Does Bitcoinica Founder Zhou Tong Have Some Explaining To Do?


Bitcoinica site as it looked in 2011. Grabbed from Wayback Machine.

Bitcoinica site as it looked in 2011. Grabbed from Wayback Machine.

Did Bitcoinica founder Zhou Tong steal funds, return a part of them, then pay someone to keep it quiet? Well that would seem to be the impression created by the latest revelation contained in a Youtube video discussed on Reddit

 

 

Bitcoinica – Some Background

Zhou Tong founded Bitcoinica in 2011 at the age of 17. Bitcoinica was an online trading company that enabled users to speculate on contract-for-difference market against the Bitcoin to USD exchange rate.

In March 2012, Bitcoinica reported that they had lost 43,554 BTC after an alleged hacking at web hosting provider Linode’s servers. A second heist happened in May 2012 in which 18,000 BTC was stolen, and lastly in July 2012 when the hacker struck once again and made off with 40,000 BTC in addition to US$ 40,000. It is important to note that Bitcoinica’s money was held with Mt. Gox.

Each time after a heist Zhou Tong would go through the same process of shutting down the servers, issuing press statements and generally doing his best to calm down worried investors on forums such as Bitcointalk, run by Michael Marquardt – also known as Theymos. He also promised to reimburse Bitcoinica customers for the full amount. The following month, April 2012, Bitcoinica announced that they had registered in New Zealand as an FSP or financial services provider. According to a New Zealand government website, the registration was done on March 22nd, 2012.

New Zealand would have been favorable for a company like Bitcoinica, due to the country’s more liberal regulatory regime that is void of the bureaucracy common in other Western countries. New Zealand is also favorable to startups wishing to do business in the Asia Pacific region. Zhou Tong spent his childhood years in Singapore making New Zealand and its liberal regulatory climate an even easier choice.

All the same the company was deregistered in November 2012. From the beginning Zhou Tong opted to outsource everything that he could not do himself including sysadmin, security and banking according to an interview that was published in mid-2012. In explaining this decision, Zhou Tong said that it had to do with wanting to keep operating costs low. Isn’t it also possible that it was done this way to create the conditions for plausible deniability later on? The other question that also arises is, why did he keep such huge sums of money in a hot wallet instead of moving them to say, deep storage?

Following the Money Trail on the Block Chain

As mentioned earlier, Bitcoinica suffered three heists over a four-month period. After the first heist, Zhou Tong posted the following on BitcoinTalk,

We will take appropriate strategies and implement more security features to prevent this from happening ever again, even with the presence of dishonest partners or employees.

Though not conclusive, the questions that arise are, did he know at that point that some of his partners and employees were dishonest? What measures did he take in order to prevent the thefts from happening on two other occasions in the same year?

The reasons for asking become even more germane when an audit trail of transactions after the July 2012 heist is examined. In the video shown below, the stolen funds can be seen leaving the Bitcoinica wallet. Of interest is the 1 BTC that moves around quite rapidly within a period of 24 hours. It is then mixed with other bitcoins from other wallets. An examination of a number of those other wallets reveals close collaboration between Zhou Tong and Mt. Gox in moving the money around so as to hide the trail.

Blockchain analysis of the stolen 40,000 BTC on Blockseer

Blockchain analysis of the stolen 40,000 BTC on Blockseer

It gets interesting when a payment of 80 BTC is made to Theymos with funds meant for the recovery of the bitcoin stolen from Bitcoinica. Earlier in this article, the identity of Theymos has been revealed as Michael Marquardt. Michael Marquardt was subpoenaed in the Ulbricht case that infamously involved the collapse of Mt. Gox  and Silk Road. Given that Bitcoinica had an account at Mt. Gox and the 80 BTC payment to Theymos, the question that arises is what Zhou Tong’s role was in the whole saga.

Story Generates Discussion on Reddit

The reddit thread on this subject had an active day on Wednesday with 167 comments and counting. Contributors to the thread revolved around four areas including bitcoin and law enforcement, coin mixing and the culpability of Zhou Tong and Theymos.

A contributor named manginahunter posed,

The real question is: Can mixer beat up those analytics software ? Because if not, bitcoin may have a privacy flaw that need to be addressed ASAP!

And in wondering whether Zhou Tong was guilty here is what Apnean had to say,

If there is a reasonable explanation, ZT should explain. Otherwise he should never be trusted in the bitcoin world again. He is currently a principle in an Australian btc trading site. There is an old addage: “behind most great wealthy people or families, if you dig back far enough, you will find a crime.” (or something like that)

 

Featured image from Shutterstock.