People who stored bitcoins at a popular Hong Kong-based exchange, Bitfinex have been told they will lose 36% of their assets following a cyber-attack.
Late last week Bitfinex was hacked and 119, 756 bitcoins were stolen causing a loss of up to $65m. The loss caused the price drop of about 30%, and it still hasn’t fully recovered to pre-hack levels.
The impact of the loss will now be shared across the site's users.
Since the exchange used a service to individually segregate each customer’s funds in unique wallets, only some customer’s funds were drained, while others retained their full balances. The question then became would Bitfinex limit losses to only users whose wallets were compromised, or distribute them equally amongst all users.
Bitfinex announced it would pull a page right out of Europe's bank resolution mechanism, saying that all of its users will lose 36% of their deposits after it concluded its review the massive hack, in what is set to be the first ever "bitcoin bail-in."
"We have decided to generalise losses across all accounts. Upon logging into the platform, customers will see that they have experienced a generalised loss percentage of 36.067%," read a statement on its website.
Bitfinex will issue new tokens called BFX equal to each customer’s exact losses which will cover the missing 36 percent. These tokens can later be redeemed or exchanged for shares in its parent company, iFinex Inc. Following the announcement, bitcoin climbed to $599 in early trading on August 07. The virtual currency had dropped 12% to $577.23 in the week through August 05, its largest weekly decline since June, however, has now recovered its sharp drop which had seen its price tumble as low as $470 on August 2.
“In place of the loss in each wallet, we are crediting a token labeled BFX to record each customer’s discrete losses,” the exchange wrote in a blog post on August 06.
The token will also soon trade on Bitfinex’s platform, so the community can set its own price that values the chances that the exchange will actually follow through and repay holders of BFX.
The company said they are also looking into raising capital from investors to pay back customers, but those discussions are still “at an early stage”.
Following the hack, Bitfinex closed down trading, withdrawals, and deposits and said it was cooperating with law enforcement and would update the public after its investigation. In the latest blog post, it said it will reopen with limited functionality in the next day or two. Bitfinex was the largest exchange for U.S. dollar-denominated transactions over the past month.
The decision is a disappointment for customers who held currency other than Bitcoin (like USD or ETH) with a prospect of safety.
The company justified their decision by saying that this type of shared loss is similar to what would happen if the company had to go through bankruptcy liquidation.
Following the news that Bitfinex had suffered a substantial loss of bitcoins, the price of the cryptocurrency fell by more than 20% - though it has since rebounded slightly.
The main reason for the surge in bitcoin has been the explosion of Chinese users of the virtual currency, who have rushed into bitcoin as one of the few remaining options to bypass Chinese capital controls on monetary outflows. As such the Bitfinex hack, impacting numerous Chinese participants, has not come as much of a surprise, said Zero Hedge.
In May 2015, 1,500 bitcoins were stolen in a previous attack on the exchange.
It is not the first exchange to have suffered.
Many users lost large caches of Bitcoin after they disappeared from the Mt Gox exchange, which then declared bankruptcy in 2014.
