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Bitcoin blogger explains Mt. Gox leak

February 26, 2014, 4:48 PM UTC

FORTUNE — Late Sunday night, a bitcoin blogger named Ryan Selkis published a “Crisis Strategy Draft” document that purported to show how Mt. Gox, one of the world’s earliest and largest bitcoin exchanges, was insolvent (due, in large part, to a massive hack). Initial reaction from some quarters was skeptical but, by last night, former Mt. Gox CEO Mark Karpeles had confirmed the document’s legitimacy.

Selkis publishes under the pseudonym Two-bit Idiot, and last night responded to a series of emailed questions from Fortune about himself and the leak:

FORTUNE: Who are you?

Ryan Selkis: I’m an entrepreneur working on two separate bitcoin projects. One is part-time, Good-Bits, which is the first charitable platform that allows bitcoin holders to donate digital currency to any U.S. registered charities. The full-time project is a company called Inscrypto, which is basically a privately-funded, decentralized version of the FDIC for Bitcoin. We’re building the pipes that help consumers and merchants offload unwanted price volatility onto professional investors willing to guarantee the fiat value of bitcoin deposits. Before becoming an entrepreneur, I was in private equity and venture capital at Summit Partners.

When and why did you begin blogging?

I started digging into bitcoin in October. By November I was hooked. I started blogging as a means to an end – not with aspirations of being regarded as a journalist, but rather to force myself to learn quickly about the industry. You can tell I didn’t take it too seriously from my pseudonym, “two-bit idiot.” I picked the name to provide air cover in the event I made rookie mistakes in my posts or wrote incendiary opinions on Reddit. But as I continued to write and to meet people within the industry, I realized strong finance voices were rare, and some of the leading bitcoin entrepreneurs started reading my Daily Bit regularly. I started to take the blog more seriously and now I’m a freelance contributor with CoinDesk.

You’ve gotten blowback from some in the bitcoin community for your posts. Why do you think that is?

Honestly, I don’t blame most people for being skeptical of my initial leaks. The people who have been following me know I don’t cry wolf and wouldn’t do anything to slander bitcoin, but that was a small group. Most people just saw this crappy little Tumblr blog with a South Park avatar and assumed I was fear-mongering or trying to manipulate market prices. The much more troubling blowback has been from people who are mad that I said anything at all since there appear to have been investors who were ready to bail out the exchange. Essentially these critics would have been ok if everything had just been swept under the rug with respect to Mt. Gox – criminal cover-up or no. Of course, everyone has an opinion on how I should have approached leaking the documents. I just did what I thought was right.

Can you walk me through your receipt of the Mt. Gox documents, and how you became convinced they were legit?

The leaked documents came from a reliable source who is well connected in the industry, and they supported a ton of circumstantial evidence that I had been gathering over the weekend. Within several hours I had four separate high-quality sources confirming that the numbers in the leaked document were legitimate. The clincher was one insider in particular who I know to have direct access to Mt. Gox CEO Mark Karpeles. That source literally messaged with Karpeles while we were going through the document, who confirmed the numbers and said that the document was “probably authentic.” It looks like it may have come from a prospective investor, not the company itself, which means there may be more to the story.

You wrote that you thought the reveal could be “catastrophic” for bitcoin. Why?

First of all, the U.S. will ultimately set the tone internationally for how bitcoin gets regulated. So far regulators and legislators have tread lightly. Even though the Silk Road scandal was bad for bitcoin’s image, it also reinforced the fact that there are ways to track nefarious transactions in bitcoin. Mt. Gox is a different kind of bad for bitcoin’s image. Even though Mt. Gox is just one exchange, the scandal is worse. This theft allegedly went unnoticed for two years, it represents 6% of all bitcoins in circulation and it accounts for over $100 million in investor losses. On top of that, the document I leaked suggests Mt. Gox was in advanced discussions with other investor(s) who planned to hide these losses indefinitely. Nobody cares when the moderators of a drug dealing website get arrested and lose their bitcoins. But when it affects mainstream investors, it seems different. I think it’s naive to hope regulators won’t ultimately come out with pretty tight and expensive regulations.

In revealing the Gox documents, you also said that you’d sold all of your bitcoin. Was that an overreaction? 

I was between a rock and a hard place ethically. I have a ton of my liquid net worth tied up in bitcoin because I believe so strongly in its potential as a technology. But there are certain massively negative events that could destroy bitcoin, the currency. I didn’t think it was appropriate to continue trading after breaking this story, and felt I had to hold or sell everything. If my account was wiped out, I’d have very little left to live on, so I decided to sell everything to be safe. However, I also said that I wouldn’t buy back in for at least 30 days, to avoid giving the impression that I was preying on irrational fear. Legally, I didn’t have to say a word. But I wanted to be transparent, and my readers were able to trade on the info as soon as I did.

What do you think really happened at Mt. Gox?

At the very least, it looks like criminal negligence of insane proportions. I’m still working on the story, so will keep you posted.

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