A number of new regulations have come into place in the past few years to help prevent recurrences of recent financial scandals and meltdowns, and to ultimately bring stability to the markets, e.g. the Dodd-Frank Act (DFA) for US parties and MiFID/EMIR (and in the future MiFIR) for EU parties.
These regulations provide for e.g. daily and in some cases semi-realtime (30min) reporting of trading activities. Reports can also go to the counterparties who can dispute or verify trading activities.
Other countries, e.g. Russia, Singapore, Hong Kong, even South Africa are enacting similar pieces of legislation.
In some cases, the trade repositories (companies who accept trade reports) satisfy multiple supervisory bodies e.g. the DTCC will accept reporting under DFA, EMIR, MAS (Singapore), HKMA (Hong Kong) legislation.
Here is the speculative part: You can imagine this gives authorities a pretty good idea of who is trading what, what their exposure is and to who, etc. Because all parties are required to be registered with the appropriate regulatory bodies, I would think the alleged fraud at MtGox would have at least two obvious problems if they were subject to similar regulatory oversight:
(1) MtGox would be registered as brokers and wouldn't be trading parties, so at minimum it'd be very suspicious (and more likely illegal) to see them taking the other side of a trade (they couldn't report using a non-existent party for their side of the trade like they do here as that submission would be rejected since the party would be invalid, and they can't just not report because the counterparty buying the BTC will identify MtGox as the seller in its submissions; they also can't use a random real counterparty because that real party will dispute the trade took place)
(2) even if they legitimately took the other side of the trade (e.g. Mark registers as a trader) while cooking the books, I'd imagine they'd have to reconcile their audited books/bank accounts with their reported trading history, which would reveal fraud (by controlling the trading history they can claim anything; with a regulator, they can't control the trading history).
In effect, regulation of this sort would force all trading claims to balance out across all parties - where they don't, there would be an investigation.
They were caught once in 2012, but its pretty clear the fact it took two years to catch them at it means they probably got away with it for as long as Mt Gox did, given the environment that enabled it lasted 9 years.
That doesn't count LIBOR, etc. When the incentives to break the system exist, it will get broken from time to time even with regulation. Regulation just reduces the frequency and generally requires multiple bad actors to truly manipulate the entire system.
And when 'breaking the system', basically gets you fined [not put in jail for 5+ years], you can generally calculate the degree of risk you are taking and effectively have a chance of just breaking even if you get caught...:/
Mt. Gox wouldn't happen, but the type of people that ran it would have found a different way to 'cheat'.
Regulations are about shifting incentives and in the case of Libor the banks involved were both investment and commercial banks and thus had enormous temptation.
Anyhow, you can't eliminate bad actors and thus reducing their frequency and intensity is the whole point. These crises have negative costs to everyone, and for most of these the inefficiency cost of regulations is utterly dwarfed by the cost of big crises.
Won't argue against how much easier the justice system is on you if you're rich.
Anywho, best of luck :)
For instance, if the exchange had been regulated as a Designated Contract Maker (DCM) by the US CFTC [1] (which by the way will most likely never happen), it would had been subject to very specific and strict disclosure/auditing, price discovery, capital, risk and monitoring requirements --including for instance strict limits on account aggregation, hard position limits for very large accounts, 'surprise' audits and automated 'alerts' to regulators [2].
Furthermore, if people's complaints or whistleblowers were to persuade CFTC they had a case, they would had had the authority to investigate them, prosecute them, pre-emptively close them down and freeze their assets, and even piercing the corporate veil (eg target Karpeles' individual assets, or even criminal liability) under their broad anti-market manipulation authority [3,4]. At the very least the prospect of harsh prosecution --as opposed to simply wash your hands by declaring bankruptcy and moving on-- should have affected his cost-benefit calculus.
Again this is not to say of course the regulations would have precluded any form of massive fraud or market manipulation (which happens all the time regardless; cf the recent Libor scandal), but definitely it would have made this particular scheme essentially unfeasible.
[1] http://www.cftc.gov/IndustryOversight/TradingOrganizations/D...
[2] http://www.ecfr.gov/cgi-bin/text-idx?c=ecfr&sid=7ccb37730775...
[3] http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/D...
[4] http://www.cftc.gov/ucm/groups/public/@newsroom/documents/fi...
Never mind the criminally dumb omission of the transaction fees. Gox could have bought a valid trading identity on one of the various websites that sell them, and included the fees (which end up in their pocket anyways) in the transaction.
1) Identifying operators and users, so if fraud happens, the right people can be found and held accountable
2) Requiring paperwork documenting what is happening, again, so if there is a fraud of some kind it can be detected and the responsible parties found
3) Actually trying to prevent fraud, usually this means mandatory audits of some kind
I can't point you to what rules govern a currency exchange in Japan exactly, but the above is how it usually seems to break down.
Gox was AFAIK never audited. How much of a paper trail exists is unclear. The relevant people's identities are known, however.
One other thing I think we should clear up: these rules are usually pretty vague and general. It's not like regulation is something that people opt into or out of depending on their personal preferences. Whatever regulations applied to exchanges and markets in Japan would likely have also applied to Mt Gox.
The problem with trying to argue that the fix is "regulation" in the abstract is "regulation" isn't some singular silver bullet. It's a big pile of rules and people who try to enforce those rules, but often those rules aren't doing what you think they're doing, or they exist to allow punishment rather than prevention, or they're somewhat theoretical because they aren't reliably enforced. This is why lots of people would dearly love to find a way to build a decentralised exchange: in theory it could be more reliable than a regulated institution.
Anyone know what kind of regulations prevent sneaky behavior in the stock market? How do they work?
On the topic of price manipulation in other markets if you follow financial news at all there have been a rash of cases of banks paying large fines and even pleading guilty to manipulation of at least the libor rate and gold prices and there are supposedly more on going investigations into price manipulation.
http://www.bloomberg.com/news/2014-01-06/royal-bank-of-scotl...
http://www.ft.com/intl/cms/s/0/08cafa70-e24f-11e3-a829-00144...
In reality, however, you don't need elaborate specific regulations. Most fraud prevention laws appears to be specific on surface but they always have one subjective caveat that if company knowingly acted in bad faith, the executives could be on trial.
So once a law is enacted saying X is regulated, it just means that enforcement authorities can come after you even if there is a wide spread suspicion of fraud. Then its just matter of invading company's internal documents, emails, databases to find that it acted in some bad faith and broke some law. Outcomes in top cases is typically dectated by public anger, events like proximity of next elections and lobby politics. Law is usually flexible enough to achieve that outcome.