What Does the Bitfinex Hack Mean for it’s Future?
Will Bitfinex Remain When the Dust Clears?
We have always regarded Bitfinex as one of our favorite exchanges. This is primarily due to the lack of verification required for transferring Bitcoin on to the exchange, along with exchanging it for USD. This is similar to BTC-E as reviewed here. Since registering years ago, laws have changed, primarily with BitLicense. We have never held much money on the exchange, so losses are minimal if they affected our account. Our primary interest in Bitcoin is the technology, therefore a long position.
Bitfinex Hack: What Actually Happened?
Bitfinex’s hack remains shrouded in mystery. The actual method of attack is up for debate, but there are a series of rationalizations around the community regarding the methodology. The one thing that doesn’t remain a mystery is the price of Bitcoin, which has dropped and recovered somewhat since the hack and official announcement of the theft.
Bitfinex has not been entirely transparent as they scramble through records and media for answers. It may take weeks, months or years, possibily even never before the exact method of attack is determined.
Bitgo and Multi-Signature Wallets Affected
Bitgo announced a partnership with Bitfinex in 2015. They promised a radical approach to securing wallets of thousands of customers with a proprietary system. This system allowed customers funds to be segregated in different wallets, rather than pooled into a hot wallet, or backed up with cold wallets. The system ensured 3 keys to be confirmed for each wallet. 2 would be held by Bitfinex and one by Bitgo.
Regardless of our understanding of this technology, BitGo would have had to sign off on any withdrawls from customer wallets. This is leading many in the Bitcoin community to question Bitgo and it’s practices. BitGo’s response has attempted to quiet the nervous community, but only time will tell. It makes sens they can’t talk about something with a current investigation, but if they are not at fault, why are they being investigated?
For the record, we will never let our silence in an active investigation impede our duties to inform you of security risks in your own wallets. Security isn’t static, and neither are we. If we need to make changes to ensure security, we are dedicated to doing so quickly and comprehensively.
Customer Accounts Heavily Affected
Bitfinex was fined $75,000 by the US Commodities Futures Trading Commission (CFTC) in late May, 2016 for how it was handling the processing of Bitcoin purchases. CFTC found issues with their futures platform, aside from not registering with the CFTC. The main problem was that Bitfinex remained in control of the Bitcoin private keys while customers shelled out for money. Speaking simply, Bitfinex denied users control of their purchased Bitcoin. Bitfinex paid the fine without pleading guilty or not guilty. Although this may have been a sign of problems with Bitfinex, many disregarded as a type of profilling against Bitcoin businesses.
The Future of Bitfinex
Bloomberg news has reported recently that Bitfinex “may spread losses among users”. This may sound ridiculous, but for some it would make sense. There are probably hundreds of accounts with thousands of dollars of Bitcoin on Bitfinex. This may be a way to satiate (almost) everyone, by not giving it’s largest users the blunt end of the attack. Afterall, Bitfinex probably relies on “whale” traders for a majority of it’s revenue from trading fees. The issue with this though is how they calculate the losses per person. It would make sense that they calculate a percent of total lost, then credit each account as such. This could drive the smaller users away, but regardless, Bitfinex’s legacy is forever tarnished by the biggest exchange theft since MtGox.
Some refute the fact that Bitfinex was hacked at all. This blog post examines how one user came to the conclusion that Bitfinex was insolvent before they were reportedly hacked. It’s hard to say if this guy is actually making a valid point. We can’t take a stance on either side. As with all things Bitcoin, stay smart and play hard to get with exchanges. Even the best exchanges are compromised at some level.
Well there you have it, all you needed to know about the Bitfinex hack. Please sign up to our newsletter (don’t worry we only send emails twice a year) using the form on the right hand side of our blog.