Robert DeVoe: What got you started in the Mt. Gox case?
Daniel Kelman: I was a MtGox user. Held bitcoins going back to early 2012 and got goxxed because Mt. Gox wouldn’t give back my bitcoins due to not being KYC’d, then it was hard to KYC me because I was a U.S. person living in Taiwan.
When it was first revealed they were in trouble, sometime in February 2013, I had an idea to rescue the exchange and make creditors whole through a debt-equity swap. That is, creditors trade their claim for shares in a newly recapitalized entity with a new business plan. I pushed this plan in the ##mtgox-talk IRC channel, where I met Olivier Janssens, who was the largest creditor at the time, and he retained lawyers and sent me to Japan to see what could be done.
From there I just kept going on trying to do what I could to get the best resolution to this matter for creditors.
* Interviewer’s note: “goxxed” is a term that means one suffered a financial loss at Mt. Gox.
RD: Are you, or your law firm Kelman Legal Solutions, involved in any official capacity with the Mt. Gox case? If so, could you share some details about your involvement?
DK: I am a creditor, and exercise certain rights on my own behalf as a creditor. I am also in talks with other creditors to form a creditor committee that would seek certain rights to represent creditors in the bankruptcy. But other than that I have no formal representation of anyone.
RD: Do you have any personal connection to, or have you ever met Peter Vessenes in person?
DK: I have never met Peter Vessenes before. Never spoken to him or emailed in any way. I have no other direct connection to him.
RD: You mentioned in your keynote speech that you expect the Mt. Gox case to eventually end up in litigation in the U.S., and that from there it could take years to finish. Why do you suspect the case will move there, and what kind of issues would make it take many years?
DK: I suspect the case will end up in the U.S. because Japanese lawyers have been unable to resolve the matter in assessment. This is because the matter involved questions of law specific to Washington State that are difficult for a Japanese court to decide on. In the case file there are “expert opinions” from Washington State lawyers representing each side trying to affect the Japan bankruptcy court’s decision.
But as in any case, one can almost always find an expert witness to support what you want supported, provided you can pay their fee. I have been told that the judge has asked the parties to settle, but that there has been no agreement. Its no secret that Vessenes wanted this handled on his home turf in Washington State, and from a Japanese lawyer I spoke to its likely the case could be sent back to the U.S. to be resolved if there is no settlement.
RD: In your own opinion, do you think the previous bitcoin creditors to Mt. Gox will ever see their funds again, in any amount or form?
DK: Creditors will likely see funds again, but its unclear when that will be or how much they will see. The main hurdle is Vessenes’ bogus claim, which is for a combined $158 million USD if you count the claim at Tibanne, MtGox’s parent company that has claimed money at Mt. Gox. Once this falls the case becomes simple.
But because Vessenes has delayed the payout for so long, another issue has arisen — how to value the claims based on bitcoin held in customer accounts. This is a second fight looming on the horizon, and its not clear how much of a fight this will be because it is hard to communicate with the trustee in any official capacity.
RD: Do you foresee something like this happening again in the future? What would you recommend normal cryptocurrency holders do to protect themselves?
DK: It could happen to any exchange. But I think Mt. Gox will always be an extreme case since newer exchanges have the benefit of more developed security policies. Also, the market is more developed. Mt. Gox had something like 70 percent of world-wide volume in 2013, so it was hard to fund another exchange with sufficient liquidity and when issues arose at Mt. Gox people kept using it for this reason.
Now, when issues arise at an exchange — slow withdrawals, rumors of insolvency, etc. — traders can shift to another platform easier. But the lesson everyone should take away from Gox is this: do not use exchanges as a bank, use them for trading; deposit funds, trade them, then withdraw them and secure them. This is how cryptocurrencies were meant to be used.
RD: Peter Vessenes declined your invitation to debate you at WBF London. Also he is trying to claim $75 million in funds from the remains of Mt. Gox, according to your recent Tweet. In your opinion, is he entitled to said funds? Why do you think he would avoid having an open debate with you?
DK: He is actually claiming $158 million total if you use the figures from both Mt. Gox and its parent company Tibanne’s bankruptcies. He is not entitled to this sum.
First, Coinlab never received a Money Transmitter license in the U.S. during the three month transition period in the agreement. Coinlab agreed to comply with all applicable laws by the end of the three month transition period, and FinCen handed down a directive making it clear you needed a Money Transmitter license five days before that period ended. Coinlab argues this was unforeseen, but this isn’t the case since lawyers all expected this could be a possibility, and there was precedent for such a finding (e.g. gold limited).
Second, Coinlab actually avoided a huge loss because Mt. Gox didn’t have the funds they represented to have had at the time. By the end of the transition period Mt. Gox only had about 20 percent of the bitcoins they were expected to have. Had Coinlab actually done this deal they would have ended up with customer money stuck in Mt. Gox and likely ended up owing their customers that sum and perhaps ended up in bankruptcy themselves.
Third, Coinlab claims they are owed at least $50 million by virtue of a liquidated damages clause wherein the contract awards Coinlab that sum if Mt. Gox breaches. This has become Peter’s main sticking point in the litigation in justifying such high damages. But even assuming Mt. Gox was in breach, this is not enforceable because the clause was designed to penalize Mt. Gox in the event they breached the agreement, not approximate actual damages.
There is deposition testimony from Peter Vessenes, conducted during the Mt. Gox v. Coinlab litigation in 2013 where Peter admits the $50 million figure was put in place to make it too expensive for Mt. Gox to breach the agreement. Peter tries to cite Coinbase’s valuation at over $125 million USD to counter this, likening Coinbase to Coinlab, but this valuation occurred after this deal with Mt. Gox was done and there are obvious differences between the two — the least of which being that Mt. Gox was insolvent at the time of the deal.
Lastly, he actually owes Mt. Gox $5.2 million USD in customer funds he refuses to give back. This is because he already spent it, which very likely exposed him to criminal liability.
I am presently penning a letter to the U.S. Attorney for the Western District of Washington State and asking they look into this matter. I hope to circulate it to US creditors and have them approve of it before sending so the U.S. Attorney knows there are U.S. persons who were victims of this crime.
RD: Very interesting. Thanks Daniel for taking the time to talk to us.
While it has already been close to four years since the start of the Mt. Gox saga, those who lost funds may still have a glimmer of hope in the form of Daniel Kelman.