News Archive

Mt. Gox files for bankruptcy, hit with lawsuit

TOKYO (Reuters) – Mt. Gox, once the world’s biggest bitcoin exchange, filed for bankruptcy protection in Japan on Friday, saying it may have lost nearly half a billion dollars worth of the virtual coins due to hacking into its faulty computer system.

The collapse caps a tumultuous few weeks in which the company has remained virtually silent after halting trades of the crypto-currency, shaking the nascent but burgeoning bitcoin community.

Wearing a suit instead of his customary T-shirt, Mt. Gox’s French CEO Mark Karpeles bowed in contrition and apologized in Japanese at a news conference at the Tokyo District Court, blaming his firm’s collapse on a “weakness in our system”, but predicting that bitcoin would continue to grow.

“First of all, I’m very sorry,” he said. “The bitcoin industry is healthy and it is growing. It will continue, and reducing the impact is the most important point.”

Angry investors have been seeking answers for what happened to their holdings of cash and bitcoins on the unregulated Tokyo-based exchange.

Gregory Greene, who estimated his bitcoin stake at $25,000, filed a lawsuit in the U.S. District Court in Chicago late on Thursday, saying Mt. Gox had failed “to provide its users with the level of security protection for which they paid.

Baker McKenzie, a Chicago-based law firm that represents Mt. Gox, declined to comment. It is not yet clear if the firm is representing the exchange in this lawsuit.

Mt. Gox said the exchange, used overwhelmingly by foreigners, had lost 750,000 of its users’ bitcoins and 100,000 of its own. At the current bitcoin price of about $565, that would total some $480 million – representing about 7 percent of the estimated global total of bitcoins.

“This may be telling for the level of traceability of the transactions. Bitcoin has been telling us that it is more traceable than cash. The question is, how much more and is there the potential for real recourse in the case of theft,” said Moshe Cohen, assistant professor at Columbia Business School in New York.

Mt. Gox said there was a discrepancy of 2.8 billion yen ($27.4 million) in its bank accounts when it checked on Monday. Junko Suetomi, a lawyer with Baker MacKenzie, said she could not comment on the balances of foreign bank accounts held by the company.


Many bitcoin market participants have said Mt. Gox’s problems were specific to the company and were caused by what they said was a lax attitude by Karpeles, while bitcoin itself – free of any central bank control – was still a noble venture.

“If we could agree on legal regulation, we should let (bitcoin and regulators) co-exist,” said Keiichi Hida, a bitcoin investor and member of the Japan Digital Money Association. He lost about 100,000 yen worth of bitcoins, but seemed unconcerned as he became interested in the virtual currency as a form of “study”.

“We should make it a national project to have bitcoin used nationwide at the time of the 2020 Tokyo Olympics,” he said.

Mt. Gox shut its website on Tuesday after freezing withdrawals earlier this month in the wake of a series of technical difficulties.

The exchange had liabilities of 6.5 billion yen ($63.67 million), dwarfing its total assets of 3.84 billion yen, the company said. It had 127,000 creditors in bankruptcy, just over 1,000 of whom are Japanese.

The company and Karpeles have said little in the days before Friday’s court filing, which is similar to Chapter 11 bankruptcy in the United States, except that they were working with others to resolve their problems.

Another lawyer, Akio Shinomiya at Yodoyabashi and Yamagami, said Mt. Gox wanted to file a criminal complaint against what he said was a hacking attack, but had no specific means of doing so.

“Bitcoin has always been volatile and speculative, said bitcoin user Ken Shishido, who had about a tenth of his bitcoin holdings at Mt. Gox, but has seen the rest of his bitcoins soar tenfold since he began trading 18 months ago.

“It’s too bad that this happened, but we have to let it go. And then we’ll buy more.”

Fortress Investment Group became one of the first big investors to say it had lost money investing in bitcoin. In a regulatory filing with the U.S. Securities and Exchange Commission, the company said it incurred $3.7 million in unrealized losses in 2013.

(Here is a list of related stories on bitcoin and the collapse of Mt.

(Additional reporting by Nathan Layne and Emi Emoto in Tokyo, and Jonathan Stempel, Emily Flitter and David Gaffen in New York; Writing by William Mallard; Editing by Ian Geoghegan)

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Regional airlines face shortage of pilots: U.S. GAO

(Reuters) – U.S. regional airlines have a hard time finding pilots because of low wages and new rules mandating more experience for entry-level aviators, according to a government study published on Friday.

The U.S. Government Accountability Office, which analyzed data on pilots from 2000 to 2012, said 11 of 12 regional carriers it interviewed for its study had problems meeting their hiring needs.

The report added that while bigger airlines did not report similar difficulties finding pilots, they were still concerned that problems faced by regional partners could affect their ability to provide flights to some areas.

U.S. Federal Aviation Administration rules that took effect last year require co-pilots, or first officers, to have 1,500 hours of flight time to operate commercial jets, up from 250 hours previously. Airlines also must give pilots more rest under separate U.S. rules that took effect this year.

The study comes as some regional carriers have voiced concerns about a pilot shortage because of the new requirements.

Earlier this month, Republic Airways Holdings (RJET.O) said a scarcity of qualified pilots would hurt pretax income as it cuts its planned flying. The company said the beefed-up experience requirements were limiting the pipeline of employable candidates.

“When we talked to the regionals, there were a number that indicated they were having a more difficult time now than in the past of getting candidates that met their standards,” said Gerald Dillingham, director of civil aviation issues at the GAO.

He added that regional airlines were working to boost the employment pipeline by forming partnerships with pilot-training schools and offering tuition reimbursement for students.

In its report, the GAO said the number of pilots certified to fly looked large compared with the number employed. The agency said FAA data showed more than 137,600 pilots under age 65 had Airline Transport Pilot certificates in early 2014, compared with more than 72,000 who were working at airlines in 2012.

About 5 percent of pilots with ATP certificates and 14 percent of those with U.S. commercial certificates had a foreign residence, the agency said, citing FAA data.

The Air Line Pilots Association, the largest U.S. pilots union, has expressed concern that the pay scale at domestic airlines discourages qualified applicants. It said in a statement earlier this month that pilots’ salaries at 14 regional airlines started below $22,000 a year.

The union added that many U.S. pilots chose to work for foreign carriers such as Emirates, where new co-pilots are paid $82,000 a year and receive housing benefits. That compares with $61,000 for co-pilots at Delta Air Lines Inc (DAL.N) and United Continental Holdings Inc (UAL.N), the union added.

The GAO study also said fewer people were enrolling in and completing pilot programs. It said low wages for entry-level pilots, rising education expenses, limited financial help and “a perceived lack of stability” in the industry accounted for the profession’s decreased appeal, based on feedback from officials at schools that provide training.

(Reporting by Karen Jacobs in Atlanta; Editing by Lisa Von Ahn)

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UniCredit may approve strategic plan on March 11: source

MILAN (Reuters) – UniCredit (CRDI.MI), Italy’s biggest bank by assets, may approve a new five-year strategic plan at a scheduled board meeting on March 11, a source close to the matter said.

The plan would focus on expanding services offered to corporate clients, strengthening the commercial bank, and developing new products including Internet banking, as well as managing problem loans, the source said.

UniCredit Chief Executive Federico Ghizzoni has said several times the current strategic plan, which was announced in November 2011, would be revised.

Unicredit declined to comment.

(Reporting by Gianluca Semeraro, writing by Isla Binnie, editing by Emilio Parodi and David Evans)

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Exclusive: North Dakota January oil output flat as winter chills drilling

NEW YORK (Reuters) – Oil production in North Dakota’s Bakken shale stayed flat in January after falling sharply the month before, according to independent data that illustrate how this winter’s bitter cold put a freeze on the world’s fastest-growing oil patches.

Although December’s extraordinary chill gave way to relatively warmer weather last month, Bakken output hovered just below 860,000 barrels-per-day, according to calculations by LCI Energy Insight, a Texas-based energy intelligence firm.

In December, Bakken oil production fell by nearly 50,000 bpd from a record just over 910,000 bpd in November, the largest drop since state records began, according to North Dakota Industrial Commission data this month.

The LCI figures, based on historical well production data and natural gas pipeline flows in North Dakota and Montana, are the first to show the full impact of winter weather on oil output, a trend that brought new seasonal uncertainty to oil markets in recent years.

Growth in the larger Eagle Ford shale in south Texas also ground to a halt at around 1.1 million bpd, according to the LCI data, which was made available to Reuters.

Parts of North Dakota had the third coldest December on record, so frigid, according to local papers, that diesel fuel froze in truck tanks. In January, it was the wind that forestalled the drilling and hydraulic fracturing operations that are necessary to keep output growing.

“December was very cold and January was warmer but windy,” said Bill Abeling, a meteorologist with the National Oceanic and Atmospheric Administration in Bismarck, North Dakota. Peak wind speeds were above 35 miles per hour for a third of the month in Williston, the heart of the oil boom, Abeling added.

Although companies often cut back on fracking operations during the winter months due to operational issues, the impact was greater this year due to the severe conditions.

In addition, the weather in the northern Midwest state is wielding a greater influence on the oil market, forcing oil traders to adjust to a new dynamic. U.S. oil markets cannot overlook the loss of 50,000 bpd of Bakken crude just as winter heating fuel demand peaks, traders say.

Still, it is likely to be a temporary lull in the otherwise upward trajectory of the Bakken region, whose bounty turned North Dakota into the country’s No. 2 oil-producing state. Regulators expect the backlog of wells waiting on completion, numbering 635 in December, to be up and running by May.

“In spite of the weather declines experienced in January, oil production from shale oil wells increased 30 percent from January 2013 after increasing almost 60 percent the year before,” said George Lippman, president of LCI.


Bakken oil output has regularly dropped or stalled during the winter months, only to race ahead until spring, when flooding sometimes crimps it again.

Natural gas markets have long been accustomed to winter supply constraints due to so-called well “freeze-offs”, where frozen vapors block the flow of natural gas from a wellhead.

It is a newer, and different, phenomenon for oil markets, one felt far beyond North Dakota this year.

Oil production in the Eagle Ford of Texas, which was also hit by unseasonably cold weather, was flat at 1.12 million bpd in January versus the month before, after declining by a small 10,000 bpd in December, the LCI data show.

That was only the second monthly decline since heavy drilling began there. Output had been racing ahead by some 30,000 bpd per month, LCI data show.

By comparison, oil production in the Wolfcamp and Bone Springs shale plays of the Permian basin were flat in December and rose by a combined 11,000 bpd in January, according to LCI’s projections.

The full effects of January’s weather will not be clear until state regulators release official monthly production figures in several weeks’ time.

LCI uses real-time natural gas pipeline flow data, modeled against historical well-by-well oil output figures, to forecast liquid production up to a month before official data is available. Big oil producers only release their data on a quarterly basis.

Meanwhile, the weather problems have helped keep wholesale price differentials for Bakken crude at a narrow discount against the U.S. oil futures contract, weighing on the market incentive to ship the oil to refiners on the East and West Coasts.

Bakken oil for delivery at Clearbrook, Minnesota traded between $1.65 and $3.50 a barrel under the front-month U.S. oil futures contract in January, compared with $15-a-barrel discounts against futures in early November.


North Dakota was slammed with four snowstorms and five windstorms in December, which slowed drilling and well completion work, the state oil and gas regulator said.

Average temperatures in Williston were 6.4 degrees Fahrenheit (3.6 degrees Celsius) below normal in December, preliminary data from the National Climactic Data Center shows. Temperatures that month hovered at 21 to 31 degrees Fahrenheit below zero (-29 to -35 degrees Celsius) on many days, freezing the water that companies pump into wells in the fracking process.

The snowstorms stalled traffic on roads and railways and rendered remote wells inaccessible. That interrupted the transport of input materials, such as water, sand and cement and products like oil and salt water.

“It was one Alberta clipper after another,” Lynn Helms, director of North Dakota’s Department of Mineral Resources, said on a conference call earlier this month, referring to the weather system that brings gusty winds and Arctic air from the Canadian Rockies to the northern United States.

The northern Great Plains were warmer in January than the month before, but North Dakota was hit by five blizzards, interfering with drilling and well completion operations.

Fast winds also halted the operation of workover rigs, which are used in the completion of new wells and to revive older ones.

The weather affected gas production and processing as well. Hess Corp (HES.N), one of the major oil and gas producers in the state, postponed the startup of its Tioga gas plant to late February because of “unseasonably cold weather,” the company said during its fourth-quarter earnings call in late January.

(Reporting by Selam Gebrekidan; Editing by Jonathan Leff and Marguerita Choy)

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Citigroup reports fraud in Mexico unit, lowers 2013 results

(Reuters) – Citigroup Inc (C.N) said on Friday that it discovered fraudulent loans in its Mexico subsidiary and that its employees may have been in on the crime.

Writing down the loans will reduce the bank’s 2013 net income by $235 million, bringing the previously reported total to $13.91 billion, the bank said in a statement.

Citigroup said it believes at this point that the incident was an isolated episode.

The bad loans were made to Oceanografia SA de CV, a Mexican oil services company that is a contractor for the nation’s state-owned oil company, Pemex. Oceanografia is in the middle of a corruption probe in Mexico.

Oceanografia borrowed from Citigroup’s Mexican unit, Banco Nacional de Mexico or Banamex, using expected payments from Pemex as collateral.

Banamex discovered in a recent review that Oceanografia appeared to have falsified invoices to Pemex that were collateral for loans, Citigroup Chief Executive Michael Corbat said in a separate memo to employees. The bank wrote down about $400 million of loans backed by the bogus invoices.

On February 11, Oceanografia was suspended from receiving government contracts for 21 months and 12 days. Oceanografia says that 97 percent of its revenues are from Pemex.

Corbat said in the statement that Banamex has “worked with Mexico’s attorney general to initiate criminal actions” over the matter and that it is exploring legal options. Criminal actions “may allow us to recover damages,” Corbat said.

In the memo to employees, Corbat noted that a Banamex employee had processed the fraudulent invoices, and that it is “not clear how many people were involved in the fraud.”

“I can assure you there will be accountability for those who perpetrated this despicable crime and any employee who enabled it, either through lax supervision, circumvention of our controls or violating our Code of Conduct,” Corbat said.

Mexico’s attorney general’s office was due to hold a news conference about Oceanografia on Friday. Pemex said it will also participate.

Citigroup shares have fallen in recent weeks on concerns that slowing growth in emerging markets may reveal bad loans, as well as increase the risk of trading losses.

In the third quarter of 2013 problems with about $300 million of loans that Banamex had made to three Mexican homebuilders prompted Citigroup to book reserves for expected losses on the loans.

Citigroup is the third-largest U.S. bank by assets. The company views its international business as a competitive advantage over other big banks in the United States.

The bank said it estimates that it is able to validate $185 million of the $585 million of accounts receivable. Citigroup said it is charging the $400 million difference to operating expenses in its previously-announced fourth-quarter results. The total pre-tax expense is $360 million after adjusting Banamex compensation expense by $40 million, the statement said.

Citigroup said it has not determined if it faces losses on another $33 million for outstanding loans made directly to Oceanografia and letters of credit issued for the company.

Citigroup shares rose 0.4 percent to $48.90.

(Reporting by David Henry in New York and Elinor Comlay in Mexico City; Editing by Jeffrey Benkoe and Phil Berlowitz)

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Fed officials downplay worries over U.S. growth

(Reuters) – Despite recent signs of a possible slowdown, the growth story for the U.S. economy remains intact, top Federal Reserve officials said on Friday, suggesting they will continue to support reductions in the Fed’s massive bond-buying program.

Recent bad weather in large portions of the United States is having an impact on economic activity, but that is no reason for less optimism about economic prospects for the rest of the year, St. Louis Federal Reserve President James Bullard told CNBC television on Friday.

His remarks came as the U.S. government slashed its estimate for fourth-quarter growth as consumer spending and exports were less robust than initially thought, suggesting some loss of momentum heading into 2014.

The revised estimate puts fourth-quarter growth at an annual rate of 2.4 percent, down from an earlier estimate of 3.2 percent. First-quarter data has also come in weaker than expected, as unusually cold weather took a toll on retail sales, housing and other metrics of growth.

Still, even if the recent spate of soft data is entirely unrelated to weather, Bullard said he remains optimistic.

“I’d still project that 2014 would have stronger GDP growth than 2013 did and I’d still project that inflation would come back to target,” he said.

Charles Plosser, the hawkish president of the Federal Reserve Bank of Philadelphia, concurred in nearly simultaneous remarks on another news channel.

“The data is very noisy right now, extremely noisy with the weather and other things,” Plosser said in an interview on Bloomberg News. “We have to be a little patient.”

Plosser said he was optimistic about the nation’s turnaround and said the economy is “in a firmer position than it’s been in a number of years.” He also reiterated forecasts, saying he sees close to 3 percent growth for 2014.

“We’re going to have a sort of steady pace of growth going forward,” he told Bloomberg.

After more than five years of super-easy monetary policy in the wake of the 2007-2009 recession, the Fed is taking the first small steps toward a more normal interest-rate environment. It trimmed its bond buying program by $10 billion in each of the past two months, and it expects to raise interest rates some time next year as long as the economy continues to improve.

Though the views of both Bullard and Plosser are sometimes at odds with those at the core of the Fed’s policy-making decisions, their comments on Friday appeared to reflect the dominant line of thinking at the Fed.

On Thursday, new Fed Chair Janet Yellen attributed much of the recent weak economic data to bad weather and suggested that only a significant change in the economic outlook would drive the Fed to reconsider its plan to wind-down its massive bond-buying program this year.

Dallas Fed President Richard Fisher, speaking in Zurich, wholeheartedly embraced that plan.

“As soon as feasible, the Federal Reserve should stop large-scale asset purchases entirely,” said Fisher, who has a vote on the Fed’s policy panel this year.

The Texan is one of the most outspoken opponents of the current round of bond buying, which has swollen the Fed’s balance sheet to more than $4 trillion.

(Reporting by Susan Heavey, Bill Trott, Alice Baghdjian and Katharina Bart; Writing by Ann Saphir; Editing by Andrea Ricci)

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Fourth-quarter growth cut, but outlook improving

WASHINGTON (Reuters) – The U.S. government slashed its estimate for fourth-quarter growth, but tentative signs are emerging that the worst of the economy’s slowdown may be over.

Gross domestic product expanded at a 2.4 percent annual rate, the Commerce Department said on Friday, down sharply from the 3.2 percent pace reported last month and the 4.1 percent logged in the third quarter.

Growth in the first quarter is expected to be even slower after an unusually cold winter disrupted activity. However, data on consumer sentiment, regional factory activity and housing on Friday indicated some thawing, which analysts hope will put the economy back on a strong growth trajectory.

Consumer sentiment rose modestly in February, while factory activity in the Midwest edged up after three months of slower growth. In addition, contracts to buy previously owned homes nudged up in January.

“That suggest some stabilization in economic activity,” said Millan Mulraine, deputy chief economist at TD Securities in New York. “It bolsters the current narrative that the slowing in activity has been the result of the unseasonably cold winter conditions, which we expect to reverse in coming weeks.”

Stocks on Wall Street rose on the mixed economic data, with the Standard Poor’s 500 index touching fresh all-time highs for a second straight day. Prices for U.S. government debt fell, while the dollar weakened against a basket of currencies.

Frigid temperatures have been blamed for a decline in retail sales, industrial production, residential construction, home sales and a sharp braking in hiring early this year.

The Federal Reserve, which has been cutting back on the amount of money it injects into the economy through monthly bond purchases, views the recent soft patch as temporary.

Fed Chair Janet Yellen told lawmakers on Thursday that the cold weather had played a role in the weakening data.

Yellen said, however, that it would take a “significant change” to the economy’s prospects for the Fed to suspend its plans to wind down its bond buying.


It is not unusual for the government to make sharp revisions to GDP numbers, as it does not have complete data when it makes its initial estimates. In fact, the latest figures will be subject to revisions next month as more information is received.

The revision left GDP just above the economy’s potential growth trend, which analysts put somewhere between a 2 percent and 2.3 percent pace. Even with the revision, the second-half growth pace was a stellar 3.3 percent and a jump from 1.8 percent in the first six months of the year.

“It looks like the economy is settling into a 2 percent growth world. Not good enough,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, made up a large chunk of the revision after retail sales in November and December came in weaker than assumed.

Consumer spending was cut to a 2.6 percent rate, still the fastest pace since the first quarter of 2012. It had previously been reported to have grown at a 3.3 percent pace.

It contributed 1.73 percentage points to GDP growth, down from the previously reported 2.26 percentage points. As a result, final domestic demand was lowered two-tenths of a percentage point to a 1.2 percent rate.

Despite the first quarter’s weak start, economists remain optimistic that growth this year will be the strongest since the recession ended almost five years ago. For all of 2013, the economy grew 1.9 percent.

An uptick in inflation also accounted for the downgrading of GDP growth in the fourth quarter. A price index in the GDP report rose at a 1.0 percent rate, instead of the previously reported 0.7 percent rate.

A core measure that strips out food and energy costs increased at a 1.3 percent rate, revised up from a 1.1 percent pace.

Trade weighed on fourth-quarter revisions as well, after a fall in exports in December resulted in a bigger trade deficit in the fourth quarter than the government had initially assumed.

Trade’s contribution to growth was lowered to 0.99 percentage point from 1.33 percentage points. It was still the largest contribution to GDP growth since late 2010.

Inventories, previously reported to have risen by $127.2 billion in the fourth quarter, were revised down to $117.4 billion. The rise in the stocks of unsold goods was still the largest since early 1998 and followed a gain of $115.7 billion in the third quarter of 2013.

The contribution to growth from inventories, which the government put at 0.42 percentage point a month ago, was revised down to only 0.14 percentage point. Excluding inventories, the economy grew at a 2.3 percent rate, revised down from a 2.5 percent pace.

Government spending was also revised down, but the impact was offset by upward revisions to investment in residential construction, nonresidential structures and business spending on equipment.

(Reporting by Lucia Mutikani; Editing by Paul Simao)

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Mt Gox: The brief reign of bitcoin’s top exchange

(Reuters) – The collapse of Mt. Gox might appear sudden, but bitcoin insiders say its downfall began nearly a year ago as the virtual currency exchange tangled with regulators, split from former business partners and grappled with cyber attacks.

Mt. Gox’s fall lays bare the difficulties the bitcoin community faces as it tries to square its freewheeling, libertarian ideals with the rigorous regulation required in financial services and customers’ needs for reliable service.

Once the world’s biggest bitcoin exchange, Mt. Gox on Friday filed for bankruptcy protection, saying it may have lost nearly half a billion dollars worth of the virtual coins due to hacking into its faulty computer system. How it managed to lose so much so quickly is still unclear.

U.S. federal prosecutors have subpoenaed Tokyo-based Mt. Gox – and other bitcoin businesses – to seek information on a recent spate of disruptive cyber attacks that overwhelmed some exchanges and forced them to suspend withdrawals. Mt. Gox never recovered, whereas rivals such as Slovenia-based Bitstamp have since resumed operations.

“The first wave of entrepreneurs were evangelists for the technology, but low on quality,” said Nick Shalek, an investor at Ribbit Capital, which has backed bitcoin companies including digital-wallet Coinbase. Now, he said, a more serious group of entrepreneurs is trying to build more serious infrastructure around bitcoin.

Bitcoin is a digital currency that, unlike conventional money, is bought and sold on a peer-to-peer network independent of central control. Its value has soared in the last year, and the total worth of bit coins minted is now about $7 billion.

Mt. Gox’s decline, ironically, started just as bitcoin was hitting a new level of notoriety in the broader public. Proponents include prominent Silicon Valley venture capitalists who talked up a virtual currency system free of government intervention or control.


Founded in 2009 by American software hacker Jed McCaleb, Mt. Gox was originally a site for people to trade cards for a game called “Magic: The Gathering.” (Mt. Gox is short for “Magic: The Gathering Online Exchange”)

McCaleb turned the site into a bitcoin exchange and sold the fledgling business in 2011 to Mark Karpeles. Under the Frenchman, Mt. Gox became the face of bitcoin – where investors regularly checked the price of the digital currency and where the largest volume of trades occurred.

As regulators started to take notice of the bitcoin market, Karpeles became a vocal champion. He described Mt. Gox as “the main exchange” and argued for bitcoin’s legitimacy while trying to distance it from criminals using the digital currency for money laundering or drug-related activities.

Karpeles said Mt. Gox had no interest in helping criminals launder funds, and pushed back against claims that bitcoin transactions were completely anonymous, noting that while the system was designed for privacy, it was easy to track bitcoin across the network.

If authorities found a way to shut down Mt. Gox, “the likely result will be more exchanges popping up all over, with methods much harder to track, and who will be much less likely to agree to help with any investigation,” Karpeles said in a 2011 email to a reporter for the Compliance Complete service of Thomson Reuters Accelus.

“We want (authorities) to understand that the problem is not bitcoin itself, but what some people do with those,” he said in the message, one of numerous emailed exchanges over the years.

In 2011, bitcoin was barely trading at $1, but volumes were picking up at Mt. Gox, which routinely saw more than 20,000 transactions daily, more than double those in late 2010.

Karpeles said Mt. Gox had servers in the United States but little in the way of money. It used Iowa-based online payment processor Dwolla Inc to make U.S. customer transactions easier.


Bitcoin’s popularity increased incrementally, similar to its price. On April 1, 2013, it topped $100 for the first time, and trading volumes were increasing.

Around this time, a regulatory push intensified. The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) declared bitcoin exchanges to be money transmitters, requiring them to register, enact formal anti-money laundering programs, and report suspicious activity.

Shortly after that, a bitcoin exchange known as bitfloor was shuttered after its U.S. bank account was closed because it had not properly registered with regulators.

Concerns that regulatory action would cause customer funds to be trapped resulted in a sharp plunge in bitcoin, falling from $230 on April 10 to a low of $68.49 on April 17 – a period of time that turned out to be the peak in terms of dollar-denominated trading on Mt. Gox, according to Bitcoincharts.

As volumes jumped that month – on two separate days, there were more than 500,000 dollar-denominated transactions on Mt. Gox – the exchange said it was overwhelmed by the volumes, and it was working to upgrade its systems.

Karpeles said in an April 13 email that bitfloor’s closure was a fate that would not befall Mt. Gox. “We apply very strict AML (anti-money laundering) procedures to avoid exactly this kind of issue. We have very good relationships with our banking partners and making sure everything is run as good as possible.”

On April 18, Karpeles clarified that Dwolla was the company’s only transaction provider. “We do not use any U.S. bank,” he said via email.

Mt. Gox did not immediately register with FinCEN – a misstep that would in part lead to its demise.

In May 2013, the U.S. Department of Homeland Security froze an account that Dwolla held at Veridian Credit Union in the name of Mutum Sigillum LLC, a Mt. Gox subsidiary incorporated in Delaware.

A related court document said another account at Wells Fargo had been seized earlier that month. The Department of Homeland Security justified the seizures by accusing Mt. Gox of failing to register with Treasury as demanded by FinCEN. (It eventually registered in June.)

Karpeles has declined to comment on the seizures, but this complicated the ability of Mt. Gox to allow U.S. customers to liquidate existing investments. Dwolla eventually ended its relationship with Mt. Gox, in a blow to the exchange.

“Most professional users moved away from Mt. Gox months ago, leaving April 2013 or thereabouts. By June 2013, the final nail was in the coffin for U.S. users,” said one of bitcoin’s core developers, who requested anonymity.

This in turn caused bitcoin’s prices on Mt. Gox to surge.

“What happened then is because you couldn’t withdraw dollars, there became a major premium for bitcoin on Mt. Gox,” said Jacob Dienelt, a maker of bitcoin paper wallets in New York.


The rise in bitcoin’s value gave it more cachet with the general public, even though most people were still uninformed about exactly what bitcoin was.

Dollar trading volumes started to diminish on Mt. Gox then – from about 66,770 transactions daily in May to a little over 14,000 in September. Volumes surged for a few months, but dropped to about 9,000 daily by January, according to bitcoincharts.

Those in the industry said Mt. Gox ceased to be the exchange of choice about nine months ago as competitors such as Bitstamp gained prominence. By the start of this year, Mt. Gox was considered a diminished player due to concerns about its technology and safety.

“It was obvious there was something really bad going on there for nearly a year. They were processing withdrawals very slowly and generally being very opaque about what was going on,” said Mike Hearn, a bitcoin developer based in Switzerland.

Mt. Gox’s problems earlier this month stemmed from “distributed denial of service” attacks, where hackers sent thousands of phantom transactions to the exchange to slow its operations. Other exchanges experienced this problem as well, but were able to restore service more quickly.

The hackers exploited a process used by some bitcoin exchanges that introduced “malleability” into the code governing transactions, experts said. Simply put, this allowed hackers to slightly alter the details of codes to create thousands of copies of transactions. These copies slowed the exchanges to a crawl, forcing them to independently verify each transaction to determine what was real and what was fake.

“It was a well-known issue that every major exchange in the bitcoin community knew about and had solutions for. Mt. Gox did not,” said Jordan Kelley, chief executive of Robocoin, the world’s first bitcoin ATM maker.

Mt. Gox said on Friday that it had lost 750,000 of its users’ bitcoins and 100,000 of its own. At the current bitcoin price of about $565, that would total some $480 million – representing about 7 percent of the estimated global total of bitcoins.

“There could be issues with security, with theft and so on, and there could be issues with the way things were implemented, where there’s just some negligence and just some accidents and poor management of the exchange,” said Moshe Cohen, assistant professor at Columbia Business School in New York.

Mt. Gox said there was a discrepancy of 2.8 billion yen ($27.4 million) in its bank accounts when it checked on Monday.

It had 127,000 creditors in bankruptcy, just over 1,000 of whom are Japanese.

“First of all, I’m very sorry,” Karpeles, wearing a suit instead of his customary T-shirt, told a news conference in Tokyo on Friday. “The bitcoin industry is healthy and it is growing. It will continue, and reducing the impact is the most important point.”

(Reporting by Brett Wolf of the Compliance Complete service of Thomson Reuters Accelus in St. Louis and Emily Flitter in New York; Additional reporting by Jim Finkle in Boston and Sarah McBride in San Francisco; Writing by David Gaffen; Editing by Tiffany Wu)

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Euro zone inflation stabilizes in ‘danger zone’

BRUSSELS (Reuters) – Euro zone inflation stabilized in the European Central Bank’s “danger zone” in February but did not fall as expected, making it less likely the ECB will loosen monetary policy further at its monthly meeting next week.

European Union statistics office Eurostat estimated on Friday that consumer prices in the 18 countries sharing the euro rose an annual 0.8 percent this month. That was the same rate as in January and December, after readings of 0.9 percent in November and 0.7 percent in October.

Economists polled by Reuters had forecast inflation would slow to 0.7 percent. Fears the bloc may be at risk of deflation as it struggles to recover from its debt crisis have raised expectations the ECB will use interest rates or other policy tools to give the economy further support.

“The higher than expected inflation numbers reduce the chances of an ECB rate cut at next week’s meeting, and we maintain the view that … the central bank will keep rates on hold,” said Nick Kounis, head of macro research at ABN AMRO.

ECB President Mario Draghi has warned of the risk of inflation getting stuck in a danger zone below 1 percent, but said again on Thursday that there was clearly no deflation.

“While the ECB does not see deflation as a serious threat in the euro zone, it is worried about inflation staying below 1 percent for a prolonged period, thereby destabilizing inflation expectations,” IHS Global Insight economist Howard Archer said.

“Consequently, it still looks touch-and-go whether the ECB will take any further stimulative action at its March 6 policy meeting. Much will likely depend on whether the ECB staff’s new forecasts show euro zone consumer price inflation still below 2.0 percent in 2016.”

The February inflation rate was stable because lower energy costs were offset by more expensive industrial goods and services, the Eurostat data showed.

“The outcome is rather odd as it does not seem to be consistent with the falls in annual inflation we have seen in Germany, Spain, Italy and Belgium,” Kounis said.

“The outcome may have been driven by a jump in inflation in France, where the data are not yet released, but this would be difficult to explain. We suspect that euro zone inflation will be revised down in the final estimate.”

Figures on Thursday showed annual inflation in Germany, the euro zone’s economic powerhouse, easing to its lowest level in 3-1/2 years in February at 1 percent.

But so-called core inflation in the euro zone, which excludes the most volatile components like energy, food, alcohol and tobacco prices, continued to inch higher, Friday’s data showed. It rose to 1.0 percent year-on-year in February from 0.8 percent in January and 0.7 percent in December.

Price pressures in the euro zone are low because unemployment remains stuck near record highs. Eurostat said on Friday that 12 percent of the bloc’s workforce was unemployed in January, unchanged from a month before.

In absolute terms, the number of people without jobs edged higher to 19,175,000 from 19,158,000 in December, it said.

(Editing by Catherine Evans)

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