Former Mt. Gox CEO: Current Bitcoin exchanges are a 'disaster waiting to happen'

When we last saw Mark Karpeles, the former CEO of collapsed Bitcoin exchange Mt. Gox, he was bowing deeply for forgiveness after having lost millions of dollars’ worth of Bitcoin.

Since then, he has been the subject of allegations in the Silk Road case that he was the real “Dread Pirate Roberts,” the pseudonymous head of the black market site, and revealed as the missed target in a bungled U.S. Drug Enforcement Administration investigation into the collapse of the world’s largest crypto exchange.

In fact, Karpeles has yet to be formally charged in either matter. Nor it seems has he quit the Bitcoin world.

On Monday, Karpeles, aka @magicaltux, Tweeted the following:

On Tuesday, he wrote a post titled, “Didn’t We Learn Anything?” on his Tumblr, elaborating on this idea, along with a warning:

“The current situation is nothing but another disaster waiting to happen.”

The problem, he explained, is that like Mt. Gox, today’s exchanges continue to hold customer funds directly, making them susceptible to the same kind of bugs and alleged thefts that plagued his exchange—not to mention exposing them to violations of anti-money laundering laws.

“I’m not saying it is simple or cheap to make things different, but I’m surprised nothing happened at all,” he writes.

Unlike Bitcoin itself, the exchanges themselves are not decentralized enough: too many parts of the business have access to fiat currency.

Tim Swanson, an analyst who blogs about Bitcoin at OfNumbers.com, agreed with Karpeles diagnosis.

“The overall problem is that from a financial controls perspective what we call a Bitcoin exchange (like Mt. Gox or Bitstamp) is more of a broker-dealer, plus custodian, plus bank, etc.,” he told Fusion in an email. “They basically have everything under one roof and this creates a problem for abuse.  At least in the traditional world of finance, these different institutions are separated.”

Karpeles’ solution: create a more strict firewall between the different parts of the exchange.

“After each executed trade, the financial entity would move funds to escrow, then the coin entity would process the transaction, which once cleared would trigger the release of funds to the seller,” he writes.

Alternatively, he says, the exchange could never touch fiat in the first place, and instead exist only to transfer Bitcoins between other cryptocurrencies, like litecoin.

However, Swanson points out this could further expose an exchange to money laundering violations.

“I suspect that a large portion of the litecoin trading volume on a daily basis…are related to money laundering type of activities,” he said.

Still, Swanson said, the Bitcoin community should definitely be paying attention to what Karpeles is saying.

“The only real problem with this post is that it has his name at the top of it,” Swanson said. “If it was written anonymously it would have been warmly greeted instead of the ‘Irony of the day’ tweets it has been accompanied with.”

Zane Tackett, a representative of Bitcoin exchange BitFinex, said the ability for exchanges like his to avoid holding customer funds remains “very theoretical,” and that existing safety features, like requiring multi-signature authentication, were adequate.

“I believe that the steps we have taken at Bitfinex go along way towards remedying the issues laid out in his blog post,” he told Fusion in an email.

A representative for Bitstamp did not immediately return requests for comment.

Rob covers business, economics and the environment for Fusion. He previously worked at Business Insider. He grew up in Chicago.