Bitfinex has issued its own digital asset in what analysts are labeling an unusual attempt to offset customer losses stemming from a $66m theft last week.
As the market eagerly awaited more details this weekend, Bitfinex announced and subsequently released a new blockchain asset called a BFX token to all customers. The offering, now visible in user accounts, is an attempt by the company to reimburse exchange users for the "generalized loss" of roughly 36% of their funds as an emergency measure to keep the exchange online.
Initially priced at $1 each, the BFX token is intended to be traded on an open market, and it might even eventually be swapped out for stock in iFinex, the exchange's Hong Kong-based parent company.
The exchange wrote this weekend:
"The BFX tokens will remain outstanding until repaid in full by Bitfinex or exchanged for shares of iFinex Inc. The specific conditions associated with the exchange of these tokens will be explained in a later announcement."
To analysts, the token is yet another step into uncharted territory for the troubled exchange that began last week with the plan to generalize losses across its user base.
On one hand, analysts agree the token is representative of what might happen should a business enter the liquidation phase of a bankruptcy. On other fronts, they were less sure of both how to view the token, and maybe more importantly, how it could be viewed by regulators.
The same, but different
Veteran digital currency lawyer Carol Van Cleef, for example, told CoinDesk she believes this is the first instance where a digital asset has been issued by a company to meet its debt obligations.
According to the terms, the BFX tokens are being deposited "without release or waiver" — which presumably means whether the customer wants them or not — into the account of each user. US customers may face additional restrictions, though exactly why was not clear from company materials.
Van Cleef added the idea isn't without its parallels in traditional finance.
"It is apparent that they have attempted to develop a solution that is cognizant of various legal frameworks," she said.
However, she foresees that US government agencies such as the SEC and the CFTC could take an interest in the company's activities, but said that there’s nothing that inherently prevents Bitfinex from pegging its token to the US dollar or making it redeemable for stock.
Van Cleef said:
"That kind of financial arrangement, while not commonly done using a token, is not unheard in other contexts."
In lieu of insurance
Digital currency lawyer Drew Hinkes agreed that the BFX token is fundamentally different that anything he's ever seen before.
Further, he commented on the speed at which the decision to issue the asset was reached.
"This concept of having an equity shortfall and issuing a token that then can be convertible into stock to my has never happened before," he said. "Convertible debt into equity is not something you typically toss out there."
Another difference is that while Bitfinex is branded as an exchange, many of its customers have opted to use the platform as a means to store their funds.
As Bitfinex uses a margin trading system based on peer-to-peer lending, there are advantages to doing so – namely the interest payments users can gain. But, Hinkes said the lack of insurance offered by the company made doing so especially risky.
Traditional banks are required to ensure deposits of up to $250,000 through the Federal Deposit Insurance Trust (FDIC), but this is not the same for digital currency exchanges.
Hinkes is concerned about what might happen if customers demand a full withdrawal of their deposit. In some ways, the BFX token appears to be based on the assumption that the customers will be more interested in recovering their funds over time without a fight than all at once through the potentially tedious process of a lawsuit.
"The entire community should take a half step back and look at what’s happened," said Hinkes.
He continued:
"A lot of people have been robbed and instead of their money, they're being offered a debt token."
A pound of flesh
Jerry Brito, executive director of the non-profit research facility Coin Center, agrees with Hinkes that US agencies are likely to be paying close attention to the way Bitfinex is handling the theft.
Speaking with CoinDesk, Brito said he believed it is likely the US Federal Trade Commission that would be paying the closest attention.
Specifically, he's concerned about the Bitfinex terms of service. The documents have come under community scrutiny in recent days for revealing new details, such as Bitfinex's registration in the British Virgin Islands.
But Brito said that uncertainty about Bitfinex’s decision could result in action by more than just the private sector.
He concluded:
"I would be surprised if there are not lawsuits that emerge from this incident, especially by customers who may want to contest the socialized loss scheme."
Bitfinex did not respond to requests for additional information at press time.
Ticket image via Shutterstock