A Japanese bankruptcy court declared this week that collapsed Bitcoin exchange Mt. Gox will not be permitted to reorganize and therefore must enter liquidation. The court rejected Mt. Gox’s petition (similar to a Chapter 7 filing in the United States) on the grounds that the plan of reorganization submitted by Mt. Gox is unlikely to be successful. Moreover, the court claimed that CEO Mark Karpeles has lost the confidence of creditors and customers whose cooperation would be necessary to carry out the reorganization under Japanese law.

Liquidation comes as unwelcome news to Mt. Gox’s customers, many of whom have held on to the possibility of a full recovery of lost funds. Since liquidation involves selling or otherwise distributing all of the identifiable assets of the company, a partial recovery may still occur. However, Mt. Gox customers will likely be grouped with other creditors and subjected to whatever debt subordination agreements or statutes are applicable to Mt. Gox’s situation rather than being treated as “depositors.”

For US taxpayers, complete liquidation will be necessary before a loss can be claimed for tax purposes. Though the process is expected to be lengthy, movement from reorganization to liquidation is a step that indicates that it is moving forward, at least in Japan.

One key question is whether the bankruptcy trustee will treat bitcoins remaining in Mt. Gox’s possession as liquid assets that can be distributed as such or will require that they first be converted to cash by selling them on another exchange. Sale of a large horde of bitcoins is likely to put significant downward pressure on the price, at least for a short time, which will negatively impact the amount that customers could receive. A bulk sale of the entire lot by another exchange or investors is also a possibility.

Another question which is likely to interest Bitcoiners, whether or not they lost money with Mt. Gox, is whether any investigations into possible wrongdoing by the company’s management will continue after bankruptcy liquidation. The question of what, exactly, happened at Mt. Gox is important, but law enforcement interest in pursuing a case involving a foreign national and foreign company might not be sustainable past discharge of Mt. Gox’s bankruptcy.

Mt. Gox’s other assets, such as they are, will be sold at auction. Whether a buyer will be found for the intellectual property, website and trademark remains to be seen. The company’s name has become synonymous among Bitcoiners with fraud, which may hamper the future value of the name and website. This fact may have been taken into consideration by the Japanese bankruptcy court in its evaluation of the company’s reorganization plan.

Mark Karpeles, who is a French national but lives in Japan, has thus far declined to travel to the United States to provide a deposition in relation to the company’s US bankruptcy filing. The US bankruptcy judge has suggested that the company might not enjoy the protection of US bankruptcy law if its CEO fails to appear. Karpeles has also been subpoenaed by the Financial Crimes Enforcement Network (FinCEN). Mt. Gox and Mark Karpeles now face lawsuits in

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