Mt. Gox was a leading Bitcoin exchange that recently filed for bankruptcy protection, TechCrunch reports.
Though the company filed for bankruptcy in Japan, its filing serves as a cautionary tale to business owners in the U.S. about bankruptcy issues that come with entering highly volatile financial arenas of business.
Here are three legal lessons from Mt. Gox's bankruptcy filing:
- Beware lawsuits from customers. When a business files for bankruptcy, potential legal action by disgruntled customers may soon follow. In Mt. Gox's case, an Illinois man who lost roughly $25,000 in bitcoins has filed a class-action lawsuit against Mt. Gox, alleging consumer fraud, negligence, breach of fiduciary duty, and breach of contract, among other allegations. Although it's often very difficult to obtain damages from a company undergoing bankruptcy, it may be possible for the plaintiff to obtain special permission from the bankruptcy court to proceed with the civil lawsuit, The San Francisco Examiner reports.
- Bitcoin makes for a risky investment. As Wired described it, Bitcoin is a "potentially world-changing technology -- the first viable, decentralized, reliable form of digital cash." It could democratize international finance. But for now, it remains an incredibly volatile business model, making the market players prime targets for bankruptcy, which in turn could negatively impact their ability to attract and secure investors. Many investors consider a firm's bankruptcy risk prior to making equity or bond investment decisions.
- Chapter 11 filing is a viable option. Mt. Gox sought protection from creditors under Japan's Civil Rehabilitation Law. Akin to Chapter 11 bankruptcy in the U.S., the law will allow Mt. Gox to continue as an ongoing entity while an independently-appointed official supervises the restructuring of operations.
Above all, Mt. Gox's bankruptcy filing illustrates how quickly a filing by a company in a risky market can attract the attention of regulators.
While Mt. Gox's bankruptcy filing is a way for the company to rise from the digital currency ashes, it's also likely to further stoke the debate over whether Bitcoin should be regulated -- the company's legal woes may have only just begun.
- Bitcoin Exchange Mt. Gox Files for Bankruptcy (Forbes)
- Find a Phoenix Bankruptcy Lawyer (FindLaw)
- Should Your Business File for Chapter 11? (FindLaw's Phoenix Bankruptcy News Blog)
- Video Game Company THQ's Bankruptcy Sale Put on Hold (FindLaw's Phoenix Bankruptcy News Blog)