The head of the largest organized creditor group representing the former users of failed bitcoin exchange Mt. Gox is stepping down amid what he described as a protracted legal quagmire that could take years to resolve completely.
Andy Pag, the founder and coordinator of Mt. Gox Legal, told CoinDesk in an exclusive interview this week that he now believes ongoing legal issues – in particular, a single massive claim by startup incubator and former Mt. Gox partner Coinlab – may hold up the crypto exchange’s civil rehabilitation process for up to two more years.
Pag, who started Mt. Gox Legal roughly 18 months ago with the intent to advocate for the reimbursement of creditors, first revealed his opinion of the expected timeline in a private forum post last week, obtained by CoinDesk, which told creditors he would be stepping down from his role as coordinator at the end of the month.
The viewpoint put forth conflicts with more optimistic assessments that creditors may be paid before the end of 2019.
Mt. Gox, at one point the world’s largest crypto exchange, went into bankruptcy in 2014 shortly after its operators discovered that some 850,000 bitcoins had been stolen from its wallets. While some of these funds were later recovered, the exchange never did.
However, partly due to the massive increase in price between 2014 and 2017, Mt Gox went from a bankruptcy proceeding to a civil rehabilitation process that remains ongoing.
That this occurred is significant: under bankruptcy proceedings, the exchange’s customers would receive the fiat equivalent to their holdings at the time Mt Gox entered bankruptcy. Under civil rehabilitation, the customers will actually receive the amount they lost in bitcoin instead.
When the Tokyo District Court, which is overseeing the case, first announced that Mt Gox would enter civil rehabilitation last June, claimants expected that they may receive their missing bitcoin as soon as this year. The claim by Coinlab, however, has since put this timeline in jeopardy.
Now it appears to be impacting other efforts by creditors to self-organize to achieve reimbursement.
Legal slugfest
Coinlab, which has been backed by Tim Draper, Barry Silbert and Roger Ver (among others), entered into a partnership with Mt. Gox in 2012 to essentially act as the exchange’s U.S. branch. However, Coinlab sued Mt Gox in 2013 alleging that the exchange had failed to honor the agreement and asking for $75 million.
Mt. Gox then counter-sued, claiming it was Coinlab who breached their agreement. Neither case was resolved prior to Mt. Gox’s bankruptcy filing, though Coinlab did stake a claim against the exchange at the time of the filing.
“Coinlab originally put in a bankruptcy claim originally of $75 million which people thought was excessive … When we went to civil rehabilitation, everyone refiled the same claim, but Coinlab filed $16 billion,” Pag explained.
Edgar Sargent, a U.S. based attorney for Coinlab, told CoinDesk that he could not speak to the amount filed in Japan, and was not familiar enough with Japanese law or court proceedings to discuss the matter. Coinlab’s Japanese attorneys could not be reached for comment. Coinlab founder Peter Vessenes did not respond to a request for comment.
The first problem stems from the fact that the Mt Gox trustee, Nobuaki Kobayashi, normally attributes voting rights to creditors based on the size of their stake. This cannot happen with Coinlab until the claim is assessed.
Pag explained:
“Because it’s pending and it’s still disputed, the trustee can’t attribute fair voting rights if it’s accepted or zero voting rights if it’s rejected but … until it’s [resolved] the trustee can’t give them voting rights … It looks like it’s stalled.”
It could take the bankruptcy judge anywhere from several months to a year just to assess the claim. If Coinlab’s claim is rejected, the company can then litigate it in court, which would take another year. If the court rejects Coinlab’s claim, the company can then appeal, which would also take some time.
All told, Pag estimates that resolving whether or not Coinlab has a credible claim can take between 18 and 24 months.
Once that is resolved, only then can the creditors vote on a civil rehabilitation plan (and there is always a chance that there may be competing plans). Depending on the outcome, the potential payout to creditors will be dramatically different as well.
“We’ve started that process but it’s not finished and it’s not confirmed, it’s not confirmed that we’re in civil rehabilitation until the creditors vote on a civil rehabilitation plan,” Pag said.
Coinlab’s claim
Speaking generally, Sargent told CoinDesk that Coinlab’s suit comes from “a good claim,” adding that “it’s not just something that we made up.”
He confirmed to CoinDesk that he participated in a brief AMA on Reddit a few weeks ago, where he noted that Mt. Gox did not obtain a dismissal when Coinlab first sued the exchange, which it could have done “if the case were frivolous.”
In an email, however, former Mt Gox CEO Mark Karpeles told CoinDesk that Coinlab performed “close to zero” work for the exchange.
“Courts are likely to consider CoinLab’s case with some matter of urgency today and will likely try to get things handled quickly, but CoinLab has likely no interest of bringing a losing battle to its conclusion, and will likely try to extend the process as much as possible,” he said.
Coinlab is in a position of strength right now, “as they hold hostage the whole of Mt Gox’s distribution process,” though the company could end the situation quickly by signing a settlement. If a settlement is signed quickly, bitcoin distribution can begin by the end of 2019.
This might be the plan too – according to Pag, “a lot of creditors feel like it’s a very conscious strategy to try and force a settlement from the trustee. Most creditors don’t want them to receive a penny.”
While both Pag and his attorney have tried to reach out to the Wada Law Firm, which is representing Coinlab in Japan, Pag said he did not receive any response and his lawyer’s request was rejected.
Hibernation
Mt. Gox Legal is, in Pag’s words, the largest creditor group for Mt Gox. There are currently more than 1,000 members claiming more than 150,000 bitcoin, good for roughly 15 percent of the total value owed to creditors.
The group was founded in fall 2017 to advocate for Mt Gox’s shift from bankruptcy to civil rehabilitation.
“It started around 18 months ago when it became clear that the price of bitcoin was rising and the assets of the Mt Gox trustee was going to be more than the liabilities,” Pag explained. “Top Japanese lawyers are very expensive so [we pooled together].”
Mt. Gox Legal filed for the shift, possibly setting a number of legal precedents in Japan along the way. Pag explained that under such a transition, a company does not normally move from bankruptcy to civil rehabilitation, adding:
“It’s rekindling the legal entity enough that you can distribute assets but not restart it as a business.”
Pag is currently the coordinator for the group, with his activities overseen by a board of governors. Over the last 18 months, he’s flown to Japan a number of times to communicate with Kobayashi and gather updates for the members of the group.
“We’re quite a considerable creditor body and we’ve spent some time building up a relationship with all the players, the trustee, other creditor groups [and] law firms,” he said.
At the end of April, he’ll be stepping down.
“The more bitcoin’s price goes up, the more vultures are circling around. My personal worry is that we’re just going to be bogged down in litigation,” he said. “For me personally, and it’s a personal decision, it makes more sense to sell my claim.”
Mt. Gox Legal’s board has already begun the process to replace him, opening up nominations to bring in a new coordinator. While a new coordinator has not yet been confirmed, Pag expects that the group will likely shift into a hibernation state, as there will not be a lot that can happen until the legal claims have been sorted out.
Moving on
Rather than wait for the court system to sort out whether Coinlab has a legitimate claim, Pag said he intends to sell his claim, step down from Mt. Gox Legal and move on with his life.
“I’ve put my career on hold for 18 months and … It’s just a big regret that we’ve kind of been outplayed by other parties,” he said:
“In 2014 I had this money sitting there and it was this great big windfall and it was amazing and I had all these plans that I was going to put into place with it. It’s not losing the money that stung, it’s losing those plans and not being able to doing those things I wanted to do, and there’s a bit of a repeat here.”
A New York-based investment firm will purchase Pag’s claim for $600 per bitcoin. While he declined to name the firm, Pag said if other creditors reached out, he’d be happy to put them in touch.
“This isn’t the windfall that I was hoping for but it’s still a windfall and it’s a windfall today,” he said.
Pag said he has seen some backlash for this decision, which he understands. However, “this is a really personal decision that everyone needs to make for themselves,” he added.
He is not making a recommendation for other creditors to sell or not sell, Pag said, noting that many creditors have a shared identity born out of the fight to recoup their missing coins.
That being said:
“I had to ask myself how far do I stand on principle? When do I say enough is enough. Do I want to be right, or do I want to be happy? I’ve decided I’d rather be happy and get on with my life.”