Just after sunrise on August 1st, Tokyo police stormed into a sleek two-story townhouse on a quiet residential street in Japan's capital and arrested Mark Karpeles, the 30-year-old head of Mt. Gox, the largest bitcoin exchange in the world. By the time they led the doughy, pale Frenchman away, the police could barely make their way through the throngs of reporters closing in outside.
Just three months earlier, when I met Karpeles here, the scene was considerably calmer. He was baking apple quiche, a recipe passed down from his grandmother. Scruffy and chipper, his dark hair pulled back in a loose ponytail, he wore baggy green pants and a flour-dusted black T-shirt with the words 'This Isn't Even My Final Form.' System of a Down played from his radio. Apples and bread crumbs covered the living-room table he otherwise used for his model train set.
Karpeles was the accidental emperor of bitcoin, a hapless geek who, as much to his own surprise as others', became the most powerful lord of digital cash. During his reign, bitcoin, the leading form of virtual currency, rose in value from approximately a quarter to more than $1,200. The Wall Street Journal estimated that at one point Mt. Gox was processing 80 percent of all bitcoin transactions in the world. At its peak, the company traded more than $4 million a month. Tyler Winklevoss — one of the famed twins who sued Mark Zuckerberg over the founding of Facebook for a $65 million settlement and is among the bullish investors in digital money — says Mt. Gox was "the most important and prominent property in bitcoin."
But in February 2014, it was discovered that a half-billion dollars worth of bitcoins simply vanished from Karpeles' exchange, leaving customers around the world unable to withdraw their funds. It's the largest online heist in history. (Estimates vary on the exact amount. Many have reported $450 million; Karpeles says it could be as high as $650 million.) Some — including even those who worked closely with Karpeles — suspected it was an inside job. "We had an ongoing joke: 'Take pizza to Mark when he's in jail,' " Ashley Barr, the first employee at Mt. Gox, tells me. "We always assumed that was where he'd end up."
The Japanese police arrested Karpeles for allegedly padding his digital accounts with $1 million worth of fake bitcoins and fleecing another $8.9 million from Mt. Gox customer deposits. He's still being investigated for what, if any, role he had in the disappearance of the half-billion in bitcoins.
Karpeles, over several months of interviews, denied culpability. "A lot of people seem to think that someone at Mt. Gox was evil," he says. "I know that I didn't steal anything. I mean, if I had, like, $650 million in bitcoin, or even a fraction of this, I wouldn't be here."
Karpeles never expected to be at the center of a financial revolution. Growing up in Burgundy and Paris, the melancholic only child of a single mother (he never knew his father), Karpeles escaped into the world on the other side of his computer screen. His mother, Anne, a science teacher and amateur coder, wrote a musical keyboard for him to play on his Sinclair computer. "I created small game programs for him, and he liked it," his mother e-mailed me in French. "A lot."
By 10, Karpeles had started teaching himself to code by taking apart his grandmother's alarm system. While other kids dreamed of being rock stars or athletes, Karpeles dreamed of finding fame through coding. "I wanted the software I write to be useful enough for everyone to want to use it," he says.
At a young age, he was sent to a Catholic boarding school in the Champagne valley. But, socially awkward and geeky, he was bullied by his classmates and ostracized at school. "It was not so easy to adapt," he tells me one afternoon, as he browses manga in a Tokyo bookshop. Karpeles spent his days devouring Japanese comics and scribbling code in a notebook, since he didn't have access to a PC.
After finishing middle school, he put his skills into practice when he moved to Paris with his mother, and began, in his early teens, hacking into shopping sites so he could get anything he wanted for free. (When I ask how he did it, he smiles and says, "It's probably not a good idea for me to tell you.") Karpeles savored his newfound power. Stealing Gameboys and mobile phones for his classmates, he learned, was a way to make friends. "A lot of people respected me for that," he recalls. "I did feel more important, in a way. If I need something, I press a button and I get it."
Karpeles' scam ran for two years, so long that his initial fear of getting caught faded. "After a while, you see nothing happening, so you forget about it," he says. Forget about it, that is, until the police showed up and carted the teenager off to jail. As a minor, he got away with only probation, but the experience marked the beginning of years of adolescent turmoil. To his mother's despair, he ran away and attempted to live on the streets of Paris for a week. Through his teens and early twenties, he sank into a suicidal depression; at his lowest point, he made a noose out of a computer cable ("It was the only thing I had around," he tells me with a shrug), though he never brought himself to use it.
In 2009, he moved to Japan, a country he'd been fascinated by since getting hooked on anime as a boy. Despite being a gaijin, or foreigner, he felt at home for the first time in his life, quickly learning the language and launching his own Web hosting company. He was first introduced to bitcoin when a customer in Peru told Karpeles he was having trouble getting a credit card and asked if he could pay with bitcoins instead.
Bitcoin was created in 2009 by a mysterious coder (or group of coders) under the pseudonym Satoshi Nakamoto as a radical new payment system: decentralized, unregulated and, for the most part, anony-mous. Though it has real value (with a current exchange rate of around $250), bitcoin exists electronically. There's no paper, no coins, no bank to charge transaction fees or government to control the flow. Intrigued, Karpeles became an early adopter of the currency. He found purpose and community among bitcoin faithful such as Jed McCaleb, a young American who'd recently launched his own bitcoin exchange, Mt. Gox.
Mt. Gox was originally a site McCaleb had made for people to exchange Magic cards (thus the name — Magic: the Gathering Online Exchange, or Mt. Gox for short). But by July 2010, he'd devoted it to bitcoin instead, setting it up as the currency's first online brokerage: processing purchases and holding customers' money. By taking a small commission on trades, Mt. Gox was set to bring in $100,000 its first year, Karpeles says. But there were setbacks, like when a hacker stole $45,000 worth of virtual currency. By March 2011, McCaleb wanted out.
According to Karpeles, McCaleb, who he'd become familiar with online, asked him if he'd want to take over Mt. Gox. All he asked for in return was a 50-50 split of the profits for the first six months, and a 12 percent stake in the future. "I basically got it for free," Karpeles recalls. (McCaleb declined to comment.) At the time, with only about 1,000 people using the exchange, Karpeles hardly expected to get more than ramen money. But he figured it would be "a new adventure."
It didn't take long for Karpeles' new adventure to take an unexpected turn. On June 6th, 2011, just three months after he took over Mt. Gox, Sens. Chuck Schumer and Joe Manchin wrote to Attorney General Eric Holder and Drug Enforcement Agency administrator Michele Leonhart, urging them to shut down Silk Road, an online black market predominantly used for drugs. It wasn't just the site that was a concern, but the new economy making it possible. "The only method of payment for these illegal purchases is an untraceable peer-to-peer currency known as bitcoins," the senators wrote.
Hoping to stay out of the fray, Karpeles wrote to the DEA, offering to comply with any investigation. "Ultimately, we are pursuing a goal of accepted legitimacy, both for bitcoin and our exchange," he wrote. To protect against drug dealers laundering money on the site, Mt. Gox began to track suspicious transactions, especially anyone moving large sums. All the news about Silk Road, however, proved good for business. With growing exposure, the price of bitcoin hit a new peak of $30. In less than two months, according to Karpeles, Mt. Gox had grown from 1,000 customers to 65,000.
But Karpeles' burgeoning empire would soon take a massive hit. On June 18th, someone claimed to have hacked into the Mt. Gox computers and was putting its files up for sale. Customers began to notice bitcoins mysteriously disappearing from their accounts. Karpeles took to Twitter and Reddit to reassure the nervous bitcoiners that, in fact, the problems affected only a handful of users. "Trust me," he wrote, "if we had a problem in Mt. Gox and it was actively exploited, we'd have way more than a dozen compromised accounts."
Yet the next night, Karpeles awoke to an urgent call. The price of bitcoin was crashing. Around 2 a.m., he discovered a hacker was cashing out thousands of bitcoins, and thus plummeting the price from $17 per bitcoin to less than a penny. "Someone's cashing out the motherlode on mtgox!" one person posted on the forums. Karpeles quickly moved $7 million in bitcoins on the site to another server and temporarily shut down Mt. Gox before more damage could be done.
These were just the first of many warning signs Karpeles seemed to ignore. Behind the scenes, people were growing concerned over his role in the nascent bitcoin economy. Chief among them was Roger Ver, the so-called "Bitcoin Jesus" who was also living in Tokyo at the time. A wiry libertarian from Silicon Valley, Ver had renounced his U.S. citizenship after getting arrested for flipping fireworks on eBay and serving 10 months in prison. Ver, who made millions selling computer hardware online, saw bitcoin as a way to subvert the government he'd grown to despise.
"A real clear milestone is when governments no longer control money," Ver tells me one night at a Tokyo steakhouse, one of the many in town that accept bitcoins. "If the world's using bitcoin," he believes, "governments won't be able to fund wars through inflation like they do today."
Ver bought up what's now worth millions in bitcoins, and he committed himself to spreading the word — after moving to Japan, he was the first to lend a hand to Mt. Gox in the wake of the hacking attack, desperate to keep the currency viable and attractive. But he grew dismayed over what he saw as Karpeles' strange sense of remove. "He has no work ethic," says Ver, who had to deal with panicked customers during the crisis while Karpeles went home. (Karpeles says he left because he "couldn't work on the code with everyone around.")
Still, the company, and currency, survived the early hacks and continued to boom. Karpeles expanded to dozens of employees and moved to Google's former office building in Tokyo. Despite his tendency to be, as his mother puts it, "withdrawn," it seemed to some that the success was going to his head. "I had to talk him out of buying a Lamborghini," says co-worker Barr. "I always felt Mark was trying to prove something — like, from childhood he was told he wouldn't amount to much. One time at his computer he said, 'I wish my old teachers could see me now.' He wanted to be the head of something big."
For Mt. Gox, one of the biggest breaks came from the "Winklevi." The twins had been vacationing on the Spanish island of Ibiza when they heard about bitcoin. The two had just begun spending their Facebook settlement by investing in various startups, and they were looking for the next big thing.
"Bitcoin and digital currency is just this thing that was always going to happen," Tyler Winklevoss says. The Winklevi bet big, spending hundreds of thousands of dollars on bitcoin. And there was only one place to buy it in bulk, they realized: this company run by an elusive Frenchman in Tokyo, Mt. Gox. Still, the Winklevi were aware of the risks of getting involved with the exchange. "It's like, you see houses built on the side of a hill and they don't have insurance," Tyler says, "then a mudslide comes along and the houses get destroyed."
By 2013, Karpeles felt like he was achieving his lifelong dream of reaching computers around the world. But while he was enjoying his newfound wealth, the feds suspected his hands might be getting dirty in something nefarious: running Silk Road. In April 2012, investigators were able to identify Silk Road bitcoins being laundered on Mt. Gox. And by that summer, the lead investigator, Jared Der-Yeghiayan, had zeroed in on "a good target," as he later put it: Karpeles.
In an affidavit, Der-Yeghiayan stated there was "probable cause" that the e-mail accounts of Karpeles — whom he described as "a self-proclaimed computer hacker" — would contain evidence on a conspiracy to sell drugs online and run a money-laundering business.
On May 9th, investigators filed a separate affidavit to seize $2 million from Karpeles' U.S. bank accounts for allegedly operating an illegal money-transfer business. By doing this, Karpeles' U.S. business would effectively be shut down. (In a bizarre twist, the investigator who filed the affidavit was later revealed to be Shaun Bridges, one of two Silk Road investigators who broke bad while tracking the site's elusive founder, known as Dread Pirate Roberts. Bridges, a Secret Service agent, had moved $820,000 in stolen bitcoins on Mt. Gox, and some speculate that he ordered the seizure in an attempt to erase traces of his own misdeeds.)
With the feds squeezing Karpeles, Mizuho Bank, the firm in Japan that handled all the international transfers and withdrawals for Mt. Gox, refused to process any more withdrawals from the site. When Mt. Gox customers began complaining that it was taking longer and longer to withdraw money, Karpeles would stall and reply that there was a "backlog" of orders. Meanwhile, the feds cracked the Silk Road case. In October 2013, authorities arrested Ross Ulbricht, a 29-year-old Texan, for running Silk Road. (This past May, Ulbricht was sentenced to life in prison.)
By early 2014, concerns were mounting over Mt. Gox, which "started to look like a roach motel," according to Tyler Winklevoss, who, along with his brother, got out unscathed. But others wouldn't be so fortunate. On February 7th, 2014, Mt. Gox announced it was suspending all withdrawals. The decision sent bitcoin value dropping more than eight percent and created panic online.
The crash showed the power of Mt. Gox – and just how vulnerable the currency was to the company's troubles. "It was the only exchange," says prominent bitcoin investor Barry Silbert, "but it was one of the worst-run businesses." After two long weeks without any new information, customers logged on to Mt. Gox on February 24th to find the most nightmarish thing of all: a blank page. Their worst fears were confirmed when a note appeared on the site. A "decision was taken to close all transactions for the time being," it read.
According to Karpeles, the problem stemmed from what's called a "transaction malleability," a software flaw that allowed people on the outside to manipulate the bitcoin transactions and steal money from the exchange. At first, he tells me, he had no idea how much bitcoin was missing, but the deeper he dug, the worse it became: By his estimate, $650 million in bitcoins were gone. "It really felt unreal," he recalls late one night in a subterranean Tokyo bar. "I don't know how to describe that. When you get a hospital operation without any anesthetic, it hurts at first, but at some point the pain reaches a point where you don't feel anything anymore."
High above the anime billboards and lights of Tokyo, Karpeles hid inside his apartment, terrified. Protesters had flown in from around the world to camp outside his office. Reporters loomed outside his home. He got death threats. "We need an organization to search and torture and kill Mark Karpeles," read one anonymous post on a bitcoin message board. "I didn't feel safe for my life," he tells me.
On February 28th, 2014, Karpeles filed for bankruptcy and held a press conference in Tokyo. As he stood before the cameras in his ill-fitting gray suit, his mind raced. "There were weaknesses in the system," he stammered. "I'm truly sorry to have caused inconvenience." He says he wanted to say more, that he was sorry for what happened, how "devastated" he felt. But instead he just bowed awkwardly in apology as the cameras flashed. "I tried to speak," he tells me, "but I didn't feel any words come out."
As Mt. Gox's collapse made headlines, it wasn't just the future of bitcoin cast into doubt, but Karpeles' role in the debacle. Suspicions rose that March when the company announced it had found 200,000 bitcoins in a forgotten digital wallet — the equivalent of forgetting $125 million in gold you left under a mattress.
"This isn't something you could accidentally misplace," says Jay Edelson, an attorney representing the 600,000 North American Mt. Gox customers in a class-action suit. Investigators hope to recover the missing bitcoins, a difficult task in an age when someone can hide half a billion dollars on a thumb-drive. "Someone has hundreds of millions of dollars in bitcoin that has not been returned," says Edelson, "and it is out there in the universe."
For the true believers of digital currency, the fall of Mt. Gox and Karpeles' arrest mark the end of bitcoin's Wild West. With major banks such as Goldman Sachs now investing millions in virtual currency exchanges, bullish investors are betting that bitcoin will become "the future of money," as Cameron Winklevoss says. He, along with his brother, is set to launch a Wall Street-friendly exchange called Gemini.
In the meantime, police are still trying to find Mt. Gox's missing hundreds of millions of dollars worth of bitcoins and determine what went wrong. Some blame incompetence. Nicolas Christin, a computer scientist at Carnegie Mellon University, examined several leaked Mt. Gox databases and found evidence of bugs, missing records and internal accounting that was "a horrible mess," he tells me. In the bankruptcy filing, Karpeles acknowledged that he had been aware of vulnerabilities since 2011, leading others to believe he had, at best, overlooked years of leaking funds.
Others insist this was an elaborate theft. In January, after a six-month investigation into Mt. Gox, the Japanese police concluded the heist was at least a "partial inside job." Many people, including the lawyers filing the class-action suit, are pointing to Karpeles himself. "Mt. Gox was run by Mark," says Edelson. "He had control of all the code, all the transactions, and he kept everybody out of the process. All signs point to him as the person who did this."
Karpeles, as of this writing, is still being questioned by Japanese investigators and has not yet been charged with any crimes. He has admitted to reporters that he did create fake bitcoins, but only as "a test" for new software, not with the intent of making himself rich. He has also said he will "of course deny" any charges that may come. So what does he say really happened at Mt. Gox? When I last saw Karpeles at his townhouse in May, he told me he suspected that perhaps someone within the company was the victim of a phishing attack, which allowed an outside hacker access to the Mt. Gox database. "I don't know if there was inside help or not," he says. "I still believe it's very likely someone from the outside coordinated the operation."
Throughout my time with Karpeles in Tokyo, he maintained his innocence with such calm that I was left with two possible conclusions. He's either the greatest criminal mastermind of the digital age or an overeager chump who got in way over his head, and, perhaps, resorted to the most desperate means to get out. But whether he's found guilty or innocent, he's not done dreaming yet. He hopes to take the lessons he's learned at Mt. Gox and create a more secure form of digital cash: "I still want to be on every computer in the world."