Trading while insolvent is apparently fine if you’re a bitcoin exchange

Amid the fiasco of MtGox’s apparent collapse last night (acquisition? rebranding? god knows), some kind person leaked MtGox’s “Crisis Strategy Draft”. It’s an internal Powerpoint that appears to describe a plan for shutting down MtGox and relaunching it as “Gox” – a new, trustworthy Bitcoin exchange from the people who brought you this. And this.

And there is so much icky stuff in there.

On page 2, there’s the admission that they’ve been robbed of nearly 750,000 BTC – call it  $400 million and you’re not far off.

There’s also a couple of paragraphs arguing that if MtGox fails, it’ll destroy the public perception of Bitcoin’s worth. This seems like a tenuous argument at best, and you can come up with any number of good arguments against it – not least the fact that everyone already knows that MtGox is up the spout – but the MtGox crew seems to take it as gospel, and that leads them to a very icky strategy to revive the exchange.

The first step in their strategy – “Immediately reduce liabilities as much as possible with partners” – seems to involve making money by arbitraging the MtGox discount that they created. The rest of it is basically “shut down, rebrand, and relaunch in a month” with a low-cost platform that people will want to use… or, to put it another way, “trade our way out of insolvency”.

The Financial Assets and Liabilities slide, if it’s even remotely close to reality, should be enough reason to shut down MtGox (and maybe send the management out in handcuffs?).

The first thing I like on this slide is that they value the bitcoin deficit using the cheaper MtGox price ($160), not the broad-market price ($500-ish). The only way that valuation would be legit is if they can buy enough BTC to cover the deficit at the MtGox price – again, exploiting the discount that MtGox created through its own incompetence. (Arbing your customers – it’s the Bitcoin way!)

The exchange’s assets exceed its liabilities by somewhere around $21.5 million of actual cash. Even if you leave out the 742,000 BTC bitcoin deficit, that sounds a lot like an admission of insolvency. Is trading while insolvent as illegal in Japan as it is in the UK or Australia?

Update: a kind Redditor named pyalot has unredacted the blacked-out financials slide, and it is comedy gold. Despite some fairly enthusiastic growth assumptions, the revised gox.com would only be making $40 million a year by 2016 – so it’d still take somewhere close to ten years to dig itself out of its half-billion-dollar hole and refund all those missing bitcoins.

MtGox doesn’t deserve to be acquired, bailed out, or saved. It’s a disaster. It needs to be liquidated.

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