The views expressed are those of the authors and aren’t investment advice.
“History doesn’t repeat itself, but it often rhymes”
This quote is usually attributed to Clemens . And while Bitfinex doesn’t exactly rhyme with Mt. Gox, there are several parallels within the stories of those two exchanges. People curious about understanding Bitfinex are well-served to know what happened with Mt. Gox.
Bitfinex and Tether were investigated by the ny York Attorney General (NYAG). Here’s a synopsis for those unacquainted the story. Bitfinex may be a cryptocurrency exchange, the owners of which also control Tether, issuer of the foremost popular stablecoin, referred to as tether or USDT. The NYAG accuses Bitfinex of losing over $800 million. It alleges the exchange tried to recoup those losses by dipping into the cash reserves of tether, the stablecoin its principals also control.
Problem is, taking money held by Tether would render the stablecoin more or less useless. this is often because Tether is supposedly backed by cash reserves and there are people that still believe this. Yet if there are not any cash reserves, or significantly less cash than believed, then the entire concept of Tether is actually fraudulent.
This is laid call at the filing from late last week. At the top of the document, the NYAG issues an ultimatum. The office “does seek to enjoin Respondents from taking any longer action to access, loan, extend credit, encumber, pledge, or make the other similar transfer or claim between Bitfinex and Tether.”
Where’s the money?
The cliff for BTC on Coinbase April 25 once the Bitfinex/Tether lawsuit dropped. Source:Tradingview
One may rightly wonder: how exactly did Bitfinex manage to lose quite $800 million? the solution is closely intertwined with the exchange’s banking relationships, or lack thereof. Crypto “OGs” and insiders could also be feeling like they’ve seen this movie before.
Indeed, those feelings would be quite valid. within the youth of crypto, one among the most important bitcoin exchanges, referred to as Mt. Gox, also got into significant trouble due primarily to its banking relationships. It got so bad that in February of 2014, Mt. Gox stopped all trading and filed for bankruptcy protection. At the time, it claimed to possess lost 624,408 BTC.
What unbanked, noncompliant cryptocurrency exchange holdings appear as if . Source: Wizsec
A Japanese bank that handled Mt. Gox’s cash transactions had been trying to shut its account. additionally , no U.S. banks would work with Mt. Gox. This made it essentially impossible for Mt. Gox to send users’ cash back to them once they tried to withdraw their money. Users experienced delays of weeks or months until the exchange pack up unceremoniously.
In the case of Mt. Gox, the fallout lingered for an extended time and still continues to the present day. If history is any guide, we will expect any potential fallout from significant troubles experienced by Bitfinex to linger too. While this could give many participants within the crypto industry pause, it’s a superb opportunity to reflect on the state of crypto generally – and for the crypto space to try to to a touch soul-searching.
At issue in 2019 is that the presence of numerous problematic cryptocurrency exchanges. Spectacular failures where many many dollars go missing, within the case of Bitfinex, aren’t good. the very fact that this appears to be happening again within the span of 5 years speaks volumes.
From the Mt. Gox crisis docs. Could other failing exchanges attempt to follow this same playbook? Source:CoinDesk
This industry remains young, immature, and experiencing growing pains. These latest issues with Bitfinex also are a learning opportunity. It’s now clear that exchanges without normal banking relationships are the weakest link during this volatile market. Now prominent traders and funds are pulling assets from exchanges in fairly large amounts.
Inflow/outflows on BItfinex by USD value. Activity has increased since the allegations were announced. Source: TokenAnalyst
One can understand why exchange outflow would increase within the current environment. Certain exchanges clearly can’t be trusted to safeguard cryptocurrency assets.
It is time for a few of the simplest engineers and developers to show their attention to the foremost basic of mandates: Compliance and custody for crypto. Until there’s an improved layer of trust, it’ll be difficult for this industry to grow in ways many advocates want to ascertain .
Lawyer Stephen Palley knows crypto folks want BTC to be worth plenty . Yet which will only happen with much stronger and more compliant exchange infrastructure. Source: Twitter
What does ‘custody’ really mean?
Cryptocurrency goes beyond just computing at now . Experts are needed – people that have experience within the various arts and sciences needed to safeguard large amounts of cash .
This is what’s meant when using the word “custody.” More security, legal, regulatory, and compliance experts are required to push this ecosystem to new frontiers. Auditors, accountants, and experienced financial operators with enough seasoning within the traditional world. These people should have a vision for the challenges and also the amazing promise of crypto. And innovations in bank-backed stablecoins like USDC and PAX are an excellent start.
“History doesn’t repeat itself, but it often rhymes.” There’s certainly a well-known rhyme going around immediately . It’s easy to seem back at Mt. Gox and see similarities to Bitfinex and Tether. This time, though, it’s arguably even more complex given the Tether stablecoin inflows and outflows.
Yet all an equivalent signals, just like the large price spread between Bitfinex and controlled exchanges like Coinbase, are there. and that we can stop the repetitive, “Groundhog Day”-type scenarios. we will do better and not let this happen ever again.
Bill Murray is trapped during a mysterious time loop within the movie “Groundhog Day.” Crypto doesn’t always need to repeat an equivalent mistakes over and over. Source: Moviefone
We could also be trying to create a far better world at the intersection of finance and technology with crypto. However, perhaps it’s time to acknowledge that we will learn some things from the legacy financial systems on Wall Street we are working to upgrade.
It’s not about “teaching an old dog new tricks,” but rather a few young, promising puppy learning a few of tricks from the old dogs who’ve been managing money for a couple of centuries.