Topic: Bitfinex legal obligations to users (Read 2804 times)

They previously paid out roughly 1% of the losses to customers about a week ago. They are currently attempting to raise money via an equity sale to have sufficient funds to make their customers whole. 

Speaking about legal obligation to users. Is Bitfinex refunded stolen BTC the users in any way?
Last time I heard about their 'refund' proposal, they were trying to force some sort of "token" refund system instead of simply paying customers their coins back.

Is there are new info about this?

One would generally be advised to not assume any tangible recovery from a bankruptcy or common law liquidation. HK follows the British common law with some exceptions in deference to China's civil statutes. The US is largely based on British common law but have some 150+ years of our own. That said, pursuing an individual claim may (at this stage) appear more valuable.

The trick is that, while one could in theory sue in any Federal jurisdication in the country, you would have to assume there are assets held in the US collect on any judgment - and that can include anything you can consider; bank accounts, payment processor balances, accounts receivable, IP, etc. Given the similarity with HK law, domesticating that judgment (as I have seen it done) is not terribly difficult to accomplish

In essense, this is the proverbial race to the courthouse.

That would be great, but costs of such insurance would likely be huge (if it was to cover 100% of customers' deposits) and those costs would be pushed on to customers in the form of higher fees. And if the hack happens it would probably take rather long time till insurer actually pays out.

Maybe it would make more sense for large exchanges to build up their own fiat money reserve designated to cover losses of potential hacks.

There should be regulations put in place ensuring that all exchanges have insurance against hacks.

If an exchange is hacked, customers will be refunded by the insurance company.

I'm pretty sure that strategy will blow up their face. The point of contention, I'm fairly sure, is the issuance of the unregistered securities. These are pretty clearly some kind of bond (whether convertible or not), so I can't imagine a sound legal argument that they aren't securities (at least under US law). I'm guessing the SEC will eventually come down on them (perhaps even shut them down), but US agencies take months and months to build a case and act.

They are trying to avoid prosecution by the SEC with a rule that U.S. people can only sell BFX tokens, but they cannot buy BFX tokens. Bitfinex will argue that they aren't allowing US people to trade them because they can't buy and sell them. I don't think that strategy will work, the SEC will probably prosecute them anyway.

Here's the problem: They issued the tokens to US users. These tokens are either a bond or a security -- or something in between. In any case, issuing them to US users is likely a violation of US securities law and could get Bitfinex into hot water with the SEC.

They can't really argue that they aren't allowing US users to trade them either, since they are allowed to sell them on the exchange. Unverified US users can also use all trading functionality (including margin trading and trading of the BFX token).

There are a lot of restrictions on issue of "securities" in the US.
That could be one reason with Bitfinex does not want US citizens to buy these tokens.

It's unclear how many users are affected. Apparently only verified US users are affected. One of two stories is being told:

1) Synapse Pay revoked Bitfinex's access to their bank accounts and wired money held back to customers. Those users had their accounts frozen for "accounting reasons" and it's unclear how many have access to the rest of their funds now.

2) Some users had their "BitGo wallets frozen" (according to BitGo, this was actually done by Bitfinex) and for similar "accounting reasons" do not have access.

Really scary stuff for these customers.

From an article at merkel I recently read, it doesn't seem they had their accounts banned, just that a lot of of them had problems with withdrawing or trading on the website.

So Im hearing that all US users at Bitfinex account are now frozen.
Any United States users that can confirm this?

It was a very serious thing that has made Bitcoin to fall and now the moment has come to normal. I hope never to happen ever

looks like just about anyone can empty bitgo wallets. what a top line service it is. I reckon the next week or two is the vital time. we'll see whether bfx is solvent, how this shitcoin's supposed to work and whether there's gonna be any legal action. I can't imagine there won't be.

just amazing 

I don't know if the OP of this reddit thread is correct, but he says there are rules preventing Bitfinex withdrawing coins from BitGo wallets belonging to its customers until an arbitrator decides what to do.

Bitfinex emptied all BitGo wallets anyway, but whether that was legal is an interesting question.

https://www.reddit.com/r/Bitcoin/comments/4wcspe/i_recommend_to_those_from_bitfinex_with_bitcoin/

So what happens when the exchange returns to profits? Do the owners get the money, or do the users recoup their losses?
Ideally, the owners equity should be wiped out before users take a hit.

You got it exactly backwards.
It is BECAUSE of current regulation they had it mostly in hot wallets.
It was demanded by CFTC, and they were fined by CFTC for NOT having enough bitcoin in hot wallets, as far as I understand it.

For now they've released a statement online informing its users that they'll be spreading/sharing its losses amongst all the users. They termed this as Socialized loss proposal. I'm sure they still owe people their money and will have to liquidate their assets to repay their users if they claim bankruptcy.

For now, We'll need to see if they have insurance to cover theft and how much of it do they have, cause the amount stolen is very very huge.

I think Bitfinex is insured against bankruptcy. So their insurance company should be able to pay the bill however large it may be.

It might require a long process though.

The ignorance of those guys is pretty scary. If they carry on with that logic and allow withdrawals, they can land themselves in jail.


Are you sure? $78m doesn't sound like small percentage to me.

way too early to tell but zane tackett's from bitfinex's wording is kinda slippery -  "some of our users have had their bitcoins stolen" and they're trying to "account for individualized customer losses"

check this comment - https://www.reddit.com/r/btc/comments/4vtv67/bitfinex_security_breach/d62uzxn

at the moment it feels like their gist is that the loss is somehow the customer problem not theirs, but that's only my guess. he's emphasized repeatedly that only bitcoin has been taken and everything else is safe so maybe they intend to continue trading as if nothing happened?

i'm not sure this guy understands bankruptcy and liabilities himself.

Bitfinex are based in Hong Kong.  Liquidation of a company in HK is set out in the Companies (Winding Up and Miscellaneous Provisions) Ordnance.

Generally, if the company is unable to pay a debt of $10,000 or above.

The stolen/hacked btc is alleged to be worth in the region of $78M USD. If Bitfinex can show that they have enough by way of reserves to cover this amount, they would avoid Liquidation.  If they have insurance against theft (and assuming the insurance covers hacking) then they would avoid Liquidation.

Ultimately, a creditor will have to make an application to the court, after following the correct procedures for Liquidation.  In HK, I do not believe class actions are allowed by the Court.  There has been much debate in HK about class actions and maybe this event will lead the judiciary to accepting a class action system.  For now, that is not an option.

I hope this is not another Mt Gox situation, I truly hope that Bitfinex are somehow covered here but due to the large amounts taken, it is inevitable I believe that many BTC customers of Bitfinex will lose out. 

I hope people will now agree that digital currency exchanges have to be regulated properly in order for trust to grow in the industry.  If proper procedures were in place at Bitfinex, this simply would not have been possible.  Why they had such a huge amount of BTC in hot wallets and not cold storage is no doubt a question that will be asked a million times.

I am not sure how much liquidation value their assets have that are not USD, or any crypto coin. Sure they have brand value, however that would probably turn into a liability if they did not make their customers substantially whole.

As for how each individual customer is treated, there are varying moral arguments as to how to handle customer losses. The fact that margin trading has been halted, and the price has moved substantially makes this an even more complex situation.

Ideally, bitfinex is in a situation in which only a small percentage of customer funds is affected, so the semantics will not really matter.

I'm looking for answers here by someone in the know about bankruptcy laws. Bitfinex has lost 120,000 BTC but not their ETH ETC and LTC USD etc. Let's assume they are insolvent which to me seems probable.

Does this mean they have to liquidate all their assets to cover their entire customers equally? So sell off all their alts and then spread the BTC or USD across their customers.


To not make this complex we should replace cryptocurrency with currency i.e look at exchanges in USD EUR and other assets where there is precedent.

This is paramount to trading in the markets right now. Appreciate any help.