United States Tries to Extend Jurisdiction over the Elusive Bitcoin

By: Justin McHugh 

Mt. Gox, once known as the world’s largest trader of Bitcoins, has unexpectedly shutdown, devastating thousands.[1]  In the aftermath of the Mt. Gox shutdown, thousands of customers who traded on the exchange lost millions.[2]  In the face of losing millions, many Bitcoin traders are now calling for legal action and remedies from the Tokyo-based exchange firm.[3]

Immediately after Mt. Gox shutdown without warning, U.S. traders called for legal action.  One U.S. trader, in what will most likely be the first of many, has filed a lawsuit against Mt. Gox looking to recover some of his losses.[4]  This lawsuit came after Mt. Gox, the world’s largest bitcoin exchange, shutdown amid rumors that hackers had stolen hundreds of millions from the exchange, leading the exchange to declare bankruptcy.[5]  Originally, Mt. Gox had halted all trading activity due to what it claimed were software issues.[6]  It was not until Ryan Selkis, a Bitcoin supporter, discovered a Mt. Gox document that claimed an estimated 744,408 Bitcoins had been stolen.[7]  The document further alleged that the Bitcoins had been stolen by hackers over a two year period.[8]

“In a complaint filed on Thursday [Feb, 27, 2014] in [the] U.S. District Court in Chicago,” trader and plaintiff Gregory Greene said, “Mt. Gox and its chief executive, Mark Karpeles, were negligent and committed fraud for having failed to protect the Tokyo-based exchange from theft.”[9]

The price of bitcoins plunged after Mt. Gox discovered that it had been hacked for hundreds of millions.[10]  Bitcoin prices dropped more than 14% to around $465.[11]   Greene and other investors of the virtual currency were unable to recover their losses after Mt. Gox halted all transactions.[12]  Many investors were completely caught by surprise by the unexpected and immediate halt of trading on the Bitcoin exchange.[13]

Greene, who has now initiated a federal lawsuit against Mt. Gox, was further quoted as stating “Mt. Gox intentionally and knowingly failed to provide its users with the level of security protection for which they paid.”[14]  Greene’s loss, of an estimated $25,000 from the closing of Mt. Gox, pales in comparison to the millions many other investors lost in the blink of an eye.[15]

The lawsuit that Greene has filed in federal court seeks class action status and remedies based on the interests of Mt. Gox investors in the form of monetary damages.[16]  Because of the fact that Mt. Gox is a Tokyo-based Bitcoin exchange, it was not immediately apparent how U.S. courts would gain jurisdiction over the Japanese exchange.[17]

In a statement on February 28, 2014, Mt. Gox Chief Executive Mark Karpeles stated in a Tokyo District Court that “he was very sorry [for] the weakness in [their] system.”[18]  Additionally, Mt. Gox stated that its 750,000 Bitcoin investors were now out of approximately $480 million.[19]  This $480 million accounts for nearly seven percent of the world’s entire Bitcoin market.[20]

Mt. Gox Bitcoin investors may not be entirely without remedy, as Mt. Gox has assets of over $38 million.[21]  However, it is estimated that due to its Bitcoin losses, Mt. Gox now has liabilities of over $64 million.[22]  The $38 million that Mt. Gox has in assets pales in comparison to the estimated $480 million stolen.  Because Mt. Gox has so little in assets compared to the amount it owes investors, a class action lawsuit may not be the most financially sound option to choose.  The legal fees needed to sue Mt. Gox would most likely consume what is left of Mt. Gox’s assets, leaving insufficient funds to reimburse investors.[23]

It remains to be seen what the outcome of Greene’s class action lawsuit will be.  However, Steven Woodrow, a lawyer at the Edelson law firm, who filed Greene’s lawsuit, has been quoted as saying that he “intend[s] to get to the bottom of [Mt. Gox’s loss of millions] in an American court.”[24]  In order to restore confidence to the Bitcoin market, Mt. Gox will need to be held accountable for the misappropriation of its investors’ money.


[1] Jonathan Stempel & Emily Flitter, Mt. Gox sued in United States over bitcoin losses, Reuters (Feb. 28, 2014), http://www.reuters.com/article/2014/02/28/bitcoin-mtgox-lawsuit-idUSL1N0LX1QK20140228.

[2] Id.

[3] Id.

[4] Id.

[5] Id.

[6] Rob Wile, Bitcoin Exchange MTGox Disappears, Business Insider, (Feb. 24, 2014, 10:50 PM), http://www.businessinsider.com/reports-mtgox-halts-all-trading-2014-2.

[7] Id.

[8] Id.

[9] Stempel & Flitter, supra note 1.

[10] Id.

[11] Wile, supra note 6.

[12] Stempel & Flitter, supra note 1.

[13] Id.

[14] Id.

[15] See, id.

[16] Stempel & Flitter, supra note 1.

[17] Id.

[18] Stempel & Flitter, supra note 1.

[19] Id.

[20] Id.

[21] Id.

[22] Id.

[23] Cameron Keng, Bitcoin’s Mt. Gox Goes Offline, Loses $409M – Recovery Steps and Taking Your Tax Losses, Forbes, (Feb. 25, 2014, 4:46 AM), http://www.forbes.com/sites/cameronkeng/2014/02/25/bitcoins-mt-gox-shuts-down-loses-409200000-dollars-recovery-steps-and-taking-your-tax-losses/.

[24] Stempel & Flitter, supra note 1.