Another huge problem with Bitfinex's bail in

in bitcoin •  2 years ago

I just realized there's another huge problem with Bitfinex "socializing" the theft loss.

The thefts were from segregated accounts

All of the funds stolen from BItfinex were in segregated accounts. Bitfinex's terms make it clear that these assets belong to their customers, have been delivered to them, and that Bitfinex has no legal right to access the funds without customer permission.

Notwithstanding the distribution of the private keys and subject to any valid liens, encumbrances, and pending settlements, all bitcoins in your Multi-Signature Wallets belong to and are owned by you. You may, at any time, withdraw bitcoins from your Multi-Signature Wallet to the extent that they are not encumbered by any Liens. -- Terms of Service

Thus, the funds stolen were funds that had already been legally delivered to Bitfinex's customers. They weren't stolen from a common pool of funds owed by Bitfinex, they were stolen after they were delivered to customers.

It is not clear that Bitfinex is liable for the thefts

When someone's property is stolen while in the custody of a third party, the third party is not automatically liable for the theft. The third party's liability would normally depend on whether they did or did not provide the applicable standard of care. If they did take sufficient care, but a thief stole the property anyway, they are not liable. So far as I know, no law creates strict liability or any special standard of care that would apply to this situation. It's ordinary third party liability for a criminal act, which requires a breach of a standard of care.

Bitfinex has not advanced any theory of liability, nor have they acknowledged liability. So far as I know, no court has determined Bitfinex's liability, nor have any of their customers had an opportunity to advance arguments one way or the other.

We have no idea what standard of care they think they were required to provide and no way to determine whether they did or didn't provide it. It also seems that the research into the theft is ongoing. There may not even be sufficient information available to assess liability.

If Bitfinex is not liable, they are not insolvent

If Bitfinex is not liable for the theft, they have sufficient assets to cover their obligations. Those whose accounts were stolen from will suffer 100% of the losses, until funds are recovered from the thief.

Of course, were Bitfinex to claim they were not liable, they would certainly face legal challenges. They have not said anything one way or the other.

Bitfinex's terms do not permit socialization of losses if Bitfinex is solvent

If Bitfinex is not liable for the theft, there is no justification for imposing losses on those not stolen from. Nothing it Bitfinex's terms allows this. While it may seem fair, one could equally well argue that those who had funds in segregated accounts benefited from the advantages of those accounts and so they are the ones who should suffer from its vulnerability.

Socializing losses will make Bitfinex insolvent

If Bitfinex is liable for the theft, they are insolvent. If they are not liable for the theft, they owe 100% of deposited funds to those not affected by the theft and 0% to those whose funds were stolen.

The problem is that right now they are paying 64% of deposits to those whose deposits were stolen. If they are not insolvent, that's roughly $50 million they are paying out to customers that they must not pay out. Unless they have $50 million in capitalization, this will surely make them insolvent.

Socializing losses that Bitfinex is not liable for is an illegal disaster

So either Bitfinex is already insolvent (because they are liable for the theft) or they are intentionally making themselves insolvent (because they are overpaying the theft victims). It may well be that as of yet, nobody has enough information to determine it Bitfinex is liable for the theft or not.

It Bitfinex is ultimately found not to be liable for the theft, there's a possible that theft victims' withdrawals would be deemed fraudulent transfers. That is, Bitfinex's actions may be harming the theft victims as well as destroying their business.

Frankly, I find their actions baffling. They have not explained them. They do not make sense. If Bitfinex knows for sure that they are liable for the theft, why haven't they explained their reasoning? Right now, they've pretty much assured themselves that everyone will sue them because nobody can tell if they're being treated fairly.

If you were not directly affected by the theft, your 64% payout should be safe and lawful. But if you were directly affected by the theft, your 64% payout may be a fraudulent transfer -- an insolvent company paying out funds not owed.

I hope I'm wrong

I really do hope I'm wrong. Can anyone please explain to me where and how I am wrong? Is Bitfinex really as out of control as they appear? Can we get some sort of official statement explaining why Bitfinex thinks it is fair and lawful to socialize the losses?


Please read my earlier article -- Bitfinex: Do not deposit any funds

Authors get paid when people like you upvote their post.
If you enjoyed what you read here, create your account today and start earning FREE STEEM!
Sort Order:  

I agree. How can we get together to get justice. I lost money in the breach. actually I didn't until the website took my funds to help cover the loss. It feels like I got robbed, and I dont like the Idea of letting them get away with it because what does that tell crypto websites? It tells them they have access to take any money they want for customers. This is what leads me to think someone like the Government is involved. They have the most to gain from peoples loss of faith in bitcoin and crypto. We need to do something. Even if it means complaining enough to show people care.

·

There will be lawsuits. Bitfinex's unilateral, unexplained decisions have ensured that representatives of pretty much every class of customer will sue them. Though, to be fair, they probably would have gotten sued by lots of people pretty much no matter what they did, assuming they can't get the stolen funds back.

Sadly, lawsuits are a terrible solution. Lots of money will go to lawyers and everyone will lose.

But, to be clear, they will definitely happen. Every customer who was not directly affected by the loss but who is finding Bitfinex unwilling to pay them what they are owed has an incentive to be first to sue. Bitfinex has no excuse for not paying them unless they concede they are insolvent, in which case all kinds of legal proceedings are unavoidable.

Great post.