Tokenizing Your Claims

The blockchain sector continues to entertain, amuse, impress, and inspire me. 

Last week one of the biggest cryptocurrency exchanges, Bitfinex, was hacked and was reported to have lost around $65mm of bitcoin it was storing for its customers.

So what did they do in response? They told every customer that they had lost a portion of their assets (36% to be exact) and that they were issuing crypto-tokens to them in proportion to the amounts they had lost. 

I have not done business with Bitfinex so I was not directly involved in this affair. However our portfolio company Coinbase competes with Bitfinex so I am most certainly an interested observer and maybe even an interested party.

What is interesting is that it is not entirely clear what these crypto-tokens will be exchangeable for. Will Bitfinex treat them as liabilities that they will eventually pay off (debt)? Or will they ultimately be paid back with equity in Bitfinex? Will there be a traditional bankruptcy or will this be settled out of court? And who is going to represent the creditors?

But maybe the most interesting thing of all is that a market is being made in these crypto-tokens. If you hold them and want to sell them for dollars or bitcoin, you can do that. 

They have tokenized the claims their customers have against them. Talk about the dogs eating the dog food. It is impressive in many ways to watch the blockchain sector encounter traditional business problems and address them in a native blockchain way. And it will be interesting to see if the legacy system intrudes or not.


Comments (Archived):

  1. jason wright

    crypto cannibalism. BSE – cows eating cows. people made a lot of money out of that unnaturalness.decentralised exchanges are the future!

  2. Mario Cantin

    Is the hacker(s) really going to be able to get away with that on the long run though? If he, she or them are caught, can the funds be restituted, or is it unlikely? In the case of the DAO, they’ve had to fork. Bitcoin can’t obviously be forked over this, being that it’s worth 10 billion.

  3. Tom Labus

    Did they ever say how they were hacked?

  4. William Mougayar

    Notwithstanding the creativity of the Bitfinex token issuance, customers losing their holdings if a crypto-currency exchange gets hacked is a ludicrous idea.Imagine if you lose a % of your bank deposits if your bank gets robbed. And there is a long list of bank thefts and robberies, up to TODAY:…Crypto-currency exchanges need to grow up and provide deposit assurances. I wrote about this whole issue of security, this past Monday:http://startupmanagement.or

    1. fredwilson

      I agree with you. And it is not only operating a safe and secure exchange. It is also operating one that is fully compliant. Brian Armstrong wrote s good post on this the other day.

      1. pointsnfigures

        “Regular” exchanges hire and have hackers on staff that keep exposing vulnerabilities. It’s time the crypto exchanges did the same.

        1. William Mougayar

          of course. I was in NYC yesterday and used Uber, but hadn’t done so in the US for 2 months. 1 min later, I get an automated call from my bank’s fraud prevention to verify it was me, and they locked my account in the meantime. It took a minute to unlock it.

          1. LE

            Little known fact (says me). That’s also partly clever marketing spam. A company using a legitimate justification [1][2] to keep in your face and remain relevant, important and providing value in your eyes.Low cost advertising. Really. My theory anyway … and it makes sense.[1] And practically free… thanks to Twilio.[2] Back in another business I noticed that even when we screwed up an order it built customer loyalty. Why? Because if we fixed quickly it was almost better than if we never screwed up in the first place (within reason of course).

          2. cavepainting

            Hilton had a policy (known only to insiders) to screw up deliberately every once in a while on a loyal customer’s reservation and then make it up to them. The idea being that the good is not realized or appreciated until there is a bad. And they thought it was important to let customers perceive the contrast in sharp relief every so often to keep things fresh and relevant.Such is the nature of the human mind. What is good or bad is really a function of what it perceives as the opposite. Without the baseline, there is no contrast, and without contrast there is no emotion, involvement or engagement. This is more true in relationships than people care to admit or understand.

          3. LE

            What is good or bad is really a function of what it perceives as the opposite. Without the baseline, there is no contrast, and without contrast there is no emotion, involvement or engagementWell well said.

          4. Kevin Hill

            I’m not sure bitcoin can enforce the same type of security, and this isn’t similar to what happened with Bitfinex.Any transaction made with the private crypto key of an associated wallet MUST be honored, and there is no way to roll back or prevent such a transaction without hard forks. This is a direct consequence of the distributed bitcoin system, as any arbitrators with real power become gate keepers. Bitfinex uses a 2-of-3 signing structure, but the end result is more or less the same. If you have 2 keys of the 3, the transaction happens and there is nothing anyone in the world can do about it after the fact.What you are talking about seems two be a two layer system that doesn’t expose bitcoin to an end-user really at all. Then bitcoin becomes a b2b layer. That’s certainly an interesting take… actually makes a lot of sense as banks can batch up transactions and are well equipped to manage the risk associated with 8 minute transaction windows, but certainly goes against the inertia and intent of the bitcoin ecosystem.

          5. William Mougayar

            but I would expect there are other pattern recognition algorithms that could trigger an alarm, and mitigate these losses, the minute they start.

          6. Kevin Hill

            Not really without some second layer. The best you could hope to do is transfer them out to some other account you believed was secure faster than the attacker… Maybe that is possible but I’m not sure what would prevent the attacker from just transferring all owned coins in a single go.There is the larger point though as well. The more sub-systems like that are in place, the more the system as a whole resembles today’s banking system with a few powerful actors and the need for relevant legislation, regulation, and governing bodies to set standards. This seems to be directly weakening the idea of bitcoin as an alternative currency.

          7. awaldstein

            The uber incident wasn’t an algorithm.All banks closed down on Uber as there is a ton of misuse of corporate accounts as one account now is the center for Uber Fresh deliveries.A bit of a mess but this is strictly old school fraud prevention working on coarse patterns.

          8. William Mougayar

            Ok, algo maybe was too strong. Process, trigger, alert, event – whatever, it caused them to fire a text message.

      2. William Mougayar

        It’s a good article. Brian and Fred E are on a roll, writing good stuff 🙂

      3. Kevin Hill

        To you, what’s the difference between compliance and centralized control?Maybe there is some ‘sweet spot’ type argument to be made by which cryptocurrencies allow current regulations to operate more efficiently and with fewer unintended consequences, but I haven’t seen that spelled out anywhere.

    2. Jason T

      I am a broken record but will say this again. Once you start laying all of these loss protections, anti-fraud measures, related administrative overhead and other functionality to ensure a good client experience (and enable trust in the marketplace), these currencies lose all of their appeal. They are probably no longer anonymous and they are certainly no longer low cost.So then whats the point of using them?

      1. William Mougayar

        do you think these exchanges need to have the same overhead as a regular bank, really?I think these exchanges can operated at much lower costs, and still provide a benefit.

        1. Jason T

          Banks do lots of things beyond payment products. And banks actually have massive scale to keep costs low.But that wasn’t my point.My point was that if you want a good user experience, these currencies quickly stop becoming free and anonymous. And then who cares anymore? It all starts to feel very much like a prepaid card.Meh.

        2. LE

          do you think these exchanges need to have the same overhead as a regular bank, really?Overtime, regulation and safety measures get added because shit happens that causes those things to appear to be necessary to protect customers (or people). A single bad outcome can cause a change.I remember when credit cards first offered buyers protection and I am sure you do as well. It was literally anything goes if something was lost or damaged or stolen. Later as more people started filing claims they inevitably watered down the protection to the point that I am not sure it really has any value, relative to even the effort of understanding it.

      2. kidmercury

        you are largely correct, but there are still some advantages. it can help big companies scale. for instance it could help amazon decentralize AWS with trusted partners and reward them for sharing their computing resources.

        1. LaVonne Reimer

          That’s interesting! I was thinking about an approach like that as a way to empower small business MSPs (e.g., hosted IT for other small biz) to support a larger network. Do you know anyone who is working on the layer that coordinates such a decentralized network? Is it “native blockchain?”

          1. kidmercury

            i think storj is kinda in that spirit: way too hard to use IMHO though

          2. LaVonne Reimer

            Thanks! We’ll take a look.

        2. Michael Elling

          km, would welcome an offline discussion if possible. ping me at first name @ ivpcapital dot com. been workign on notion of inter-actor settlements to creater broader and more sustainable network effects that can be applied to variety of infrastructure models (not just cloud/compute). specifically am looking for good academic literature on pricing models, algos, etc… me

      3. fredwilson

        there are so many reasons but some to think about are:- they are natively programmable- transactions clear publicly on the blockchain- the code behind this stuff is open source, you can see how the stuff works- entrepreneurs and developers are building all sorts of interesting things on top of thembottom line – you have to be a geek to like this stuff right now. just like the internet in 1990

        1. Girish Mehta

          | – They are natively programmableA feature. Not a Benefit that matters for something to become mainstream currency/ money| -Transactions clear publicly on the blockchain.A feature. Not a Benefit that matters for something to become mainstream currency/ money| – The code behind this stuff is open source, you can see how the stuff works.A feature. Not a Benefit that matters for something to become mainstream currency/ moneySomething that does matter : That a currency not lose 20% of its value (as Bitcoin did last week) because somebody steals some money.You had to be a geek to like the Internet 1991-1993 (post launch of WWW and pre-Mosaic, or if you were using Gopher (and Veronica, Archie..) or even until 1994. You didn’t have to be a geek to like the Internet in 1995. Satoshi’s paper is 8 years old now….

        2. awaldstein

          Diff between now and then is that this is money.i was building and acquiring virtual communities then that got hacked. no big deal.I would sit and work on email but docs were faxed to me in hotel room.This is playing house with real dollars or so it seems to me.

        3. Kevin Hill

          At least the public transactions part is actually a large barrier towards acceptance. I’m sure porn sites would take a hit.I’m not sure what ‘natively programmable’ means…. any transaction api would fit this category. and any open api would fit the 3rd…the 4th isn’t terrible but basically just boils down to a first mover advantage for bitcoin. With transaction volumes < amex alone it isn’t terribly stable. Also points 1 and 3 lessen the impact of first mover advantage as there is no lock-in to bitcoin.If amex built an open api standard and would clear transactions in < 1 sec would any of your benefits still hold? And isn’t that basically paypal, braintree, etc?

      4. Kevin Hill

        Best I can think of is while you do allow governments to stop you, other businesses can’t.In theory integrating with Paypal or Braintree solves all of the issues fred brought up, but then those systems become a more critical point of failure than the vague inefficiencies that government tends to bring.Now if there were a single payments api that could trivially switch it’s broker, or shop between multiple trusted brokers at once… now that would be awesome.

    3. Guy Hargreaves

      So under this deal will the exchange have all its capital wiped out before the haircut? I would have assumed so.

    4. LE

      Interesting WSJ article the other day about cat bonds and Wall Streets impact on the reinsurance business :…The oddball securities have exploded in popularity, driven by pension plans, sovereign-wealth funds and wealthy families seeking better returns. Investment banks and insurers’ own securities-brokerage operations churn out billions of dollars a year in catastrophe bonds…..As a result, the price of reinsurance is falling, as are profits.No doubt the best route for the deposit assurance would be a wall street product for ‘return seeking investors’ willing to stomach the uncertainty and unknown related to unpredictable hacking.

    5. ZekeV

      Even while criticizing Bitfinex, I think you are too kind. It appears that the founder has previously dabbled in more obvious ponzi schemes (see Do we think that the same guy who wanted to launch a “continuous deposit program” thought better of it and decided to go legit with the next business idea? Or, is it possible that he is a career criminal deliberately fleecing customers. Legally he is innocent until proven guilty, and it’s certainly possible the guy is a victim of other crooks. From a business standpoint, I wouldn’t go anywhere near this exchange or anyone who is involved in any meaningful capacity.Banks in the US are insured by a mutual insurance scheme, and it works great. However, it’s nearly impossible at this point to launch a de novo bank in the US. I won’t go into whether this is a good thing or not, but it does seem to be a fixed reality.Do we want to require exchanges to mutually insure deposits? At the current time, this would basically mean Coinbase, as the only (and I mean the *only*) lawful and compliance-minded exchange, insuring the deposits of other exchanges that are run by people who are naive (at best) and possibly career criminals in many cases! Well, obviously we would then need to impose very severe licensing requirements on exchanges including background investigations into the founders, etc. Perhaps unavoidable in the long run, as the bridge between banking and bitcoin is always going to be highly risky.

    6. Jeff Lunsford

      Deposit insurance does not come free – and is capped at $250K per depositor per institution. Banks pay around 0.1%-0.45% of deposits per year to the government PLUS have to bear the cost of being heavily audited and regulated institutions. The two probably add to a 1% annual ‘tax’ on deposits in exchange for $250K of insurance. An interesting question is: How much more efficiently could the private market of savvy blockchain entrepreneurs provide the same level of insurance? Has anyone started *that* company yet..?

      1. JLM

        .FDIC insurance really applies to the financial failure of the bank and not either robbery or embezzlement.Different breed of cat.JLMwww.themusingsofthebigredca…

        1. Jeff Lunsford

          Understood. A blanket bond will cover theft, but the bank is probably failing if they get hacked and someone runs off with a third of their deposits, then the FDIC (in this analogy) would kick in. Since no FDIC exists, the blockchain world could combine these two layers of protection into one and provide some level of insurance more efficiently.

          1. JLM

            .A fidelity bond would only insure an employee, not an outsider. They used to be cheap and they’re expensive as Hell now.I once had an embezzler who nicked me for $250K and I had a fidelity bond with a $1K deductible I collected on it every penny but $1K.That bond cost me less than $1K per year.JLMwww.themusingsofthebigredca…

      2. William Mougayar

        Good question. But it’s bound to happen gradually.

    7. Geoffrey Hamilton

      Insurance of crypto exchanges doesn’t even make sense. You’re insuring a real crypto asset with fake fiat money, you really think that’s going to work? Coinbase is insured, yea, but they hold 20% of the active Bitcoin in the world, if they got hacked, do you really think insurance would pay for them paying back all of those deposits in Bitcoin?To put it another way: if Coinbase lost 20% of all of the active bitcoin in the world overnight, and they were given hundreds of millions to billions of dollars by their insurers to buy new bitcoin to give back to their customers, how far would they get with that money? What would the price of bitcoin be by the time they are done dumping that cash into the market?

      1. William Mougayar

        Lots of low probability hypothetical questions, so it’s tough to answer.

        1. Geoffrey Hamilton

          I don’t have an answer either, but almost certainly over 100k/coin. The future value of 1 BTC is at least $1.5M in today’s dollars, maybe significantly more. More on my thoughts on that here: http://www.armchairphilosop

  5. kidmercury

    nobody still knows what any of this is worth, and i really doubt anyone will ever come to find out in the way they are expecting.monetary systems almost always emerge from within the context of a political system. that is at the heart of what is holding up all the blockchain stuff from advancing.

    1. jason wright

      I don’t see the space under seige from regulators. Some territories are very laissez faire.

      1. kidmercury

        perhaps, my point though is that historically speaking, the odds of creating a new monetary system without a new political/governmental system are extremely slim. so either blockchain currencies need to be endorsed and enforced by existing nation-state governments, or blockchains need to create their own governing bodies that can establish political and monetary order within the confines of the economies they are creating.

        1. Valentin

          What exactly do you need a government for in order to establish cryptocurrencies? And why is the fact that no government is effectively taking over the development and regulation of bitcoin etc. at the heart of their problems? You only made a statement so far without any sort of evidence.

          1. kidmercury

            my comment only refers to how things have been since the dawn of civilization. money didn’t arise spontaneously; it arose out of tribes and governance systems, which provided the trust needed to engage in commerce. maybe anarchy will win this time, though given that it almost never does, i remain skeptical.i’m less interested in nation-state government involvement in bitcoin, though i do think the current vision of bitcoin is one that assumes anarchy will prevail and restore order. i think new governments/monetary councils/etc that create highly regulated blockchains are needed.

        2. erichamm

          True, historically speaking, governments were necessary to create new monetary system, but only insomuch as people had faith in the currency because they had faith in the government. As long as I knew that my cobbler had faith in the currency and would accept it as payment, it was valuable. And my cobbler had faith in the currency because the guy he bought bread from had faith in the currency. All of that faith was ultimately backed up by the fact that the King or the Government said we will accept this payment and so should you. If enough people have faith in crypto-currency (and we’re talking a lot of people), then it will become an accepted form of exchanging goods and services. That faith is going to be partially built on the soundness of the security behind the system. Until that gets figured out, there will be no faith on a large scale. And it will take a large scale for crypto currency to work.

  6. jason wright

    Everyone lost 36%, and now all are holding paper.Fractional trading reboot?

  7. Frank W. Miller

    The trouble with hacks vs. physical bank robberies is they’re much easier to get away with. Yet another straw on the back of lack of confidence in virtual assets.

  8. JimHirshfield

    I’m not an expert on the blockchain, so please help me out. If it’s an open decentralized ledger, why don’t we know who posses the stolen bitcoin? From everything I’ve learned (here) about bitcoin/blockchain, every transaction is traceable, no?

    1. Sebastien Latapie

      Same! Please educate me.

    2. William Mougayar

      The transaction activity is transparent and searchable (via some effort), but the identity of users is not always known.However, in this case, the thief hacked the accounts, and the thief is not going to identify themselves. It’s almost like a bank robbery. Few thiefs are found in real. That said, exchanges can take internal measures and implement risk prevention algorithms, but many of them don’t, which speaks to the level of un-sophistication that currently exists in the marketplace.

      1. JimHirshfield

        I get that the blockchain wouldn’t show that “William M” is the holder of the stolen goods. But I thought there would be a record of the account that holds the goods.

        1. charlieok

          If 100 BTC of stolen goods is credited to account 0xafebc, and then a later transaction debits 100 BTC from that account and credits 100 BTC to your account, are you now in possession of stolen goods?

          1. fredwilson

            yes, just like if you sell cigarettes to a bank robber at your bodega, you are in possession of stolen dollars

          2. JimHirshfield

            Are you then a blockchain-smoker?

          3. LE


          4. JLM

            .The logic applies to people who are not “bank robbers.”JLMwww.themusingsofthebigredca…

          5. LE

            just like if you sell cigarettes to a bank robber at your bodega, you are in possession of stolen dollarsInterestingly in a cash businesses like that Mr. Bodega owner is probably passing that cash off to employees under the table, or using it to purchase inventory for cash from his vendors or other contractors and suppliers. And I know of at least one landlord that was paid rent from the Bodega owner in cash and a check the cash part was un-reported income.

          6. JLM

            .Exactly right.In the recent “Iranian ransom” debacle, I was surprised nobody stated the obvious.The reason the Iranians wanted Euros and Swiss francs was because they use those currencies to fund their terror networks. We were idiots to accommodate them. We literally funded terrorists.The Nazis, in WWII, had the same problem.They were banked by the Swiss who would lend them Swiss francs against gold (some from sovereign nations like Belgium, Norway and some from the teeth of the Jews (dental gold is very recognizable and chemically detectable because of additives for hardening).The Swiss could tell the gold came from a sovereign country because of the markings. At the end of the war, the Swiss seized the collateral and had it melted and recast to remove the markings.The Germans had to have the Swiss francs to run their international spy networks.A lot of terror funders have been identified and eliminated by the means in which they moved money. The CIA ran a scam whereby they deposited large sums of money in a terrorists accounts and then watched who he called on his cell phone. They rolled up massive amounts of shitheads in this manner.The 9-11 terrorists were funded by a Master Card out of Germany and they should have been detected before their attack by that means alone. Twenty + guys having their bills paid by a single Master Card and all of them Arabic and all taking flight lessons? WTF?JLMwww.themusingsofthebigredca…

          7. LE

            The CIA ran a scam whereby they deposited large sums of money in a terrorists accounts and then watched who he called on his cell phone.Almost to easy!!!I like the scheme where local or feds round up people on outstanding warrants by telling them they’ve won a prize. So they all show up at the same time in some hall and are surrounded by the police. (This is the inverse of the “you’ve won tickets to a show” where the thief robs you on the night of the show when you are away).

          8. Kevin Hill

            Huh? Would you count any illegal transfer in that definition? If so you and anyone else who owns bitcoins are probably in the possession of bitcoins that have been used to buy drugs, and are basically admitting to participation in money laundering…Now to be clear. I do not think you or most people who use bitcoins should face any legal or social retribution for that participation, but definitions of who should face retribution get really hard really fast, and those definitions do not fall into the ‘natively programable’ functions of bitcoin.

          9. JimHirshfield

            Yes. No doubt.

          10. charlieok

            One additional detail I forgot to include: before, between, and after the two 100 BTC transactions I mentioned, are ~1 million other transactions, sending and receiving amounts of BTC ranging from .01 BTC to 10000 BTC to various other accounts.Still no doubt?

          11. JLM

            .Stolen goods are easy to deal with. One only has to be able to identify the goods and their trail of ownership.What is not is money. Money has to be proven to be “fruit of the poisoned tree” to be able to be seized.This is classic money laundering frame of mind.JLMwww.themusingsofthebigredca…

          12. charlieok

            My point exactly 🙂

        2. William Mougayar

          The thing is it’s possible to offload that crypto-currency into an “offline” wallet, so it’s like if you robbed a bank and put the cash in suitcases. Tracing that cash will be difficult unless the bank knows the numbers and each retailer reports the numbers on the bills and they take pictures and ID from each spender.It is possible to fingerprint each “coin” and fraction thereof, and follow its history- that’s what blockchain analysis software does, but it’s early days, and it’s not done with relative ease.

          1. Rob Larson

            Seems to me building out such software should be a top priority of any crypto-currency and the exchanges that hold it. It seems the best solution is to publicly mark certain coin as “stolen”. Which will give people an incentive to auto-check against a database of known stolen coins before accepting any coins. Which will eventually render the value of stolen coins as zero. Which will remove the incentive to steal them in the future.

          2. Kevin Hill

            What stops me from paying for goods or services then saying ‘hey that bitcoin was stolen!’? Basically you are saying there needs to be legal system with the power to enforce norms. That’s fine and all, but incompatible with the structure of cryptocurrencies.

          3. Rob Larson

            You’re right – it couldn’t be used for all thefts. However, in hacks that are sufficiently large and high profile, you might be able to get 51% of the market to agree to designate those coins as “stolen”. That seems like a pretty good bar to use – i.e. only in exceptional cases that can be proved beyond a doubt. Making that a possibility, even if infrequently used, would I think be a competitive advantage vs. currencies that don’t have it. People would be more comfortable putting $ in a system that had a mechanism providing a disincentive for hackers to steal from the big exchanges.

          4. Kevin Hill

            Sure, you could build such a system, but there are 2 big problems.1) That system is out of scope for the mathematical core of bitcoin. It means either permanent break in compatibility, or managing a world where some people could still accept those coins.2) You are basically building a government structure. What if the US Feds seize a bitcoin wallet from someone selling pot? What if the Chinese government does the same from someone using bitcoin to fund a pro-democracy campaign? How about a local warlord? And proved beyond a doubt to who? The miners? Law is damn damn hard, and most of the benefit of bitcoin comes from ignoring those difficulties in lieu of a mathematically enforceable standard.

        3. Kevin Hill

          Yes, but there is no governing body that can forcibly return that coin to the rightful owner, or prevent that coin from being traded to someone else. In theory you could achieve something close to the 2nd by having all exchanges blacklisting certain bitcoins, but then you have to figure out the definition of an illegal transaction and have means of enforcement.

          1. JimHirshfield

            Good point, thanks.

    3. fredwilson

      we know the addresses that the bitcoin was moved to. to some degree this stuff is traceable. and getting more so every day

  9. pointsnfigures

    As economist Mark J. Perry likes to say, There are markets in everything.… It’s part of being human. Core to our DNA.

    1. JimHirshfield

      What’ll ya pay for an upvote?

      1. fredwilson

        you have to earn that

  10. TeddyBeingTeddy

    I respect your perseverance, USV would be my first choice as an investor if I had baby unicorn.

    1. fredwilson

      we are very patient and committed investors. for better or worse. and what does a baby unicorn look like?

      1. TRoberts

        Early on, they are almost indistinguishable from a horsicorn… Body of a unicorn, head of a horse.

      2. TeddyBeingTeddy

        A PPT presentation.

  11. onowahoo

    The problem with many of these companies is that there is still so much incentive for the custodian to dip into their own holdings and claim ‘hacked’. They’re especially incentivized when the custodian is anonymous or not well known and why you see so many of the dark markets just pack up and go home once they have a large bitcoin holding.I will typically use Coinbase for any currency exchange in BTC but haven’t kept a large portion of bitcoins in any wallet but my own. I did lose a few coins with mtgox and I can’t find blame with anyone but myself. I know USV is an investor in Coinbase but I still can’t find a compelling reason to have any substantial holding in a wallet I don’t personally control.

  12. LE

    They told every customer that they had lost a portion of their assets (36% to be exact)Unfortunate haircut. But creative obfuscation on bitfinex’s part. And great way to deflect attention and give people false hope. I’ve seen this technique used in the past in different situations.

  13. LE

    But maybe the most interesting thing of all is that a market is being made in these crypto-tokens. If you hold them and want to sell them for dollars or bitcoin, you can do that. Similar to buying dead accounts receivable.

  14. K_Berger

    May be out of the box thinking but it may also be smoke and mirrors. Here’s some virtual thing that may be worth something someday. Basically zero cost to hand this out. I’d rather be backing the company that made sure this didn’t happen in the first place.

    1. falicon

      +100.Just saying a company shows a lot about it’s character and resolve in how it deals with major crisis.

  15. JLM

    .Bitcoin has been around too long to be dealing with getting stuck up by robbers. Growing pain time is past. Maybe too critical but maybe not.Being robbed is an old school, old financial institution problem which leads one to ponder whether bitcoin can actually compete effectively with legacy institutions.The idea that one’s funds are robbed because the depository is broken into is not a risk that should be borne by the depositor.The fact this is happening indicts the safety of the entire system.The fact the system cannot follow a trail of technical bread crumbs to the lair of the thieves is a problem with the entire concept given what bitcoin is supposed to be able to do.A legacy financial institution would not be able to get away with having your money stolen and giving you a token. They would have to possess sufficient capital (insurance) to whether the storm.Old World Problem.JLMwww.themusingsofthebigredca…

    1. William Mougayar

      Yup. Check out the long list of ongoing bank robberies from 33 countries in the world, including the UK, Germany, Denmark, Sweden, the US, etc.

      1. JLM

        .The biggest bank robbery in the US continues to be the Brinks Robbery which was about $27MM (in current dollars).JLMwww.themusingsofthebigredca…

      2. Kirsten Lambertsen

        Screenwriter goldmine 🙂

  16. Jay DeVivo

    I’m curious as to the legal rights of customers if they sell their tokens. If in selling the tokens customers give up (or meaningfully circumscribe) their right to sue, tokenizing the losses could prove to be shrewd move.Suppose Bitfinex were to capitalize a separate entity and this entity bought all of the outstanding tokens for $20 million (in actual USD). If Bitfinex were to get an outside valuation and convert those tokens into $65 million in equity, they would have essentially sold $65 million worth of equity to themselves for $20 million. Bitfinex could further offer to purchase those equity shares for $65 million (in USD or bitcoin) and argue that customers who accepted the tokens were ultimately made whole.Unlikely, of course, but an interesting gambit.

    1. JLM

      .To do something like this, they’d have to make some awesome disclosures. Otherwise, it would be garden variety fraud. There is a reason why a public company has to make public filings for a stock buyback program.JLMwww.themusingsofthebigredca…

  17. James Ferguson @kWIQly

    Banknotes that are marked, or identifiably counterfeit, or tainted by an illegal transaction, are no longer equal.If a nominally face-value item has less than face value (ie they are not interchangeable) – it is not money.And, if face value difference depends on trace-ability – laundering is possible.It strikes me therefore (since there is strictly limited issue of bitcoins) – there needs to be an open “laundry protocol” (and given history a Chinese laundry perhaps ? ;)Such a laundry protocol could be a free service to people prepared to disclose their transactions “show their laundry in public” and unavailable to people not prepared to disclose.It could be funded by confiscation of demonstrably dirty bitcoins (which could then be washed and put back into circulation).By this means illicit or shameful practices cost more and eventually a bit of “bad money” becomes worthless – but clean money holds value – Which would you want ?

  18. Chris Phenner

    Future Headline:’AIG Announces Today Blockchain Insurance for Exchanges’Who says CDOs can’t be constructed from bitcoin liabilities?This IS getting good.

  19. ZekeV

    Saying that coinbase competes with bitfinex is like saying that Fidelity competes with Bernie Madoff.

  20. Adam Sher

    The crypto-tokens sound like a way to self-insure the risk of theft. At least early on, the cost for Bitfinex to issue pseudo currency on top of the currency it was housing is low.Unlike a bank, Bitfinex can issue its own currency in a way.

  21. Geoffrey Hamilton

    Fred, been waiting for you write about this debacle!I think it’s very interesting indeed, and though the losses were substantial, if Bitfinex is able to recover those losses through future fees I do believe that savvy speculators stand to make money buying these tokens off of people less confident of their value. It is also a great way for Bitfinex to buy back some of this debt for cheap making it easier for them to become solvent again.It does really suck that they lost those funds in the first place and to be honest it is a little shocking that people have been engaging with them in the wake of those losses, but this is a hell of a lot better than the do nothing alternative, closing down a revenue stream that has potential to pay back the losses and making people eat their 36% haircut, which btw sounds a lot like the Cyprus bail-ins of 2013 in some ways.

  22. andrewparker

    Matt Levine’s take on this subject was pretty entertaining. In general, his daily email newsletter is great:

  23. Lawrence Brass

    Dear Customer,Yesterday night the bank was robbed and the hard disks containing your balance were stolen, no distibuted ledger here just some data on disks. We are working hard to recover your balance ASAP from backups, hopefully during the day. Meanwhile, taking into account your loyalty and our continued commitment to serve your needs, our ATMs will supply monopoly bills for the rest of the day so you can move on.Have a good day!;)

  24. howardlindzon

    not understanding how this does not create massive inflation? so confusing to me all this hard core early economics stuff

    1. William Mougayar

      that’s ok, as it’s temporary. On the good side, it funds growth, innovation, development, etc.

  25. William Mougayar

    trash + trash = hope?

  26. LE

    Mr Baker, you are on a creative ‘roll’ lately.

  27. PhilipSugar

    I am going to use that one.

  28. Lawrence Brass

    strong headwinds Captain, better grab the wheel 😉

  29. JLM

    .Point taken.It wasn’t a bank but it was a cockup of gargantuan proportions. The longer in time we get from our involvement in the Middle East, the more ill-advised it appears.The money we pissed away there is an example of Presidential vanity and folly.What an odd situation — the Dem candidate HRC is in favor and the Rep candidate DJT is against it. So they say.The lingering damage will go on for decades much like Viet Nam. It is amazing how damn expensive wars are.JLMwww.themusingsofthebigredca…