Tokyo police arrest head of Japan-based bitcoin exchange, Mt Gox

Tokyo police on Saturday arrested the head of the failed Japan-based bitcoin exchange Mt Gox, who they suspect, inflated his cash account by $1 million, authorities said.

Mark Karpeles (30), allegedly accessed the exchange's computer system in February 2013 and inflated his account, Japanese police said.

The France-born Karpeles could face up to five years in prison, or a fine of up to ¥500,000 ($4,000) if found guilty.

According to Karpeles' lawyer, his client denied wrongdoing, the Kyodo News agency reported.

Mt Gox went offline early last year and according to Karpeles, tens of thousands of bitcoins worth several hundred million dollars were unaccounted for. He suggested they were stolen by hacking.

What the relationship between the lost bitcoins and the inflated account was, was not immediately clear.

Karpeles appeared on Japanese TV clad in a T-shirt, with a baseball cap pulled low over his face, as he was being led to a police car from his home in Tokyo.

The Mt Gox case had baffled Japanese authorities, by their own admission, as they had never dealt with a crime involving bitcoin.

Experts further said it might be difficult to take action due to the absence of laws covering virtual currencies.

According to the police only Karpeles had access to the computer system and that he accessed the computer system and tampered with in-house records of transactions.

Police say after inflating the amount in his account, Karpeles exchanged the inflated dollars into bitcoins and then converted those bitcoins into actual currency before withdrawing the money.

Police are trying to find out how Karpeles used the money and are considering arresting him and pressing charges, including embezzlement.

Before filing for bankruptcy Mt Gox was one of the world's largest bitcoin exchanges, with most its clients being foreigners, and Japanese representing only about 1 per cent of customers (See: Bitcoin exchange MtGox files for bankruptcy protection).