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Want to understand Bitfinex? Understand Mt. gox



Daniel Cawrey is managing director of Pactum Capital, a quantitative investment company for crypto-hedging and hedge funds. Sina Nader was a professional money manager at Morgan Stanley, as well as Credit Suisse, and is now the leader of investor relations in Pactum.

The views expressed are the authors and are not investment advice.


"The story does not repeat itself, but it often rhymes"

This quote is often attributed to Mark Twain. And while Bitfinex doesn't just fit with Mt. Gox, there are several parallels in the stories of these two exchanges. People interested in understanding Bitfinex are well-versed in understanding what happened to Mt. Gox.

Bitfinex and Tether were examined by the New York York Attorney General (NYAG). Here is a summary for those who are not familiar with history. Bitfinex is an encryption exchange, where the owners also control Tether, the most popular stablecoin issuer, known as tether or USDT. NYAG accuses Bitfinex of losing over $ 800 million. It claims that the exchange attempted to recover these losses by immersing in the cash holdings of tether, stabencoin's governments also managing.

The problem is that taking money like Tether will make stablecoin more or less useless. This is because Tether is believed to be backed by cash, and there are people who still believe in it. Nevertheless, if it is not cash reserves or significantly less cash than believed, the entire Tether concept is essentially fraudulent.

This is posted in the submission from the end of last week. At the end of the document, NYAG issues an ultimatum. The Office "seeks to receive the Respondents from taking additional measures to access, borrow, extend credit, close, lift or make other similar transfers or claims between Bitfinex and Tether."

Where's the money?

Cliff for BTC on Coinbase April 25 when the Bitfinex / Tether lawsuit fell. Source: Tradingview

One can rightly wonder: how did Bitfinex lose more than $ 800 million? The answer is closely intertwined with the bank's relationships, or lack thereof. Crypto "OGs" and insiders can feel they've seen this movie before.

In fact, these feelings would be quite valid. In the early days of crypto, one of the largest bitcoin exchanges, known as Mt. Gox also had significant problems due mainly to banking conditions. It was so bad that in February 2014, Mt. Gox stopped all trading and filed for bankruptcy protection. At that time, it claimed to have lost 624,408 BTC.

What unbeaten, incompatible crypto-crop exchange companies look like. Source: Wizsec

A Japanese bank that handled Mt. Gox's cash transactions had attempted to close their account. In addition, no US banks would work with Mt. Gox. This made it essentially impossible for Mt. Gox sends the user's money back to them when they tried to withdraw the money. Users experienced delays for weeks or months until the exchange closed uncertainly.

In the case of Mt. Gox, fallout lingered long and continues to this day. If history is a guide, we can expect a possible fallout from significant problems that Bitfinex is experiencing to face. Although this would pause many participants in the crypto industry, it is an excellent opportunity to reflect on the state of crypto in general – and for the crypto field to do a little soul searching.

Exchange implosions

About the problem in 2019 is the presence of so many problematic crypto exchange. Spectacular errors where hundreds of millions of dollars are missed, when it comes to Bitfinex, is not good. The fact that this seems to happen again within five years speaks volumes.

From Mt. Gox crisis docs. Can other failing exchanges attempt to follow this same playbook? Source: CoinDesk

This industry is still young, immature and experiencing growing pain. These latest issues with Bitfinex are also a learning opportunity. It is now clear that exchange without normal banking conditions is the weakest link in this volatile market. Now prominent traders and funds have drawn assets from exchanges in quite large quantities.

Inlet / outlet of BItfinex by USD value. The activity has increased since the claims were announced. Source: TokenAnalyst

One can understand why exchange will increase in today's environment. Certain exchanges obviously cannot be trusted to protect cryptocurrency assets.

It is time for some of the best engineers and developers to turn to the most basic mandates: Custody compliance and custody. Until there is an improved layer of confidence, it will be difficult for this industry to grow in ways that many lawyers will see.

Lawyer Stephen Palley knows that crypto people want the BTC to be worth a ton. Yet it will only happen with much stronger and more compatible exchange infrastructure. Source: Twitter

What does "custody" really mean?

Cryptocurrency goes beyond just computer science at this point. Experts are needed – people who have experience in various arts and sciences to protect large amounts of money.

This is what is meant when using the word "detention." Several requirements for safety, law, regulation and compliance are required to push this ecosystem to new borders. Accountants, accountants and experienced financial actors with enough spices in the traditional world. These people will have a vision for the challenges and also the amazing promise of crypto. And innovations in bank-supported stablecoins like the USDC and PAX are a good start.

"The story does not repeat itself, but it often rhyme." There is probably a familiar rhyme that runs around right now. It's easy to look back at Mt. Gox and see similarities with Bitfinex and Tether. This time it is undoubtedly even more complicated given the Tether stablecoin inflow and outflow.

Nevertheless, all the same signals, like the big price distribution between Bitfinex and regulated exchanges like Coinbase, are there. And we can stop the repetitive "Groundhog Day" scenarios. We can do better and not let this happen again.

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

We can try to build a better world at the intersection of economy and technology with crypto. However, it is perhaps time to acknowledge that we can learn some things from the old financial systems on Wall Street we're working on upgrading.

It's not about teaching an old dog new tricks, but rather about a young, promising puppy who learns a few tricks from the old dogs who have been managing money for a couple of centuries.

Mt. Gox image via CoinDesk archives.


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