Bitfinex clients to lose 36pc of assets after HK exchange hack

Value shaved off customers’ accounts to make up for losses. But those affected offered ‘BFX’ token that can be redeemed for shares in parent company

PUBLISHED : Monday, 08 August, 2016, 2:07pm
UPDATED : Monday, 08 August, 2016, 10:08pm

Bitfinex, the Hong Kong-based crypto-currency exchange that lost US$72 million last week in a hack, has told its customers they will lose just over 36 per cent of their assets held on the platform.

But those affected will be compensated with newly issued token which can be exchanged for shares in its parent company.

In a statement over the weekend, the company said losses would be shared, or “generalised” across Bitfinex clients, adding it would come back online in “the coming days”.

“Due to the indiscriminate nature of the attack, we have decided to generalise losses across all accounts. Upon logging into the platform, customers will see they have experienced a generalised loss percentage of 36.067 per cent,” the official statement said.

Hackers stole 119,756 bitcoins from the Bitfinex exchange in the security breach early last Wednesday, about 0.75 per cent of all bitcoins in circulation, prompting the company to halt all deposits and withdrawals from the service.

Bitfinex will now issue new tokens called “BFX” to each customer equal to their loss, which can be exchanged for shares in parent company iFinex Inc.

Leo Weese, president of the Bitcoin Association of Hong Kong, said the decision to socialise the losses from the hack was preferable to drawn-out legal proceedings that would eat up remaining funds.

“It’s highly questionable, legally, but a quick settlement is very much preferred to formal litigation as we saw, for example, in the MtGox case.

“The more transparent Bitfinex is about the situation, the more this deal will be accepted,” Weese said.

The MtGox exchange filed for bankruptcy soon after it lost 850,000 bitcoins worth US$480 million in a hack in 2014.

It’s highly questionable, legally, but a quick settlement is very much preferred to formal litigation as we saw, for example, in the MtGox case
Leo Weese, president of the Bitcoin Association of Hong Kong

Weese added some have questioned the company’s calculations and the nature of the hack, so the firm must share as much information as possible to reassure customers.

Bitcoin users have become increasingly aware of how to protect their assets from hackers, Weese said. It has become easier and safer for bitcoin users to store funds on their phones, computers or dedicated hardware wallets meaning they no longer need to hold funds with exchanges, he explained.

The Hong Kong Monetary Authority does not have control over virtual currency exchanges such as Bitfinex but has issued multiple warnings on the risks of crypto-currencies including bitcoin.

Paul Haswell, a partner at international law firm Pinsent Masons, said bitcoin and other virtual currencies require regulation to protect consumers and that without this, the growth of the currencies will be limited.

“Therefore for the benefit of both the development of crypto-currencies and to safeguard Hong Kong consumers Hong Kong regulators, most likely the HKMA, should be considering how best to regulate the many exchanges that are in operation,” Haswell said.

Bitfinex customer Peter Todd, a Toronto-based developer of Bitcoin Core technology who estimates he lost between a US$200 and US$2,000 from the breach, agreed socialising the losses was one of the preferable outcomes.

“It’s probably one of the better outcomes that can come from this — the alternative is probably a messy bankruptcy process where the total funds that end up in creditors hands will be even less once legal fees are taken into account,” Todd said.

Todd said he limits his risk by keeping the amount of bitcoin he holds on exchanges to a minimum.