MtGox currency withdrawal delays --> insider arbitrage or free loan ?

[bkava]

In the article by Jonathan Stacke on the withdrawal delays he proposes that MtGox may be converting it's Bitcoin denominated transaction fees into fiat currency (from new deposits) and using that money to pay for withdrawals.

You can read his argument here.
http://thegenesisblock.com/mt-gox-withdrawal-freeze-driving-significant-liquidity-concerns/

The article also mentions that withdrawals could also be coming from new deposits but given that withdrawals are likely outnumbering deposits due to lost confidence it seems more likely funds for withdrawals would come from fiat due to selling bitcoin earnings. Either way it seems almost certain there is a liquidity issue and that customer funds have been mixed/commingled with company funds.

What he doesn't address is the 7-10% arbitrage opportunity for MtGox insiders. They can sell Bitcoins to MtGox account holders who want to transfer Bitcoins to Bitstamp to convert to fiat currency. Essentially this turns into a 7-10% withdrawal fee.

Thus it seems likely to me that either delayed withdrawals are a free loan to MtGox to develop their business and fix their liquidity issues or it's an underhanded way to have a huge withdrawal fee and rob their users, likely also to fix liquidity problems due to seized / frozen funds.

A point worth considering is that the withdraw freeze/delay occurred during a period of intense technical development to deploy to private colocation and build out a new trading platform. These would certainly have incurred very high costs for MtGox.

In either case MtGox may not be trying to outright rob users but they are likely behaving unethically. As an account holder with a pending withdrawal the problem I see is that with the increasing reputation of BitStamp the only transactions that can be occurring right now on MtGox are the following
1. Customers buying Bitcoins to transfer out via BitStamp/Coinbase
2. MtGox selling Bitcoins (to arbitrage)
3. Customers selling to arbitrage (hoping that mtgox won't go under. 7% arbitrage gain for 3 months delay still 28% annual return)

Is anyone here doing (1) or (3)?

Does anyone have any ideas how it would be possible to determine if MtGox is using the arbitrage strategy?

-B

[Kato]

These are really interesting questions. I had a withdrawal request from June that was not met. Responses they gave me kept indicating another 2 or 3 week backlog, as per their public announcements. Eventually in early August I gave up, and took the price hit on transferring out via BTC. A bird in the hand is better than a dead one in the bush.

I agree this smells of Mt Gox adopting some highly unethical practices to solve cash flow issues. Although this is unproven, Mt Gox has given no evidence of what it has actually paid out in withdrawals once these delays were announced, which banks they have new arrangements with (if any), etc, so they have not been very transparent and therefore invite skepticism even if unfounded. I would be interested to hear who has actually received withdrawals, and how long they waited.

The arbitrage seems easy unless you take into account that we really don't know how much longer the problem will go on for, given past statements have not been met (at least for myself). Until Mt Gox demonstrate otherwise it is possible there could be a bigger danger lurking behind the scenes.