Matt Levine, a former investment banker and mergers and acquisitions lawyer, sees the Bitfinex “bail-in” as an early step in bitcoin’s attempt to address unexpected financial fallouts. Writing in his “Money Stuff” column for Bloomberg, he noted there will be more such crises to come, and he is hopeful bitcoin/blockchain will be able to come up with solutions.
He thinks that the innovation in the bitcoin/blockchain financial system taking place could give direction to more traditional finance.
Levine noted that Bitfinex, which suffered a $71 million hacking attack, is not the first bitcoin exchange to be hacked, but the hack was unique in some ways. In most cases, hackers steal bitcoins from an exchange wallet, and the exchange then passes the losses to its customers. In Bitfinex’s case, there was a separate wallet for each client. So instead of stealing 36 percent from all the customers, they stole all the bitcoin from 36 percent of the customers.
Bitfinex, due to the attack’s indiscriminate nature, opted to charge all customers 36 percent. Bitfinex also allocated customers a new token on the “Omni protocol” transferable and remaining outstanding until exchanged for shares in Bitfinex’s parent company or repaid by Bitfinex.
Spreading losses among creditors and giving them equity to compensate them is what established bankruptcy does, Levine noted. This means Bitfinex is attempting to use a concept that has already been used by traditional financial systems.
The bitcoin and blockchain communities, participants in a new financial system, are trying to figure out how to spread losses and weigh contract rights against fairness and other goals.
The regular financial system addressed similar questions eight years ago during the big crash, Levine noted. The fact that the traditional financial system has developed contract law, bankruptcy, and bank regulation over the years did not prevent unexpected financial problems that continue to challenge the existing systems.
The bitcoin and blockchain communities, given their libertarian idealism, have a hard time making rules. But they can build on what the traditional financial system has learned over the centuries without having to be bound by its mishaps. Levine sees the responses to bitcoin hacks as a laboratory for the future of finance.
Fortunately, there will be plenty more such crises in the future for bitcoin.
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