Asset Tracing and Asset Recovery in a Cryptocurrency Exchange Bankruptcy

The bankruptcy of the Mt. Gox cryptocurrency exchange in 2014 was a pivotal moment in cryptocurrency history. It demonstrated the vulnerabilities of early cryptocurrencies and saw the worst fears of the industry become a reality. However, in the years since it has also provided an excellent example of the successful tracing and recovery of a variety of asset classes. Creditors have recently received the first distributions from the recovered assets of Mt Gox, in stark contrast to the initial claims that access to the assets had been lost forever. 

Background

Mt. Gox was once the world’s largest cryptocurrency exchange and famously collapsed in 2014 following the loss of approximately 850,000 Bitcoins, worth around 450 million US Dollars at the time. The company filed for bankruptcy protection in Japan after citing massive losses due to hacking, mismanagement, and security vulnerabilities. Mt. Gox's failure sent shockwaves through the emerging cryptocurrency industry and left many at the time to conclude that there would be no recovery of the lost digital assets.

Asset Tracing and Asset Recovery

The trustee in the Mt. Gox bankruptcy oversaw the process and management of the recovery of assets. Approximately 200,000 Bitcoins were found and recovered by the trustee who undertook a complex review to identify and locate the misappropriated assets. The recovery of those assets through the appropriate legal channels delivered a significant benefit for the creditors of Mt. Gox who are now beginning to receive dividends on their claims. The recovered assets are held in a fund pending the final distributions to creditors.

Key Issues in the Recovery and Distribution Process

While the distribution is ongoing, several unique issues arose during the process including the valuation of claims, the appropriate currency for distribution, and the application of cross-border insolvency laws. The trustee was required to make a determination on the appropriate valuation of the digital assets recovered so that distributions could be made to creditors. One of the key issues to be resolved was how to value the creditors’ claims and whether they should be valued based on the price of Bitcoin at the time of the exchange’s collapse, or at the current market value. This has significant implications, as Bitcoin's price has skyrocketed since 2014. The trustee was required to assign a value to each of the claims prior to distribution.

Some creditors sought, and have been provided, with a distribution in cryptocurrency to maintain the form of their original investment. All of these steps have been complicated by the fact that creditors are spread across the globe, including in Ireland. As the bankruptcy is taking place under Japanese law creditors have been required to take advice on the insolvency process in Japan and the implications for receipt of distributions in their own jurisdiction.

How Can Creditors Maximise Recovery?

As with any insolvency it is important that creditors stay informed of the process from the insolvency practitioner, take any necessary legal advice as to the nature and extent of their rights and obligation, and consider any offer that may be forthcoming for an interim distribution or a claim purchase.

Conclusion

The recovery of assets in the Mt. Gox bankruptcy has been one of the longest and most complex insolvency matters in recent times. However, many of the issues addressed will remain relevant to the tracing and recovery of assets into the future. Similar issues were addressed by our team recently in the successful tracing and recovery of assets in the liquidation of Boxer Logistics Limited.

If you have any query in relation to asset tracing or asset recovery our experienced Corporate Restructuring and Insolvency team are available to provide the guidance and support you need. For more information, please contact Simon Murphy or your usual contact in Beauchamps.