It is clear that the police made critical mistakes at the start of the investigation, thus stretching it out over half a year, but it turns out the culprit also made some mistakes. Detectives were able to determine by November that one of the messages sent to the lawyer had gone through a US server, and they asked for the FBI’s help in tracking the mail. The task force also sent some of its own people to the United States on November 12, to speed up the information-sharing process.
Sources close to the investigation say the FBI found a copy of the virus on a server in America that contained encoded information linking it to Katayama. There was also a careless mistake made in uploading the virus that allowed the route to be traced back to a computer Katayama had access to. This new evidence certainly didn’t help Katayama’s case. However, considering Demon Killer’s ability to frame other people, it couldn’t be considered conclusive.
It appears that after the media reported that investigators had been dispatched to the United States, Demon Killer began to get nervous and tried to drop out of sight. On November 13, he sent a message to the lawyer: “It’s been a long time . . . I made a mistake. It looks like the game is over. It would be unpleasant to be caught so I’m going to commit suicide, by hanging myself.” The accompanying photo of a witch figurine with a computer cable—in the shape of a noose, wrapped around her neck—was unsettling. The tabloids were filled with speculation as to whether the perpetrator had really killed himself.
He didn’t stay dead for very long.
On January 1, 2013, he sent a traditional New Year’s message to the Japanese media, encouraging them to go for a big scoop.
On January 5, he sent them new messages with a “puzzle for the New Year” to solve. The task was to find, somewhere on Enoshima Island—a popular tourist spot—a cat with a memory device in its collar that would yield clues about the man and his motives.
The police tracked down a micro SD card on a cat’s collar that same day. In the chip was the source code for the virus, with a message buried in it that said, “I was punished for a crime I wasn’t guilty of, and had to drastically rearrange my life.” One of the investigators who worked the case revealed to us later that “Katayama was already a person of interest by then because, based on previous e-mails, we were looking for someone who’d been convicted of similar crimes in the past.”
Police sources say a security camera on Enoshima captured footage of a man resembling Katayama moving toward the cat. Further examination of security cameras in the area produced footage of a motorbike that apparently belonged to Katayama. It also turned out that Katayama was a huge cat fan and made frequent visits to Tokyo’s cat cafés, where customers can play with the proprietors’ pets. This, along with other information, was used to get a warrant for his arrest.
When they searched his home, the police took away ten computers for analysis. Also, several of the computers at his workplace were found to have Tor installed—the browser designed to protect Internet privacy and make it hard for others to track any websites visited. Demon Killer had mentioned using Tor in his e-mails to the press. He may have failed to use it when he uploaded his virus.
Police suspected Katayama of using these PCs to remotely access other computers and send more than ten threats, either by e-mail or by posting them online. If Katayama was the Demon Killer, he certainly had a motive for making a fool of the police: revenge.
According to the Mainichi, in 2005 he had been arrested, and convicted, for posting death threats online. The threats pertained to what he perceived as an insulting illustration of a cat. To his horror, he was given a prison sentence of a year and a half in March of 2006. He wasn’t released until late 2007.
Contrast his punishment with what often happens to first-time rapists in Japan, who even if found guilty may only get a suspended sentence—as was the case recently with a Tokyo university student. It seems that only in this country can making a threat get you more prison time than actually committing a crime.
In spite of all this, no one can be absolutely certain the police finally got the right man. Ochiai, the lawyer, replied to inquiries from the press by saying, “I can’t help feeling a little uneasy. Is this really the offender? Has there perhaps been a mistake in identification? I hope the police make doubly sure. An arrest doesn’t necessarily mean the real culprit has been caught. The police themselves have proved that point.”6
Words to live by.
Mark Karpelès is guilty of bad habits. If he had paid his huge salary into a personal account and made all his purchases from there, it would be hard to make even charges of embezzlement stick. As of late 2016, he is still waiting to be tried. Unless new charges are made, he will not be held criminally responsible for the missing 650,000 BTC, but for unrelated offenses.
When a huge business fails due to human error or a poor business plan, does someone have to go to jail? Is anyone from Lehman Brothers in jail?
In many ways, it’s hard to feel sympathy for Karpelès, and certainly the people who lost huge amounts of real and virtual money with him would agree. However, you could attribute the chain of events that resulted in the collapse of the company to his better nature: a trust in people, a desire to do the right thing and comply with the law, a refusal to give in to attempted extortion. The freezing of nearly $5 million of his US assets does seem very unjust. It would appear to be rogue agent Carl Force’s retaliation against Karpelès for not playing ball. Is that the lesson to be learned here—give in to corrupt cops or lose a fortune?
On April 17, 2015, Karpelès filed a Freedom of Information Act request with US Immigration and Customs Enforcement (ICE) for information relating to the Silk Road investigation and himself. On July 29, ICE rejected the request on the grounds that a criminal investigation was still ongoing.
On June 16, 2016, after a visit to the Tokyo District Court, where he was held in a small room and not allowed to eat, read, or do anything but wait for almost the entire day, Karpelès and his lawyer had a short meeting with the prosecution.
The next morning, when he asked a guard to post a letter to his mother before the end of the day, he was told it was impossible because the translator wasn’t there.
Months of solitary confinement awaiting trial can drive anyone crazy. This was the day Mark Karpelès lost it.
He punched and smashed his head into the wall several times, breaking a bone in a finger on his left hand. He was immediately grabbed by the guards and put in a straitjacket, like the one used when Hannibal Lecter was transferred between prisons in The Silence of the Lambs—arms bound, face masked. He passed out.
He woke up in another cell, still bound, unable to move at all, and passed out again.
The inhumanity of life in a Japanese prison is a hard fact. People, particularly those not actually guilty of anything, should never be treated that way. Amnesty International has pointed this out for years. Karpelès experienced it firsthand.
On June 12, the judge granted Karpelès bail for ¥10 million, after severely criticizing the prosecution—who had tried to set bail at around ¥40 million—for dragging their feet and doing a poor job of preparing their brief. Earlier that month, at a meeting with the Cybercrime Unit, they had been told much the same: they were ignoring huge amounts of data, their case was incomplete, and their central argument of embezzlement might be wrong. In court, when asking that bail should be denied altogether, they were forced to admit that they weren’t in fact ready to go to trial.
It isn’t very often that a judge in Japan chews out the prosecutors.
Karpelès was finally released on bail on July 14, 2016.
Generally, government policy decisions and criminal prosecutions don’t connect unless a presidential pardon is involved. However, Karpelès’s complicated trial may also show that the decision by the National Diet to vote in favor of making digital currency a legal form of payment may undermine the prosecutors’ argument against him.
Put simply by his lawyer: “A large part of making the
ir case involves proving he had criminal intent. Which he didn’t.”
The nightmare situation Mark Karpelès found himself in—held in jail for almost a year with no trial date set, finally granted bail but unable to pay it because he had none of the bitcoins he was accused of stealing—would make anyone bang their head against a wall. Over and over again.
EPILOGUE
As the Mt. Gox fiasco fades from recent memory, banks and financial institutions are now studying and expressing interest in using bitcoin.
Coinbase, operating in California, is now one of the best-known bitcoin exchanges in the United States and handles millions of dollars’ worth of transactions. In New York, financial regulators have officially recognized it as a legitimate exchange, and others have also been given the official green light.
In March 2016, the Japanese government recognized virtual currencies such as bitcoin as legal tender. The National Diet also enacted a bill to regulate operators of virtual currency exchanges in order to ensure better protection of their users. This development comes more than two years after Mt. Gox went under. At the time, bitcoin had no legal status in Japan. Mt. Gox was not required to register with the Financial Services Agency. Those in the business say the newly recognized status of their currency will obviously improve trust in it, and the companies that have replaced Mt. Gox do seem to be stronger and better run.
A huge part of the present bitcoin surge comes from China. Exchanges there offer numerous incentives, and Ponzi schemes using bitcoin help fuel the fires as well. While the Chinese stock market is slowing down, and the renminbi seems weak and unsteady, investors see an attraction in bitcoin, especially in the way it allows people to move money out of the country unnoticed.
Bitcoin exchanges also remain an attractive target for hackers.
In August 2016, Bitfinex, based in Hong Kong and the largest bitcoin exchange by US dollar volume, had $66 million worth of bitcoin looted from it. At the time of the hack, the 119,756 BTC stolen was reckoned to be worth $66 million, about a fifth of what was lost by Mt. Gox. Bitfinex survived the crisis and is still doing business.
Mt. Gox is still missing 650,000 BTC.
Where are they? The Japanese police seem to have no idea. They aren’t even interested in finding them at this point; their priority is to put Mark Karpelès in jail on some charge that sticks and wash their hands of the whole mess.
Maybe Karpelès has them stashed away somewhere. Unlikely.
Shortly before this book was finished, in late July, Homeland Security Investigations, The Internal Revenue Service–Criminal Investigation Division, and other federal agencies working together with Greek police arrested the alleged mastermind behind a $4 billion money-laundering scheme that used bitcoin transactions. The US Department of Justice identified the so-called mastermind as Russian national Alexander Vinnik, age thirty-eight. He is also known by his web moniker “WME.” The US indictment filed on July 26 alleges that Vinnik was the owner and operator of BTC-e, one of the world’s largest digital currency exchanges. The investigation revealed that BTC-e received more than $4 billion worth of bitcoin over the course of its operation. Among violations outlined in the indictment, Vinnik is accused of using BTC-e and Tradehill, another US-based exchange he owned, to process funds “obtained” from Mt. Gox between 2011 and 2014. BTC-e is believed to have processed more than 300,000 bitcoins in transactions that can be traced to the theft from Mt. Gox.
A special agent working the case stated that Mt. Gox had been the victim of a colossal hack. The authorities are hoping Vinnik will lead them to the hackers, whoever they are. We now know that over 300,000 of the hacked bitcoins have been traced but what about the other roughly 350,000 remaining unaccounted for?
Maybe, after all, angry pirate friends, a.k.a. Silk Road vendors, hacked Mt. Gox and “liberated” them.
Or maybe they’re in limbo, hidden in a box of paper wallets that Satoshi Nakamoto keeps near the Buddhist altar in his tiny ten-tatami apartment in Japan. Behind a stack of tangerines, next to the incense bowl.
Maybe Nakamoto is keeping the coins for his faithful disciple Karpelès, while the latter spends time in the limbo of the Japanese criminal justice system.
If Nakamoto is in Japan.
And if he really exists.
ACKNOWLEDGMENTS
We’d like to give special thanks to some of the people who helped make this book possible.
Thank you, Aaron, Neil, Ben, Aya, Dave, Juro, Ken Shishido, Jimmy, J, Ryu, everyone for vigorously and constantly helping us understand the mechanism of bitcoin and for keeping us on the loop with the bitcoin trends. A huge thank-you to John Avlon at the Daily Beast for keeping us on the story and Christopher Dickey for editing our articles.
David Javet in Lausanne for proofreading our book, Alana Marie Plewinski and Stephen Shaw for copyediting. Thank you, Michael Staley, at Amazon Publishing, who green-lighted our proposal and gave us excellent advice.
Hail Mary to Roger Ver, a.k.a. Bitcoin Jesus, for spreading the gospel to us; the mother of Ross Ulbricht; French documentary makers Thierry, Xavier, Vincent.
Producer of Les Nouveaux Champs de Batailles, Jean-Martial Lefranc; the French embassy; the few Japanese government officials who responded to our inquiries. DarkSoul, Jason Maurice, DK for being so nice from the early stage of this book, Kim Nilsson of WizSec, Bertrand, Kristian, Jesse Powell, Bobby Lee, former CoinDesk reporter Jon Southurst, and Yuzo Kano for sharing their insights with us.
A special thanks to Neo futur (today Neopresent), for introducing us to PGP cryptography and secret communication systems. Thank you, Mr. K, for the ride on the yacht in Hayama Marina and the “Crazy 8”; without you, there would be no story today. Julien Laglasse, a.k.a. Naiku, Antho, Cédric, Laudé, and “the boys,” for your kindness. Eido Inoue, Herr Kurt Sieber, Anne Karpelès, Méko, and Alexandre, for your great support and your kindness too.
Thanks to all the reporters at FACTA and other Japanese publications who worked with us as well; to former yakuza; to some honest cops; to the Ogata Law Office crew, for their straightforwardness; to the Foreign Correspondents’ Club of Japan that is still standing up for freedom of the press. A special thanks to Tibane and Julia, the two cats of Mark Karpelès, for making this whole coverage enjoyable and hairy.
A huge bow of gratitude to all the sources that talked to us on the record and also those who wished to remain in the shadows. Thank you for trusting us.
And finally, our heartfelt thanks to you, the reader, for actually reading the acknowledgments. If you liked the book this much, feel free to toss some bitcoins into our account. Or if you didn’t like the book, you can try to hack it and prove a point!
Our bitcoin wallet is this series of numbers below. If you’re really savvy, there’s the QR code to boot. We have faith in the ability of people we don’t know to put in bitcoin and just as much faith that people we don’t know won’t be able to take the money out.
The Bitcoin Jesus will (probably) bless you for your donation.
どうも有り難うございました
Nathalie and Jake
ABOUT THE AUTHORS
Photo © Ayano Sato
Jake Adelstein has been an investigative journalist in Japan since 1993. Considered one of the foremost experts on organized crime in that country, he works as a writer and consultant in Japan and the United States, writing for the Daily Beast, the Japanese economic monthly ZAITEN, and other publications. He has served as a special correspondent for the Los Angeles Times and is the author of Tokyo Vice: An American Reporter on the Police Beat in Japan (Vintage), which has been translated into twelve languages, and Operation Tropical Storm (Kindle Single).
Nathalie Stucky is a freelance journalist in Tokyo and Europe. She was an assistant correspondent for the Japanese news agency Jiji Press in Geneva and contributed to the book Reconstructing 3/11. She has written for the Daily Beast, the Los Angeles Times, and several French publications.
CHAPTER ONE
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sp; 1 Emily Spaven, “Bitcoin Enters Oxford Dictionaries Online,” CoinDesk, August 28, 2013, http://www.coindesk.com/bitcoin-enters-oxford-dictionaries-online/.
2 The authors of this book are not computer science experts either. We have learned as we’ve worked on the story, and hopefully as you read this book, even if you have no interest in the mechanics of bitcoin, you will learn enough about it to understand how it works.
3 United States v. Carl Mark Force IV, et al., at 9, 10 (N. D. Ca. 2015).
4 Satoshi Nakamoto, “Bitcoin: A Peer-to-Peer Electronic Cash System,” Nakamotoinstitute.org, October 31, 2008, http://nakamotoinstitute.org/bitcoin/.
5 In September 2015, the Kyoto police were able to arrest three men, including a college student, who used Tor to post child pornography on a members-only website that allowed purchases in bitcoin. The police used the blockchain to track them down. Law enforcement gets smarter all the time.
6 The benefits of bitcoin mining are explained in great detail at “How Bitcoin Mining Works,” CoinDesk, last modified December 22, 2014, http://www.coindesk.com/information/how-bitcoin-mining-works/. It is highly technical, but for those who really want to know, all the nuances and “nonces” are covered.
7 The bitcoin.org website was created with the aim of permitting individuals to register domain names without providing their own names. Even the name of the registrant of the forum where Nakamoto posted his essays is a mystery.
8 Bitcoin true believers would probably object to comparing Satoshi Nakamoto with Dr. Victor Frankenstein for many reasons; bitcoin is not a monster and Dr. Frankenstein is a fictional creation while Satoshi Nakamoto is real. Of course, ironically we know more about the fictional Frankenstein than we do about Satoshi Nakamoto.
9 Timothy, “Online-Only Currency BitCoin Reaches Dollar Parity,” Slashdot.org, February 10, 2011, https://news.slashdot.org/story/11/02/10/189246/online-only-currency-bitcoin-reaches-dollar-parity.
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