Note:
This is the sixth in a twelve part series I'm doing on centralized exchanges. This part is going to focus on the why the collapse of Mt.Gox was so devastating and also start building the case of the issues with modern day CEXs with a story from my personal life
Part 6: Worst Case Scenario
It is hard to articulate how bad of a scenario the Mt. Gox hack was. Not just in financial terms but in human suffering. I hope that Parts 3 to 5 have shown you how the crypto-currency space is designed to conduct some kind of Psychological Operation (PSYOP)) and this helps you understand the kind of mental stress the victims of Mt.Gox went through and are going through. There is a reason why the suicide prevention hotline was up top on r/cryptocurrency at one point
The customers of Mt.Gox lost millions if not billions of dollars each. More importantly the lives that money could have given them. It was a worst case scenario
The CEX was essentially insolvent and the BTC was just gone
200,000 BTC was eventually recovered and hopefully will be distributed as the creditors agreed. However it is nearly 8 years later and some of them are not with us
It frightens me that nearly all market participants are now in a similar position to those poor souls in 2014. Full of hopes and dreams of a promised crypto bull run that will make them "financially independent". Built on the back of a shady business that can go tits up any second. At the end of the last part I hinted at doing a deep dive into what many consider to be crypto's biggest systemic risk; USDT. But feel a lot of people who cover USDT don't cover the entire system. They are fixated on just one part of a complex web. So to try and show how complex and bad a system can get. I will tell you the tale of:
The Beverage Heist
Background:
A couple of years ago I worked as an administrator for a large resort during one of the most complex and baffling case of employee negligence and theft
Anyway this resort was divided in to three sections each with its own bar and beverage
- Accommodation: hotel bar and restaurant used exclusively by hotel guests
- Entertainment area: 2 restaurants, 2 bars, 1 beverage bar (no alcohol), 1 cocktail bar and a night club with a bar: Used by hotel guests and day visitors
- Family area: with 1 beverage bar used by day visitors
The place was massive and it had separated entrances for guests but walkways for employees to get around. Because of this while one company they had different prices for beverages in the family area and other two. It cost the company $0.30 a Coke, Pepsi etc... and they sold them in the Accommodation and Entertainment bars for $1.50 and $1 in the Family. As the Family area usually got more guests so the volume of sales was higher
The beverage system was that there where 5 barmen and a beverage manager at a Central bar ( CB). Each bar operated independently and only interacted with the CB to get restocked if their stock was low and to hand in cash sales at the end of the day. A typical week was that from Friday to Sunday they would sell 2000 -5000 units of non-alcoholic beverages. On Monday there would be a stock take and at the end of the day or Tuesday morning this would be sent to our office for review. On Tuesday or Wednesday a new order for beverages would be placed to the suppliers based on the stock take and what needs replacing. Thursday a delivery is made before the weekend
The surprise check:
On a random Monday in July we decided to do a physical stock take with the barmen and the CB manager . We showed up and did the rounds with them. Took about 2hrs to 3hrs. We had blank sheets where we basically just counted how many drinks where in display fridges, the back of each bar etc.... Drove back to the town office and decided to go over them on Tuesday ( We obviously did more work, I remember the whisky and wine stuff taking ages)
So on Tuesday we started going over the stocks and we did this by entering them in a system that was linked to the pay-points at the resort. So it would automatically detect an issue. We where off by a couple thousand units (~$1000 to $1500) worth of stock. This obviously raised a big flag. Because each bar was independent and now we had missing stock across all six. So we ordered the replacement stock and decided to drive out on Wednesday to figure out what happened. As because of the size of the resort and CCTVs on the pathways it only meant that there where unrecorded sales (missing funds)
The heist
So we set up shop in the hotel managers office and started interviewing each of the barmen. It turned out that the two of the barmen had been restocking not from the CB but from the other bars. The Family sections barman had been smart enough to keep a book of all the times they had taken stock from him. It was a lot, but he had maintained his stock by getting it back from the CB later. This meant that on average 4 of the bars where fractionally stocked with the CB under stocked and 2 bars overstocked. However based on our Monday stock take all the bars where understocked based on the sales
After hours of interviews and going over CCTV footage and sales records we got it:
- The two barmen had a deal with both the CB manager and the delivery van to purchase drinks off the van at the co at company rate
- They would use these beverages to cover up the stock they would sell for cash on weekends and pocket the difference ( $600 - $1000) each weekend
- Because the CB manager was responsible for sending the stock on Monday she would falsify the stock on hand
- Their plan had been to frame the other barmen in the event of getting busted by making all the bars look bad and thus remove suspicion off their two
- Unfortunately they got greedy and instead of being off by a couple of units they where off by thousands
Based on what the Family section barmen had written this had been going on for at least 2 years so they had stolen at least $100,000; just from beverages
Now imagine on CEXs where there are no checks and balances. You just give these people your crypto and hope they aren't sending each other your property in a complex scheme of maintaining fictitious balances.
The SEC may be the administrator who shows up and discovers that there is not enough crypto on stock. CEXs (1) sent it to CEX (2) to cover a withdrawal. The CB is just pretending to be the moral center but is involved in the shady business
However unlike me and my work mate, the SEC can't phone Satoshi to deliver more BTC for he weekend. This is the worst case scenario
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