French-born Karpeles, 30, was arrested on Saturday after a series of fraud allegations led to the Tokyo-based exchange's spectacular collapse last year and hammered the digital currency's reputation.
Karpeles is suspected of manipulating data on the exchange's computer system in 2013 to artificially create about $1 million (roughly Rs. 6 crores) in Bitcoins, while police were also investigating his possible involvement in a massive loss of the virtual currency in 2014.
He was sent to the Tokyo District Public Prosecutors' Office Sunday morning for further questioning, public broadcaster NHK said.
Police now suspect that he illegally spent customer deposits worth about JPY 1.1 billion ($8.9 million), according to NHK and the best-selling Yomiuri newspaper.
He is suspected of misusing the funds privately and sending them to his other firms, the news reports said.
Police are expected to rearrest him on suspicion of professional embezzlement over the suspected misuse of funds, the Yomiuri said, quoting police sources.
Under the Japanese criminal justice system, police can hold a suspect without charge for up to three weeks, during which time they may carry out vigorous interrogations in an attempt to extract a confession.
Karpeles reportedly denied all allegations. His lawyers were not immediately available to comment.
Before his arrest, Karpeles told the Nikkei business daily that he never misused customers' funds and he still suspected outside hackers had been stealing Bitcoins for years.
The global virtual currency community was shaken by the shuttering of Mt. Gox, which froze withdrawals in early 2014 because of what the firm said was a bug in the software underpinning Bitcoins that allowed hackers to pilfer them.
The Mt. Gox exchange which once boasted of handling around 80 percent of global Bitcoin transactions filed for bankruptcy protection soon after the cyber-money went missing, admitting it had lost 850,000 coins worth 48 billion yen (roughly Rs. 2,474 crores). They were worth about $480 million (roughly Rs. 3,069 crores) at the time of the disappearance.
Karpeles later said he had found some 200,000 of the lost Bitcoins in a "cold wallet" a storage device such as a memory stick that is not connected to other computers.
Japanese media, citing police, have said investigators suspect Karpeles knew details about the missing Bitcoins which were transferred by his exchange to a separate account without notifying depositors.
Bitcoins are generated by complex chains of interactions among a huge network of computers around the planet and are not backed by any government or central bank, unlike traditional currencies.
Investors have demanded answers from Karpeles and called on the firm's court-appointed administrators to publicise its data so that hackers around the world can help analyse what happened at Mt. Gox.
"I knew it. I thought it's absolutely strange that all of them disappeared only because of hacking," a 23-year-old investor who saved his Bitcoins at the exchange told the Mainichi Shimbun.
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