MtGox mainly has 202,185 bitcoins as assets. That’s around $2.23 billion at the time of this writing.
Most of the creditors’ claims are for 795,000 bitcoins that users had in their MtGox accounts. There are also some claims in fiat, but they are a very small percentage, so I will just ignore them for this post.
If you look at these figures, the obvious solution would be to distribute to the creditors an equal percentage of the bitcoins. Since there are only 202,185 left for 795,000 of claims, all creditors should receive around 25% of their bitcoins, minus whatever the bankruptcy procedure cost and the fiat claims add up to.
Unfortunately, the obvious solution can’t happen easily.
That’s because Article 103 of the Japanese Bankruptcy Act says that all claims except those for payment of money are to be valued at the beginning of the bankruptcy procedure. That in turn means that the massive price increases over the last three years would go into the pocket of the bankrupt. At the time of this writing, less than 40,000 bitcoins would be enough to pay off all claims (as valued in 2014), leaving the bankrupt with more than 80% of the remaining coins.
That doesn’t make any sense. But that is exactly what would happen if you just follow Art. 103 without thinking.
One way to deal with this would be to end the bankruptcy procedure, as discussed earlier. That would get rid of the wrong evaluation.
Mark Karpeles commented on this and said that MtGox would become insolvent again immediately. Therefore I had given up on that idea.
But actually, even if that happens, the problem of the unrealistic valuations would be gone, at least for the moment. If a new bankruptcy procedure starts, the valuations would be whatever the value of bitcoins is at the start of the new procedure.
The other scenario would be one where only less than 40,000 bitcoins are distributed to the creditors and the bankruptcy procedure ends with everyone paid out in full at 2014 valuations, leaving 160,000 bitcoins to the shareholders of MtGox.
Obviously the next day, all creditors would sue MtGox for their share of the remaining 160,000 bitcoins. And it would not make any sense to deny such a claim.
In this situation, the most elegant solution would be to just treat claims for bitcoins as “claims for payment of money”.
In that case, all the bitcoins could be distributed in a fair and consistent manner in the present bankruptcy procedure. There would be no need to stop the procedure just to get rid of the Art. 103 problem and start it again the next day.
In my humble view, this would also be the correct choice under Constitutional law. Depriving the creditors of $1.5 billion of their property would not be compatible with Article 29 of the Japanese Constitution.
I may want to come back to this particular point later on.
For now it is enough to point out that distributing all the bitcoins to the creditors is just common sense.
One other point is capital gains tax.
If the 202,000 bitcoins and Bcash coins and BTG coins are all sold and the funds are distributed in Japanese yen, that would be an obvious taxable event for the creditors.
If on the other hand they get paid back between 20 or 25% of their bitcoin balances, the capital gains until that point in time would not be realized, leaving the decision on when to do that to each individual creditor.
Therefore, it makes more sense for most creditors to just receive a part of their bitcoin balance back instead of whatever amount of Yen would be correspond to that. An exception would be creditors who don’t have to pay capital gains taxes (for example if only German tax law applies).
Update: Mark Karpeles kindly reacts with this tweet:
Unfortunately money in the Japanese version is written “金銭” which, if I am not mistaken, when used in laws means Japanese Yen and does not includes foreign currencies or payment instruments.
I agree completely that treating bitcoins as “money” is not obvious in this case. That’s actually why this is interesting. If it was obvious, there would be no need to discuss the question.
On the other hand, there is no Japanese Supreme Court precedent saying that claims for bitcoin payments are not claims for payment of money under Article 103 of the Bankruptcy Act. That’s because Bitcoin is so new that the existing law hasn’t had a chance to adapt yet.
Anyway, if this elegant solution doesn’t get adopted, then only 40,000 bitcoins will be distributed. Then another bankruptcy procedure will follow to distribute the remaining 160,000 bitcoins. The end result will be the same (all coins distributed to the creditors and no coins left to the shareholders), but the way there will be slightly longer.
Again, I may want to come back to the Constitutional law aspect later.