Bitfinex Interim Update | Hacker News Reader

Bitfinex Interim Update

blog.bitfinex.com

48 pointsHeliosmaster36 comments

The founder of BitFinex, Raphael Nicolle, seems to have disappeared.[1] It also turns out that he previously tried to start a Ponzi scheme. His previous job was working the help desk at Gutenberg Networks, according to LinkedIn.

BitFinex has been in previous trouble with the CFTC over customer account custody issues.[2] Having multi-sig keys doesn't help if the exchange has the keys.

Inside job?

[1] https://www.cryptocoinsnews.com/bitfinexs-ceo-seemingly-trie... [2] http://www.cftc.gov/idc/groups/public/@lrenforcementactions/...

I am not familiar with the early days of BitFinex, and I hope the conclusion the two articles point to may not be true.

How come so many people managed to trust BitFinex that appears to have such opaque management?

If it's an insider job by the founder, why did (s)he not withdraw 100% of the assets in the exchange? Probably to make it look more likely to be done by an outsider(s)?

If I recall correctly 100% of the assets that were withdrawable were actually withdrawed.

edit: Well regardless of that being the case, why would an attacker not withdraw all the funds they can lay their hands on?

Many people seem to believe the bitcoin-exchange-as-a-scam thing is worthwile, but I don't think it really is. Karpeles is in jail, and will be for a very long time, and I've heard he doesn't enjoy his jail time much.

The identities of these people are known, their spending can be tracked. I can't see how the life of a exchange scammer is in anyway more attractive than that of a straightforward exchange runner. What are they going to do, cash out a couple of million somewhere and emigrate to South America? They could do the same simply by selling their exchange. Besides, Dread Pirate Roberts showed that emigrating is not really attractive to many people, even when not doing so is a terrible idea.

wow, it was perhaps light grey but knowing that, now it's almost black. Thanks for sharing. :-)

Mark Karpeles is not currently incarcerated and is busying himself by taunting the twitterverse.

https://news.bitcoin.com/inside-scoop-mark-karpeles-release/

https://twitter.com/magicaltux?lang=en

Oh wow, that news totally passed me by. The knowledge that he was in jail had a definite positive impact on my quality of life.

> BitFinex has been in previous trouble with the CFTC over customer account custody issues.[2] Having multi-sig keys doesn't help if the exchange has the keys.

If bitfinex hadn't implemented the segregated accounts, they would probably be much better off. One reason for segregated accounts was speculated to be the CFTC trouble.

That's ridiculous. If they want to avoid trouble with CFTC the answer is to register with them, not some home cooked idea that segregated wallets would keep them clean. I simply can't believe that the CFTC would take a second look at their BitGo setup and say "sure, go ahead, no need to register anymore". I don't even believe that was the intention, it's wishful thinking in hindsight by the spectators over at Reddit.

Yeah, it would be stupid if it was the only action. As I understood, they paid 75kusd fine, then applied for the license as well, and did bunch of other compliance-actions. Segregated wallets were one of those.

The exact discussions/dealings between CFTC and bitfinex are of course unknown.

It seems like a pattern with Bitcoin platforms: 1. Start an exchange 2. Get millions in assets 3. Claim a hack 4. Profit

I'm surprised the Nigerian prince didn't jump on this one.

I wonder if this was actually a sophisticated trade to profit from shaking up the market - claiming a substantial hack to make the market panic, then buy back the "lost" coins for way lower prices. If you control this kind of assets you can easily corner the market and participate from the emotional reactions. The lost coins can either not be lost at all or sold off way before that in small chunks, netting a profit after all is over.

classic exit scam

Still no word on what happened.

How did the heist happen? Why did BitGo sign the transactions?

My expectation: It will throw a very bad light on BitFinex and BitGo when the nature of the breach is revealed.

This is more important than the 36% haircut (and the likely lawsuits that will follow).

BitGo announced two days ago that their insurance policy was discontinued in January 2016. They claim their customers were informed of this.[1] Customers are claiming they were not.

[1] https://blog.bitgo.com/bitgo-secures-first-ever-comprehensiv...

Bitfinex was started with the leaked Bitcoinica source code, after it had been hacked. The founders openly talk about trading at their own exchange. I don't know how much more bad light could make a difference. People still trade there because that's where the liquidity is, just like they traded MtGox knowing full well the account database had leaked, it regularly kneeled under pressure etc. That first mover advantage is a problem in the Bitcoin space but maybe that will change with time.

That Bitfinex was not legit was predicted: http://btcbase.org/log/2013-05-16#34498

So... just pretending not to be insolvent and hope nobody goes to court to force them into insolvency?

Their argument is that this haircut is pretty much what would happen if they went into insolvency voluntarily. But now they are opening an avenue to redeem themselves and stay operating.

It makes some sense. I don't know whether I think it is a good idea, but it isn't without sense.

Except of course with insolvency an independent 3rd party is put in charge and the board power's removed and a court overseas any liquidation of assets and repayment of creditors.

Here on the other hand... the existing players all remain in place and whether or not there's any liquidation occurring is unknown. If auctioned I wonder what bitfinex as an entity would be worth? Or even just it's assets (like a functioning, somewhat, crypto-currency exchange application)?

Frankly I'm a bit surprised. There can be significant legal risks involved in operating a business that you know is insolvent.

So everyone loses 36% of their account value?

Seems like it... this can't possibly be legal, right? Surely the company should be forced to liquidate to make customers whole again, or issue debt/equity to get the money. I'd love to read a take on this from someone with a better understanding of the regulatory environment Bitfinex is subject to.

But it might be in the interest of the customers. If Bitfinex can keep functioning (a big "if"), they will eventually make that $80M that got stolen.

Bitcoin exchanges generally are quite profitable enterprises, so I would say it's theoretically possible.

In a way, it sounds like they are issuing debt, the BFX token. The people "buying" the debt just don't have much say in the matter.

From a CFTC action: "BFXNA Inc. d/b/a Bitfinex is a corporation formed and existing under the laws of the British Virgin Islands, and has its principal place of business at suite 13/F, 1308 Bank of America Tower, 12 Harcourt Road, Central, Hong Kong, China."

If a bank tried to pull this ...

Banks couldn't pull this. They're regulated and insured. Investment banks less so, but plain old banks holding your checking and savings -- not a chance.

Bank accounts are only insured up to a certain amount. FDIC limit is $250K.

Most people know this, and setup their finances appropriately.

Many people who have a Bitcoin position seem to be ignorant to the fact that they aren't insured for even $250. (I've owned Bitcoin since 2011) I suppose they've taken for granted that for pretty much their entire life they've banked and never really thought about the possibility that tomorrow it'll all be gone and it's just SFYL.

It has been said many times: Not your keys, not your bitcoins.

You don't own bitcoin if you put them on an exchange. Period.

The 36% haircut represents ~1.5 years of USD margin funding profits on Bitfinex. I was well aware of the risks I was taking to earn that kind of return :)

Cyprus did it not that long ago. They forced a loss on bank customers, although in a way that targeted non-citizens.

Yes, but Cyprus is a sovereign nation, not a private bank.

And not just 36% of their bitcoins. Apparently everyone is losing 36% of everything, ETH, LTC, USD, BTC. That would mean the Bitcoin loss would have to be 36% of assets, not 36% of bitcoin. I wonder if anyone realized bitfinex considered your other deposits as their own personal insurance against theft of bitcoin.

It's sort of like being a Lloyds of London "name" ... only without any of the benefits.

So if John Doe transferred $100,000 to his Bitfinex account but never pulled the trigger and bought Bitcoin with it, he's going to log in and find $64,000? Ouch!

So much responsibility, and very little improvement since Gox. I still can't figure out how Bitfinex left such a large % of their assets in one place.

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