Understanding the Bitfinex Hack

On 2 August 2016, Bitfinex, the world’s “largest bitcoin exchange by US dollar volume” (according to Coindesk.com) was hacked. In the course of the Bitfinex hack, 120,000 bitcoins (equating to about $70m in value) was stolen from Bitfinex traders’ digital wallets.

What is Bitfinex?

Bitfinex is an exchange that allows users to trade between cryptocurrencies (the most well-known being Bitcoin) and government-issued currencies (mainly the US dollar).

It also facilitates peer to peer financing – and enforces the contracts entered into between “financing providers” and “financing recipients” by forced liquidation of trader’s accounts (if necessary).

Can Traders Affected by the Bitfinex Hack Obtain Compensation?

In an unusual move, Bitfinex has ‘socialised’ or ‘generalised’ the loss across its entire trader base. This means that Bitfinex reduced the value held in the digital wallets of all traders on its exchange by 36%.

Then, to compensate all of its traders for their loss, Bitfinex issued them with a new blockchain asset called “BFX tokens”. This asset can eventually be redeemed for value from Bitfinex or exchanged for shares in iFinex Inc, Bitfinex’s parent company based in Hong Kong.

In the meantime, traders can trade BFX tokens on the open market with an initial value of $1 each.

Can Traders Sue Bitfinex Instead?

Individual Bitfinex traders have the option of notifying Bitfinex that they don’t accept the compensation plan and commence legal action.

However, by commencing legal action, traders run the risk of forcing Bitfinex into liquidation. Liquidation may leave traders (as unsecured creditors) no better off and could even lead to a trading halt in the interim.

Without further information from Bitfinex on the terms and conditions for the redemption or conversion of BFX tokens, it seems to be too early to work out whether its compensation plan is a good one.

Accordingly, traders may elect to notify Bitfinex that they reserve their rights and that a delay in exercising a right does not constitute a waiver or acquiescence.

What are the Takeaways From This Incident?

When considering litigation, lawyers and clients alike must question its purpose –  what outcome can be achieved and at what cost. At present, it would be difficult to conduct a cost/benefit analysis for those affected by the Bitfinex hack.

Issues of strategic importance also need to be considered. Does an individual go public about the details of his/her investment in cryptocurrency exchange trades? Would information disclosed to a court by Bitfinex also make it susceptible to further hacks?

The right to pursue legal remedies is just one-factor parties must consider when entering into commercial dealings. Potential litigants need to weigh up their options to decide on the best outcome.

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If you have any further questions or need help in any litigation processes, please contact one of our specialist disputes lawyers on 1300 544 755.