By
Steve Muchoki
April 23rd, 2024
As various types of fraudulent schemes made their entrance into the crypto world, and while more and more often investors left spooked with massive losses, it’s high time the whole crypto industry matured with stable and trustworthy exchanges behind it.
Financial fraud is all too common. Sadly, the nature of the financial industry lends itself easily to smoke-and-mirror style underhanded practice. Cases like Bernie Madoff, Enron, and Lehman Brothers have left investors worn and weary.
Now, those same types of fraudulent schemes seem to have entered the cryptocurrency world. Recent news of Bitfinex, the erstwhile cryptocurrency exchange, being sued by the New York Attorney General (AG) for fraud has caused a stir in the industry.
According to the suit, Bitfinex has been commingling consumer and corporate funds to cover up a massive loss since last year. The AG says that the company failed to disclose a loss of $850 million, and instead played a complex game of cat and mouse to cover the lost funds:
“Our investigation has determined that the operators of the ‘Bitfinex’ trading platform, who also control the ‘tether’ virtual currency, have engaged in a cover-up to hide the apparent loss of $850 million dollars of co-mingled client and corporate funds.
New York state has led the way in requiring virtual currency businesses to operate according to the law. And we will continue to stand-up for investors and seek justice on their behalf when misled or cheated by any of these companies.”
As early as September last year, the company had already used $700 million of the reserves intended to collateralize the Tether coins for corporate needs. And this isn’t the first time the company has been accused of fraud. In fact, there have been multiple accusations against the British Virgin Islands-based company, each growing increasingly severe, and making greater and greater waves in the industry.
Spooked Investors
The current lawsuit reflects a year of observation by the AG’s office, which suspected the unregulated company of fraudulent dealings. And this case only highlights many of the other fraud cases facing cryptocurrency investors over the past year. In fact, funds totaling nearly $1 billion have been stolen from various exchanges since this time last year.
Such massive losses and clear fraud have left investors spooked. Just like Madoff and the others in fiat investments caused major crises in the market, Bitfinex and its partners in crime have left the door open for chaos.
And, because the cryptocurrency industry is based on the principles of decentralization and autonomy, users are even less willing to gamble with their coins. This has left exchanges in massive need to restore consumer confidence
Light in the Tunnel?
There is some light at the end of the tunnel for crypto investors, however. As usual, when one system fails, another comes to take its place and clean up the mess that’s been left. In this case, the losses that Bitfinex and others have endured has opened the door for more robust and reliable exchanges to take their place.
For example, recently launched FT Exchange, or FTX for short, has garnered some attention from those fleeing Bitfinex. Unlike its unscrupulous counterpart, FTX offers stability in various forms for its clients including being backed by Alameda Research, a company that trades more than $1 billion in assets. Financial backing provides needed stability for cryptocurrency protections.
Other exchanges are seeking to do similar things, as well as taking advantage of the decentralized value proposition of Bitcoin. These decentralized exchanges are providing peer-to-peer (P2P) transactions that eliminate the potential for corporate book-washing.
Since all transactions are direct without custodial services, decentralized exchanges offer users some level of protection. However, the barrier to entry can be extreme, and the complexity of trading can often drive users away from the platforms.
Will it Stick?
For now, the Bitfinex lawsuit remains unsettled. The AG has issued a court order enjoining the company from further violations of New York law, given the apparent cover-up. This order, coupled with the request for corporate financial documents, could spell the end of the exchange.
However, even if Bitfinex were to shutter over the allegations, cryptocurrencies will continue as a viable financial tool. As investors seek out new and unique ways to protect their funds from frauds, new exchanges will need to come up with more robust ways of increasing consumer confidence and providing helpful and necessary safeguards against loss.