'Grumpy hold-outs' could sink Bitfinex recovery plan after Bitcoin theft

Mon Aug 15, 2016 4:16am EDT
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By Clare Baldwin

HONG KONG (Reuters) - Crypto-currency exchange Bitfinex's plan to impose losses on all its trading clients for the theft by hackers of $72 million in Bitcoin rests on two flawed pillars, according to lawyers.

The Hong Kong-based exchange said on Aug. 2 that hackers had stolen 119,756 bitcoins from some clients' accounts, the second-biggest such hack in dollar terms, and later said it would spread the losses across all its customers, whether or not they had been hacked or even held bitcoin.

It said customers would forfeit 36 percent of their holdings and be given "BFX tokens" instead that could be redeemed by the exchange or converted to shares in its parent company iFinex.

Both elements of the plan are open to legal challenge, lawyers said.

Imposing losses on customers who were not hacked appears to go against the company's terms of service, said Ryan Straus, a Fenwick & West lawyer who advises financial technology companies on regulation and co-authored the U.S. chapter of a book on bitcoin law.

The terms state "bitcoins in your multi-signature wallets belong to and are owned by you", which Straus said implied a special banking relationship with clients that the Bitfinex plan would breach.

"The depository ... is obligated to return, on demand, the same monetary objects deposited," he said, quoting a line from his book.

The exchange's tokens could also be problematic, said Zach Zweihorn, a lawyer at DavisPolk who specializes in U.S. securities and trading laws.   Continued...

A Bitcoin (virtual currency) paper wallet with QR codes and a coin are seen in an illustration picture taken at La Maison du Bitcoin in Paris, France, May 27, 2015.  REUTERS/Benoit Tessier/File Photo