Daniel Cawrey is CEO of Pactum Capital, a quantitative investment firm for the crypto currency and hedge fund. Sina Nader was a professional money manager at Morgan Stanley, as well as Credit Suisse, and is now Pactum's Investor Relations Manager.
The opinions expressed are those of the authors and are not investment advice.
"History doesn't repeat, but it rhymes often"
This quote is often attributed to Mark Twain. And while Bitfinex with Mt is not exactly rhymed. Gox, there are several parallels in the stories of these two exchanges. Those interested in understanding Bitfinex are well informed to understand what happened to Mt. Gox.
Bitfinex and Tether were investigated by the New York York Attorney General (NYAG). Here is a summary for those who don't know the story. Bitfinex is a crypto currency exchange whose owners also control Tether, the issuer of the most popular stable type, known as tether or USDT. NYAG blames Bitfinex for losing more than $ 800 million. He claims that the stock exchange was trying to compensate for these losses by immersing itself in the tether's cash reserves, which are also controlled by its directors.
The problem is that the money that holds Tether becomes more or less unnecessary. This is because Tether is allegedly backed by cash reserves and people who still believe it. However, if there are no money reserves or significantly less money than expected, then the whole Tether concept is basically fraudulent.
This is stated in the submission from the end of last week. At the end of the document, the NYAG issues an ultimatum. The Office "seeks to ensure that Respondents strive to take any further steps to access, loan, extend credit, arrest, pledge or any other similar transfer or claim between Bitfinex and Tether".
Where is the money?
Reef for BTC on Coinbase on April 25 once Bitfinex / Tether trial has fallen. Source:Tradingview
Can we wonder rightly: how exactly did Bitfinex lose more than $ 800 million? The answer is closely linked to the stock exchange's banking relationships or their lack. Crypto "OGs" and insiders may feel as if they've seen this movie before.
These feelings would actually be valid. In the early days of krypto, one of the largest bitcoin exchanges, known as Mt. Gox has also gotten into significant problems due to his banking relationships. It was so bad that in February 2014, Mt. Gox stopped all trading and filed for bankruptcy protection. At the time, he claimed to have lost 624,408 BTC.
It seems that unsatisfactory crypto-currency holdings do not fit. Source: Wizsec
The Japanese bank that ruled Mt. Gox's cash transactions attempted to close their account. In addition, no US banks would work with Mt. Gox. This made it essentially impossible for Mt. Gox sends them money back when they try to withdraw their money. Users experienced delays in weeks or months until the exchange stopped.
In the case of Mt. Gox, the leap has long persisted and continues to this day. If history is a guide, we can expect any potential impact from the significant issues Bitfinex encounters. While it should give many participants a break in the cryptographic industry, it is an excellent opportunity to reflect on the state of the cryptographic system in general – and to make the cryptographic space a little search for the soul.
Replacement of implosion
The problem in 2019 is the presence of so many problematic crypto currency exchanges. The spectacular failure, with hundreds of millions of dollars missing, in the case of Bitfinex, is not good. The fact that this seems to happen again in five years speaks of volumes.
From Mt. Documents of crisis crisis. Could other unsuccessful exchanges try to follow this game? Source:CoinDesk
The industry is still young, immature and is experiencing increasing pain. These latest issues with Bitfinex are also learning opportunities. It is now clear that stock exchanges without ordinary banking relationships are the weakest link in this volatile market. Major traders and funds are now pulling stock exchange assets in relatively large amounts.
Inflow / outflow to BItfinex by USD value. Activity has increased since the accusation was announced. Source: TokenAnalyst
One can understand why the outflow of exchange rates would increase in the current environment. Some stock exchanges cannot be unambiguously trusted to protect the crypto money currency resources.
It is time for some of the best engineers and developers to turn their attention to the most basic mandates: compliance and custody for cryptography. Until there is a better layer of trust, it will be difficult for the industry to grow in the way many advocates want to see.
Lawyer Stephen Palley knows that cryptologists want the BTC to be worth a ton. However, this will only happen with a much stronger and more convenient replacement infrastructure. Source: Twitter
What does "binding" actually mean?
Cryptocurrency goes beyond computer science at this point. Experts are needed – people who have experience in the various arts and sciences needed to protect large amounts of money.
This is what is meant by using the word "custody". More security, legal, regulatory and compliance experts are needed to move this ecosystem to new frontiers. Auditors, accountants and experienced financial operators with sufficient spice in the traditional world. These people should have an idea of the challenges as well as the amazing promise of cryptography. And innovations in stabilized banks such as USDC and PAX are a great start.
"History doesn't repeat, but it often rhymes." On Mt. Gox and see similarities with Bitfinex and Tether. This time, however, it is probably even more complicated due to the tide and outflow of Tether.
Yet there are all the same signals as the big price between Bitfinex and regulated exchanges like Coinbase. We can stop repeated "Groundhog Day" scenarios. We can do it better and don't let it happen again.
Bill Murray is trapped in a mysterious time loop in "Groundhog Day". Crypto does not always repeat the same mistakes over and over again. Source: Moviefone
Maybe we're trying to build a better world at the crossroads of finance and cryptography technologies. But perhaps it is time to recognize that we can learn some things from earlier Wall Street financial systems are working to upgrade.
It is not a "teaching new tricks for dogs", but rather a young, promising puppy that learns a few tricks from old dogs who have been managing money for several centuries.
Mt. Gox image through CoinDesk archives.