experience in “running an exchange and being pressured into bankruptcy by lawyers.” Asked by hosts what he was going to advise the former FTX head, Karpeles says he would advise him to talk less. As for Alameda, Karpeles believes the company has too many assets to be able to fairly compensate the many injured counterparties.

About the crypto sphere

Karpeles says that the FTX situation did not shock him or cause flashbacks. In his opinion, if the Mt. Gox crash had happened earlier, after the first hacks in 2012, things could have been much worse, because there were no other ways to buy or sell bitcoins at the time.

As for the news about the major crypto exchanges confirming reserves, he said that Kraken was one of the first exchanges to prove asset reserves, long before Binance launched its system and instigated other exchanges to do so. “It’s very likely that in a few months no one will care again and people will stop doing it,” Karpeles admits.

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He speaks positively about the decentralized finance (DeFi) industry while specifying that “if you are using a stablecoin you are not decentralized”.

Going back to the early days of bitcoin again, Karpeles recalls chatting with his Satoshi Nakamoto on the bitcointalk forum, and evades answering the host’s question about whether he knows who is behind the anonymous identity of the first cryptocurrency creator. He also recalls how he was thought to be the creator of Silk Road and says he can not get used to 1 BTC being a large sum, recalling how he bought the first coins at a rate below $1.

Karpeles concludes by saying that the crypto community is really happy to help others with their problems, and its members are open to communication. “Except FTX I’d suggest they don’t talk too much,” Karpeles adds.