The Effortless Stratagem of Trust and Power Relations: An analysis of the trust-power dynamic through Mt. Gox

An student issue analysis for MIS41240 at University College Dublin.

Written by Dakshil Shah, Summer 2019. Dublin.

Mark Karpeles sits wearing a red sweater in an interview with Peter McCormack on the podcast “What Bitcoin Did” (February 2019), his eyes continually shifting between the camera and the interviewer. He swallows before speaking and launches into a prepared verse regarding the events that transpired with Mt. Gox, which ultimately led to its bankruptcy. He seems to be a timid person and doesn’t look like a natural leader. There are times where his speech is indecipherable and he sounds unconfident, since the interview was being conducted in English and not his native language, French. There comes a time in the interview where Karpeles struggles to find words for when he was arrested and subjected to solitary confinement in prison, and admitted to facing depression—evoking empathy by the viewers. As sirens wail in the background, even for just a few seconds, it feels ironic to the struggles and the story of the man being interviewed. Karpeles’ behaviour does not seem to waver or deviate in any way from a previous documentary, aptly named the Effortless French which captured the rise and fall of Mt. Gox.

The demise of Mt. Gox and the ensuing events had determinantal effects on social and human trust. The foundation of trust is usually laid during one’s upbringing in a narrow circle or their natural comfort zone. People learn to trust the actions and decisions of other actors who enact a specific discourse in their life. The decision to entrust or follow that discourse depends upon the values, beliefs, and morals the actor has been subjected to during their upbringing. In the adult world, it is quite challenging to base trust on select individuals to perform even mundane day-to-day functions effectively. In any high trust environment, like investing in a bitcoin currency exchange, there exists a cohesive environment were actors enact functions devoid of binding regulations and their coercive enforcement.  Such a setup may give rise to a lax attitude and ultimately lead to a failure to comply or deliver the expected results, forcing a combination of legal sanctions and social outrage to address such misconduct (Werbach, 2018). Karpeles’ discourse behind the shutdown of Mt. Gox draws many similarities to issues of distrust and the aftermath that followed.

The demise of Mt. Gox and the ensuing events had determinantal effects on social and human trust.

Mt. Gox started its operations in 2009 as an exchange for trading cards tied to a popular online game called Magic: The Gathering. It eventually shifted its focus to Bitcoin and in 2010 launched as a bitcoin exchange. Mt. Gox rapidly became the world's most popular place to trade, but by February 2014, the site was closed and filed for bankruptcy. Mt. Gox claimed that huge losses were because of hackers who had siphoned 850,000 bitcoins (Present worth over $8 billion), taking advantage of a significant security flaw. Eight percent of Mt. Gox was owned by Karpeles' other company, Tibanne. Karpeles tried to keep Tibanne operating but ultimately failed, and it also later filed for bankruptcy. In July 2017, a Russian national named Alexander Vinnik was arrested in Greece on criminal charges of money laundering in the United States. He was accused of being responsible for the Mt. Gox siphoning and for being the owner and operator of BTC-e, a suspicious Russia-based bitcoin exchange that did not use Anti-Money Laundering (AML) and Know-Your-Customer (KYC) protections, as required by laws in most jurisdictions.

Karpeles bought Mt. Gox from Jed McCaleb in 2011. When Karpeles bought the site, an early security flaw which seemed manageable later became crippling. Karpeles admitted in the documentary that he did not verify the cash assets before taking over Mt. Gox. He was then instructed by McCaleb not to tell anyone about a behind-the-scenes bot dubbed the "Willy Bot.” The bot was silently making trades as a way to offset this debt. However, if the price of bitcoin was to rise, the deficit would grow larger, forcing Karpeles to buy more bitcoins in fiat currency. Karpeles still decided to go ahead with the deal.

It's interesting to note that McCaleb was so eager to unload Mt Gox that he made the sale to Karpeles on a payment plan. Only as the deal was already happening did he inform Karpeles about "some" missing BTC at a time when it was still a small fraction of where it went. It seemed that there is an excellent chance someone shrewd might have known what could transpire and did not want to take any responsibility for it. It’s quite profusely implied, and not much media attention is given to this point, that before blatantly blaming Karpeles and making him the scapegoat for the bankruptcy of Mt. Gox, McCaleb sold a company with a significant security issue.

The apparent shift of blame, from McCaleb to Karpeles, could be attributed to the act of walking a thin line between manipulating and gaslighting the public at a time when Karpeles was becoming the most hated person in the bitcoin world. But it could also be blamed on the particular style of discourse used by Karpeles when running Mt. Gox, which might be characterized as a lack of vision, awareness, and a stoic leadership style.

Discourses have a direct effect on trust relationships, and in this case, personal as well as social relationships were maligned, resulting in total loss of credibility—and possibly, organizational control. Karpeles lost the trust of shareholders and investors alike, which ultimately led to his fall from power. This incident was witnessed by the public, but it is interesting to think about whether there exists a discourse that could have allowed Karpeles to save Mt. Gox by maintaining his trust relationships and not losing his credibility.