Five years ago, the world’s largest bitcoin exchange collapsed. Over the course of a few days, the Tokyo-based Mt. Gox, which had handled over 70 percent of bitcoin transactions, suspended trading, closed its website, and filed for bankruptcy, reporting that 850,000 bitcoin had vanished as the result of a hack. Half a decade later, the situation remains a huge mess, with creditors still trying to retrieve their funds. To put it all in perspective, we reached out to two crypto exchange CEOs (BitMEX’s Arthur Hayes and Zebpay’s Ajeet Khurana) and a pair of wallet company chief execs (Ledger’s Eric Larchevêque and Edge’s Paul Puey). Their responses have been lightly edited.
Where were you when you heard the news that Mt. Gox had collapsed? What impact did it have on the crypto landscape?
Eric Larchevêque: I was working on opening La Maison du Bitcoin (The House of Bitcoin), a bitcoin center in Paris. The collapse triggered extreme media reactions, saying that bitcoin was dead and couldn’t recover. The mood was quite gloomy, and many people I knew were impacted by the loss. But despite the contrarian forces, the promise of bitcoin held, and it showed how resilient it was to adversity.
Arthur Hayes: I was at the gym in Hong Kong. I expected some sort of collapse given how disconnected the Mt. Gox price was from Bitstamp’s. The collapse confirmed the bitcoin bear market was in full swing.
Paul Puey: I was at our original Edge office, and it honestly did not surprise me. Many people saw it coming and had already made attempts to get off the sinking Titanic. Some were successful, and some weren’t. Many like to think it caused or contributed to the 2014 price decline, but we were already in the downtrend. The collapse had an eye-opening effect on the importance of private key ownership. Unfortunately, humans are shortsighted and we now see annual “goxxing” events, with Quadriga being the latest.
Why, five years later, are exchanges such as QuadrigaCX still collapsing?
Larchevêque: In the early days, many exchanges were built by entrepreneurs believing in crypto but having absolutely no clue about security, best practices, and regulations. QuadrigaCX comes from the Mt. Gox legacy of thinking that basic web-programming tools are good enough to manage critical financial platforms.
Ajeet Khurana: Crypto as a space has set a level playing field between big corporations and startups. While this has happened repeatedly throughout history, with platforms such as the internet, with crypto the first-mover advantage is still with new-gen entrepreneurs. Unfortunately, not many innovators have been able to build the business-continuity plan and security robustness that this industry demands.
Hayes: Humans will be humans. Some are lazy, some are inept, some are dishonest. That is not special to bitcoin. Banks still go under, commit fraud, and break laws.
Puey: We still see exchanges collapsing because the fundamentals of crypto security haven’t changed. Crypto with a third-party custodian is playing with fire. There’s too much incentive to hack or internally steal anonymous digital money. Only when the world migrates to user-controlled, noncustodial solutions will we see the end of exchanges collapsing.
Related: The Man Who Lost Everyone’s Bitcoin
What needs to happen for exchanges to become more trustworthy?
Larchevêque: Exchanges need to be audited on their security process and adhere to very high standards when dealing with private keys management, both in terms of technology and governance. Regulators, whose role is to protect the end customer, must enforce the use of state-of-the-art hardware security systems.
Khurana: Security in the crypto space has generally not been communicated well. At Zebpay, we invest more in security than what a small exchange would spend on its entire operations. However, for a layperson the difference is not evident until the other exchange gets hacked. This has put the onus on exchanges like ourselves to do a better job of communicating how we keep our infrastructure and customer coins secure. There will always be exchanges that are very secure and others that aren’t; consumers will have to pick.
Hayes: Exchanges with a good and clean track record are trusted by the ecosystem. However, bitcoin allows you to be your own bank. Exchanges should only be trusted with funds to be traded. Exchanges should never be used as a wallet. The ecosystem should be concerned about any organization that holds others’ private keys.
Puey: It’s not about becoming trustworthy. It’s about exchanges removing financial incentive to break users’ trust and incentive for attackers to hack the exchanges. To do this, exchanges need to become noncustodial.
What do you make of Brock Pierce’s Gox Rising effort, whose “mission is to support creditors of the Mt. Gox Estate in maximizing their recoveries and to relaunch the defunct Mt. Gox Exchange”?
Khurana: Any attempt made to support the creditors of Mt. Gox is hard to disagree with. However, apart from any digital assets that were recovered from the hackers, there isn’t a straightforward or hard value that creditors can get. Perhaps the Mt. Gox customer base, if encashed in a certain way, can help the creditors. At Zebpay, we have often had suggestions and offers of ways to capitalize on the Mt. Gox brand and consumer base, but such propositions generally end up being gimmicky.
Puey: It’s an absolutely valiant effort. I’m not sure that keeping the brand for a new exchange is a good idea, given that “goxxed” is now a verb in crypto lingua. However, any attempt at recovering value for those early users will be appreciated.
Get the BREAKERMAG newsletter, a weekly roundup of blockchain business and culture.