As the bitcoin exchange Mt. Gox was careening toward collapse in early February, its owner, Mark Karpeles, found that even some fellow virtual-currency advocates were losing faith.
Members of the Bitcoin Foundation’s board, an important promoter of virtual currencies, were losing confidence because the exchange had been associated with another foundation member who was arrested in January on money-laundering charges. The young currency in recent months had been increasingly backed by prominent investors, but the taint of criminal activity was starting to take over the headlines.
Some wanted Karpeles, chief executive of Mt. Gox, the Tokyo-based site that once had been the go-to place to buy bitcoins, to either resign from the foundation or be removed from its board, said people briefed on the matter.
It was that steady erosion of faith in the bitcoin community that ultimately served as the death knell for Mt. Gox, which had been enduring a series of problems, including having accounts frozen by authorities in the United States last year. Without the public backing of bitcoin believers, Mt. Gox lacked the ability to get the financing it needed, those familiar with the discussions say.
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On Friday, Mt. Gox filed for bankruptcy protection, five days after Karpeles resigned from the foundation and just days after its website went dark. The exchange said that most likely it had lost 750,000 of its customers’ bitcoin holdings and more than 100,000 of its own coins, or more than $450 million worth.
Mt. Gox also said it has debts of about $63.6 million.
At a news conference in Tokyo, Karpeles, dressed in a suit instead of his usual T-shirt, bowed in contrition and apologized in Japanese.
“There were weaknesses in the system,” he said. “I’m truly sorry to have caused inconvenience.”
It is not clear how much lasting damage the collapse of Mt. Gox will do to the push by venture capitalists and wealthy investors to turn bitcoin and other digital currencies into a viable alternative to traditional currencies such as the U.S. dollar and the euro. Digital-currency advocates say other exchanges were quickly supplanting Mt. Gox as the place for people to convert traditional currencies into bitcoins, and the impact will be short-lived.
But U.S. prosecutors are stepping up their inquiries. They have issued subpoenas to several digital-currency companies, including Mt. Gox and the Internet Credit Union, based in New Brunswick, N.J., and one in Japan, said several other people briefed on the matter.
Prosecutors hope to better understand how money is transferred in the digital realm and converted from dollars to bitcoins. The people briefed on the matter said they would not be surprised if authorities subpoena other companies and institutions involved in money transfers.
Many of Mt. Gox’s woes came shortly after Charlie Shrem, another pioneer in the world of virtual currencies, was arrested by U.S. authorities in New York on money-laundering charges Jan. 26.
Shrem’s arrest set off alarm bells at the Bitcoin Foundation because he was a foundation board member and because the criminal complaint against him said his co-conspirator had used a “third party bitcoin exchange service based in Japan” to park his money. The clear reference to Mt. Gox unnerved the foundation’s other members, even though prosecutors did not claim wrongdoing by either Mt. Gox or Karpeles.
For the foundation, which is dedicated to promoting the legitimate uses of bitcoins and combating their popular image as playthings for the rich or as a vehicle for online drug dealers to launder money, it potentially was too much of a public-relations hit for Shrem and Karpeles to remain on the board.
The case against Shrem, 24, the chief executive of BitInstant, another bitcoin-exchange business, appears to grow out of an investigation into now-defunct Silk Road, a virtual one-stop market for illegal drugs.
Marc Agnifilo, a lawyer for Shrem, said his client intended to plead not guilty to the charges.
Bitcoin prices had briefly tumbled after the site went dark, but have since recovered.
On Friday, Bitcoin was trading at $539, according to the website Coindesk.
Still, Bitcoin investors are left to figure out what, if any, recourse they have against their losses at Mt. Gox. At least one class-action lawsuit has been filed.