Money Rehab with Nicole Lapin - Crypto Hackers Caught Red-Handed

Episode Date: June 14, 2023

Today, Nicole unpacks the headlines this week that will affect your wallet. Up today: the hacking of Mt. Gox.

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It's time for some money rehab. Last winter, when crypto prices plunged and the industry was plagued by scandal, it was dubbed Crypto Winter, a name that managed to capture the madness and the despair that characterized the past six months or so for many crypto gamblers. I want to stress that right now. Crypto is a bad investment. I have said this for a very long time, and in the beginning I was only laughed at. The only use case for it is if you're like the financial planner for someone doing some shady shit. And if you are, maybe consider a career change. For everyone else, investing in crypto is a gamble. There are no protections

for consumers and very little supervision of what goes on in these exchanges. When there are clear examples of outrageous mismanagement, like in the case of FTX, the U.S. government will attempt to prevent further bad behavior, but they can only really go after the American arm of crypto companies. You might have noticed that many crypto companies have what amounts to two accounts, an alt and a main. The main company will be headquartered in the Bahamas, Singapore, Tokyo, or the Cayman Islands. And then there will be an American arm, usually headquartered in San Francisco or Delaware. American citizens are only supposed to use the American side of the company, and transactions

that take place there have a little more oversight and protection, but not a lot. For example, if you have money in a global crypto exchange and it collapses, taking your investment along with it, there is nothing you can do. But if an American-based crypto exchange collapses and you lose the money you deposited for your next Dogecoin purchase, you will likely be able to get a small amount of that money back, albeit it will be years later after inevitable bankruptcy filings and the picking over of the corporate skeletons. Last week, the SEC sued two major crypto companies, Coinbase and Binance, which we did a deep dive on the pod last week about. Neither of these lawsuits were unexpected. As part of due process,

the SEC sent notices to both companies warning them of potential upcoming lawsuits. As a note, the SEC isn't necessarily implying a crime has been committed here, just FYI. They're filing a lawsuit to stop both companies from selling unregulated securities, which is a crime, though. The question here, is crypto a security? The definition of security is pretty broad. Generally, securities are defined as financial instruments that represent some kind of value. Stocks and bonds are both examples of securities. But since crypto came onto the scene, no one's really known how to classify it. The SEC could, of course, just declare it a security and regulate it,

but they haven't, which has created the current situation. News of the lawsuits caused crypto assets to lose value. Between the price drop and the lawsuits themselves, it looks like just because it's summer, the pain of crypto winter isn't over. But with all of this crypto news boiling over this past week or so, there's a story that's been flying under the radar, and I really want to dig into it because it's a classic crypto true crime story. It is the hacking of Mt. Gox. Journey with me back to 2010, when the price of Bitcoin was still under a dollar. A man named Jed McCaleb wanted to buy some Bitcoin, but couldn't because the process was so complex that he wrote his own code and posted it to an old domain he had just

sitting around since 2007, Mt. Gox. Other users discovered the site and they started to use it to buy Bitcoin. McCaleb, though, wasn't interested in running a whole Bitcoin exchange, so he sold it to a French man named Mark Kapellis. Under Kapellis' leadership, Mt. Gox became the world's leading crypto exchange, and by 2012 it was handling 70% of all global Bitcoin transactions. But in 2013, customers began reporting that their Bitcoin wasn't showing up in their wallets. Kapellis began looking into the problem and indeed discovered that there was Bitcoin missing. Finally, one night, he actually drove around Tokyo collecting the paper access codes for all of the Mt. Gox cold wallets. These were

the wallets where the company stored their Bitcoin that weren't connected to the internet. Carpelli's began opening these digital wallets to find that they were… empty. He opened wallet after wallet, only to discover that all the coins were missing. The exchange had lost 650,000 Bitcoins, which represented all of their customers' holdings and 100,000 worth of the company's own Bitcoins. At the time, Bitcoin was about $300 a coin, and the cost of the missing money was still in the hundreds of millions of dollars. But today, with the price of Bitcoin at over $25,000, the hack would have been worth billions of dollars. Now, how did the Bitcoin get taken out of the cold and hack-proof wallets, you ask?

Very simple. Carpelli's removed them himself. Hackers had infiltrated the company as far back as 2011. An early hack was well known and the company acknowledged it. What the company didn't know was that the hackers were still inside the system. They would take coins out of hot wallets and then Mt. Gox would replace the missing coins with those stored in cold wallets, emptying their own coffers until there was nothing left. And no one at the exchange seemed to have any idea that this was

going on. And it wasn't the only problem the exchange faced. The code it was using allowed for replicated transactions, and it was struggling to keep track of investors' transactions. Mt. Gox began its slow slide into bankruptcy, and two investors actually took up a vigil outside holding up signs, Mt. Gox, where is our money? And Mt. Gox, are you insolvent in English and in Japanese? For almost a decade, only one of those questions would have been answered. Mt. Gox was insolvent in English and in Japanese. For almost a decade, only one of those questions would have been answered. Mt. Gox was insolvent, and they declared bankruptcy. Everyone's money vanished and the coins were missing.

But this was hardly an unusual outcome, as at the time, 45% of all Bitcoin companies who accepted money went under. For many years, this is just how it was. An entire cottage industry grew up around trying to track down the money and identify the culprits. It was regarded as the second greatest mystery of crypto after the true identity of the mysterious developer of Bitcoin. Mt. Gox did recover 200,000 coins that were probably missing as a result of their poor operating system. But the location of the rest of the coins and the identity of the hackers remained a big mystery. Over the years, the bankruptcy case has made its way through the system and

all claimants are supposed to be paid back with cash or crypto by October 21st, 2023. It is not clear, though, how much they will recover. But since they were the first to go long on crypto, even if they only recover a few coins out of the hundreds they lost, they could still be even with the value of what they had been at the time or even come out ahead. After all, some investors bought into Bitcoin when it was under a dollar. If you bought 20 Bitcoin for 18 bucks and get a single coin back worth well over $25,000, you have made a fantastic return on your investment. The mystery here is drawing to a close, as the U.S. government has unsealed an indictment against two Russians for the hack, finally naming those responsible for the crime.

So things may finally be wrapping up in this case, but remember this happened almost 10 years ago. People still haven't actually gotten paid back, and no one has been arrested. Much of the crime seems to be a matter of exploiting the colossal mismanagement on the part of the leadership at Mt. Gox, But this is what an unregulated crypto exchange looked like a decade ago. And with the collapse of FTX, it's difficult to argue that we have come very far. For today's tip, you can take straight to the bank. Crypto isn't the only kind of money that scammers can target. Unfortunately, there are more and more sophisticated ways that scammers

can hack your credit card information. If you see unusual activity on your credit card after you cancel the credit card, don't forget to call the credit monitoring bureaus and freeze your credit. This will prevent anyone from doing a credit check on you, stop hackers from opening up credit card accounts in your name, and limit the amount of harm that can be done on your credit score. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions,

moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at moneynews and TikTok at moneynewsnetwork for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.