Tuesday, April 1, 2014

Bitcoins: Mt. Gox Collapse (2014)

Bitcoin logo

What in the world are Bitcoins? It is the biggest and most popular type of virtual currency today. Essentially it is digital money, a new medium of exchange not backed by any sort of national or governmental group. It is the first decentralized peer to peer network powered only by the users. Bitcoins are self regulating and all the Bitcoin users make up a tiny fraction of the total. This means there are no need for banks, they can not be taxed, and all transactions are anonymous. Bitcoins have been ever increasing in popularity over the years since originally created anonymously in 2009.
The creator of Bitcoins was clever creating the Bitcoin under an alias named Satoshi Nakamoto, making Bitcoins anonymity ubiquitous. The overall design of the Bitcoins roots back to gold. There is a finite amount of gold on the earth to be mined. So at first when people start mining large amounts of gold will be found but this exponentially decays over time because it will become harder to find. Once all the gold has been mined there can only be that maximum amount in circulation at one time. Bitcoins were created in the same way, there can be only a finite number of bitcoins in circulation at one time. However the only difference, is the method for obtaining them. In both situations the act of obtaining gold or bitcoins is called mining. The way people are able to mine for bitcoins is by using Bitcoin software, which is free. This can be downloaded on any computer or a network of computers and is run to solve complex math problems. Solving one of these problems is the equivalent to striking gold! So the person or group of people that solved the problem will be rewarded with their share of bitcoins. The difficulty of the problem increases based on the amount of time they are being solved in leading to this exponential decay. The current amount of bitcoins in circulation is roughly 12.4 million. The last bitcoin is projected to be mined in the year 2140 bringing the permanent amount in circulation to just under 21 million. Every Bitcoin transaction from creation to present is publicly available. The value of a Bitcoin is highly flexible and fluctuates often, making it dependent on the exchanges.
Another way Bitcoins can be obtained is through an exchange. Now that there is a large amount in circulation, Bitcoin exchanges have been allowing customers to exchange their native currency for Bitcoins and vice versa. For example an American could want to make and exchange for 3 bitcoins. This person would have pay the amount in US dollars equivalent to receive the 3 bitcoins. The largest and most widely known Bitcoin exchange was Mt. Gox out of Japan. Mt. Gox launched in the summer of 2010 and by 2013 was responsible for seventy percent of all Bitcoin transactions. Mt. Gox was functioning as a mix between an online brokerage and a exchange. As Mt. Gox reached its peak it had more than one million traders entrusting their money to be held safely by them. A twenty eight year old french men named Karpeles acquired the exchange from American entrepreneur Jed McCaleb. McCaleb realized he had bit off more than he could chew when people were wiring tens of thousands of dollars through his exchange at a time. This lead him to the decision of selling Mt. Gox. Karpeles was an excellent programmer and set out to rewriting the sites software eventually turning it into the most popular Bitcoin exchange in the world. The site was taken offline for several days in June of 2011 due to a hack. The response to this attack was aided by Bitcoin enthusiast, Karpeles and Mt. Gox ended up making good on their obligations.
Early in the following year of 2012 a small group of company employees began to worry that customers funds were being used to cover the estimated rise of operating costs of the company. Karpeles was the only one who had access to Mt. Gox's financial records. Based on their own estimates they felt Mt. Gox was spending more money then it was taking in. Also flags were raised that the company's expenses were being payed from the same bank account that was used for customer deposits. It became all to real for Mt. Gox in 2013 when the company had to suspend withdrawals in US dollars from the system for nearly two weeks. Startled by this course of action people began backing out of the company, taking what money they had left and running. Mt. Gox no longer had the funds necessary to return deposits.
This chain reaction of events lead Karpeles to admit the loses and apologize. Mt. Gox filed for bankruptcy on February 28, 2014 and also said that hackers may have exploited a bug in the Bitcoin system. This was the explanation for the disappearance of 460 million US dollars in Bitcoins. However failed to explain where the twenty seven million in cash had gone. The size of the loss is remarkable and with no legal recourse or financial system if the criminal successfully gets the bitcoins they are technically in his ownership. Karpeles was the only person at Mt. Gox who had access to the bank accounts and each withdrawal request was done manually. Mt. Gox was said to have owed 1.3 million Bitcoin traders 55 million US dollars based on deposits it had taken. These investors are still left without their money and may never get it back. The site has been taken down and is no longer active, also Karpeles has resigned from his position with the Bitcoin Foundation which is the virtual currency's top advocacy group.
Using the four main ethical theories, Individualism, Utilitarianism, Kantianism and Virtue theory the case of Mt. Gox's collapse will be analyzed. Mt. Gox's and CEO Karpeles's actions will be seen as unethical according to these four theories.

Protestor demanding their money from Mt. Gox

Individualism states that the main goal of a business is to maximize profit for the stakeholders. Mt. Gox was able to do just that at first. They were the most popular Bitcoin exchange in the world at the time. Over seventy percent of all bitcoin transactions took place with Mt. Gox. Business was booming and at its peak a bitcoin hit the one thousand dollar mark. However this did not last and Mt. Gox was spending more money than it was ultimately bringing in and for any business this is just bad. Mt. Gox was losing money fast due to an exploit of the Bitcoin system from hackers. Having had millions of dollars worth of bitcoins siphoned off Mt. Gox was under water and had to admit defeat. Mt. Gox would be seen as unethical in it actions by a individualist because even though at first they sought maximizing profit as a main goal they failed to do so. In the end they had to file for bankruptcy and lost millions of their customers money.

UtilitarianismUtilitarianism main intent is to make everyone happy and wants to do so for the over all good. Mt. Gox intentions were self involved and mainly due to CEO Mark Karpeles actions. He was not a business man and could not manage the company properly. He used Mt. Gox to make only himself happy rather than everyone. When hacked in 2011 Karpeles took no course of action to further protect the customers bitcoins. Karpeles spent his time else where rather then properly managing Mt. Gox he was uninterested with he business side of things and this hurt them badly. He obsessed over creating this Bitcoin cafe that would be stylish hangout in the same building as Mt. Gox offices. This was all during the slow but sure downfall of the company. This is unethical to a Utilitarian because the intent was not to make everyone happy little was done to better or save the company until it was too late.

Kantianism Kantianism is based upon making rational decision and allowing others to do the same for themselves. There is no lying or deceit of any kind and the use of people without their rational consent. Never treating the situation as mere means but rather always as an end. Mt. Gox treated their costumers as mere means and exploited their false sense of trust in the company. They were using customers funds to pay for their own business expenses. Also with held all information of the disappearance of millions of dollars until they were forced to file for bankruptcy. Instead of letting their customers make informed rational decision on their own, what they would like to do with their money, they simply decided for them. Mt. Gox froze all withdrawals and transactions on the website for their own personal benefit regardless of how this affected the customers. The loss of 460 million dollars worth of bitcoins has yet to be found, leaving customers asking Mt. Gox where their money is. This is impermissible and the actions Mark Karpeles took with Mt. Gox seen by a Kantian are unethical.

Virtue Theory
Mt. Gox Company logo
Virtue Theory focuses on four main characteristics, courage, honesty, self control and fairness. A business must act with he interest of these characteristics in mind. They must be willing to take a stand for the right ideas and actions. Honest in agreements, treatment of employees and with customers. Expectations and desires must be with in reason. Finally they must work hard, produce quality, have good ideas and fair in their practices. Mt. Gox was courageous after the 2011 hacking because they were able to overcome it unlike where all other exchanges simply threw in the towel. This was impressive and gained the respect of many Bitcoin supporters. This was able to slingshot Mt. Gox forward into the largest most reputable Bitcoin exchange worldwide. However in order to be seen as ethical by a virtue theorist they must meet all four of the main characteristics. Mt. Gox was not honest, actually quite the opposite, they were deceitful and used their customers to make up for their own mistakes. They also lacked self control because their expenses were fair exceeding their profits. What ever expectations for the company Karpeles had seen to grow and expand were not with in reason if money was being over spent. Finally Mt. Gox was unfair to their customers who entrusted their money with the company. The believed it would be safe guarded rather than spend to keep Mt. Gox above water. Analyzed from a Virtue Theorist Mt. Got acted unethically in this situation.


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