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Want to understand Bitfinex? Mt. Gox understand



Daniel Cawrey is the Chief Executive Officer of Pactum Capital, a quantitative cryptocurrency investment firm and hedge fund. Sina Nader was a professional money manager with Morgan Stanley and Credit Suisse, and is now Head of Investor Relations at Pactum.

The views expressed are those of the authors and do not constitute investment advice.


"History does not repeat, but it often rhymes"

This quote is often attributed to Mark Twain. And while Bitfinex is not exactly up to date with Mt. Reim Gox, there are several parallels in the stories of these two exchanges. People interested in Bitfinex are well informed about what happened to Mt. Gox.

Bitfinex and Tether were investigated by the New York York Attorney General (NYAG). Here's a summary for those unfamiliar with the story. Bitfinex is a cryptocurrency exchange whose owners also control tethers, the issuer of the most popular stablecoin, known as tether or USDT. The NYAG accuses Bitfinex of having lost over $ 800 million. It is alleged that the stock market has sought to offset these losses by plunging into the chain's cash reserves, with the Stablecoin also being controlled by its owners.

The problem is that collecting tethered money makes Stablecoin more or less useless. This is because Tether is supposedly backed by cash reserves, and there are people who still believe that. However, if there are no cash reserves or significantly less cash than anticipated, the entire Tether concept is essentially fraudulent.

This is anchored in the submission of late last week. At the end of the document, the NYAG issues an ultimatum. The Office "does not attempt to order the interviewee to take further measures to grant access, to lend, to lend, to encumber, promise or otherwise make similar transfers or claims between Bitfinex and Tether."

Where is the money?

The cliff for BTC in Coinbase on April 25 after the Bitfinex / Tether lawsuit had fallen. Source: Tradingview

It's fair to ask, how exactly has Bitfinex lost more than $ 800 million? The answer is closely linked to the banking relations of the stock exchange or their absence. Crypto-OGs and insiders may feel like they've seen this movie before.

In fact, these feelings would be valid. In the early days of Crypto was one of the largest Bitcoin exchanges, known as Mt. Also Gox was mainly due to its banking relationships in significant difficulties. It got so bad that in February 2014, Mt. Gox stopped trading and applied for bankruptcy protection. At the time, it claimed to have lost 624,408 BTC.

What unbanked, nonconforming cryptocurrency foreign currency holdings look like. Source: Wizsec

A Japanese bank that had the Mt. Gox's cash transactions attempting to close the account. Besides, there would be no US banks with Mt. Gox. This made it essentially impossible for Mt. Gox, to return the money to users when they try to withdraw their money. There were delays of weeks or months for the users until the exchange shut down without further ado.

Gox, the fallout, persisted for a long time and continues today. If the story is a guide, we can assume that Bitfinex is causing significant problems. While this should pause many involved parties in the crypto industry, this is an excellent opportunity to reflect on the state of the crypto in general – and the crypto space for a little soul search.

Exchange Implosions

In the Issue In 2019, there are so many problematic crypto currency exchanges. Spectacular failures that make hundreds of millions of dollars disappear in the case of Bitfinex are not good. The fact that this seems to be happening again within five years speaks volumes.

From the Mt. Gox Crisis Could other flawed exchanges try to follow this book? Source: CoinDesk

This industry is still young, immature and experiencing growing pain. These latest issues with Bitfinex are also a learning option. It is now clear that exchanges without normal banking relationships are the weakest link in this volatile market. In the meantime, leading traders and funds have withdrawn assets from the stock exchanges in relatively large quantities.

inflow / outflow from BItfinex to USD value. The activity has increased since the announcement of the allegations. Source: TokenAnalyst

One can understand why the exchange of drains would increase in the current environment. It is obvious that certain exchanges can not be trusted to protect assets of the cryptocurrency.

It is time for some of the best engineers and developers to focus on the most basic mandates: compliance and custody for crypto. Up to an improvement in the level of trust, it will be difficult for this industry to grow in a way that many advocates want to see.

The lawyer Stephen Palley knows that crypto-people are worth a ton. However, this will only happen with a much stronger and more consistent exchange infrastructure. Source: Twitter

What does "custody" really mean?

Cryptocurrency goes beyond pure computer science. Experts are needed – people with experience in the various arts and sciences to secure large sums of money.

This is meant when the word "safekeeping" is used. More experts in safety, law, oversight and compliance are needed to push this ecosystem to new frontiers. Accountants, certified public accountants and experienced financial service providers with enough spices in the traditional world. These people should have a vision for the challenges and amazing promise of crypto. And innovations in bank-backed stablecoins like USDC and PAX are a good start.

"History does not recur, but it often rhymes." It's easy to look at Mt. Gox and see similarities to Bitfinex and Tether. This time, however, it is probably even more complex given the stable inflows and outflows of the tether chain.

Nevertheless, all the signals, such as the large price range between Bitfinex and regulated exchanges such as Coinbase, are present. And we can stop the repetitive "Groundhog Day" scenarios. We can do better and never let that happen again.

Bill Murray is trapped in the movie "Groundhog Day" in a mysterious time warp. Crypto does not always have to repeat the same mistakes over and over again. Source: Moviefone

We may be trying to build a better world at the interface of finance and technology with crypto. However, it may be time to admit that we can learn some things from the old financial systems on Wall Street that we are upgrading.

It's not about teaching new tricks to an old dog, but rather about a young, promising puppy who has learned a few tricks from the old dogs who have been dealing with money for several centuries.

Gox image via CoinDesk archives.


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