Bitfinex Scandal Erupts as Director Admits Trading While Maybe Seeing Customer Orders

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by Daniel Mark Harrison · 5 min read
Bitfinex Scandal Erupts as Director Admits Trading While Maybe Seeing Customer Orders
Photo: Bitfinex

Bitfinex Director says he’s been “a trader all [his] life” but that he’s not “actively” trading Bitcoin, when questioned about a potential conflict of interest.

Scandal erupted around another exchange this week, this time Bitfinex after Phillip G. Potter, the company’s CSO, admitted on a live talk internet show that he traded bitcoin using the company’s infrastructure, and then appeared to backtrack moments later when pressed on the issue. To get a copy of the audio link and see a written transcript of the dialog go here on CoinSpeaker.

“I-I’m a long term holder and if anything there’s a very minor amount of trading that I do, like, I – you know, out of the market, either bids and offers, small amounts,” Potter replied when asked about whether his role as an officer of Bitcoin’s largest exchange, tasked with the care taking of customer orders, put him at odds personally with his role as a trader.

Potter stumbled through the next question, admitting that he had been “a trader all [his] life” and then  subsequently claiming that “there is of course a conflict of interest if I traded actively and I don’t.”

At one point, Potter portrayed as his Bitcoin trading activities as more of a hobby than a professional activity, and described himself as “impermeable”.

“I have a great deal of interest in Bitcoin, I want to see it succeed. I’m impermeable,” Potter told the interviewer after the wrangling.

But when asked directly whether he was trading Bitcoin, Potter replied surprisingly candidly: “I am an investor in Bitcoin that will add to this position a little bit on the way down and sell a little bit on the way up.”

The comments were made public on internet forums via MP3 sharing platform Vocaroo, which lets users upload and store MP3s so they can be shared freely among multiple parties.

Front Running or Just Running the Tape?

Some Bitcoin investors appeared predictably angered by Potters comments, but a good majority didn’t care and seemed to expect it too.

If Potter was using orders gleaned from customer information to better-time his personal trades, this is a practice that in regulated markets would constitute “front-running” and which is illegal. Since Bitcoin is not a regulated asset class however, it is unclear whether such practices would be illegal in practice.

The SEC is technically within its jurisdiction to bring criminal charges against front running of Bitcoin trading if the customers being disadvantaged are from the United States and if it finds sufficient malpractice involved.

Financial markets traders who also trade Bitcoin describe practices such as front-running as a regular part of exchange owners’ trading strategies. “It’s so obvious, if this place were a real world exchange these guys would all be in jail,” wrote cardevitoraphicticia on the Reddit’s post.

“Phil Potter has full access to bitfinex database. He can see user balances, hidden orders (that normal users cannot see), USD deposits and withdrawals (he has been saying for a few days how there is “FOMO with USD wires into Bitfinex”), BTC deposits and withdrawals,” writes another Reddit user under nickname bfthrow44. “He can see open margin positions also (not the same as active swaps from the lending market). This puts him at significant competitive advantage.”

Josh Rossi, VP of Business Development for Bitfinex issued a statement which he posted on Reddit, denying any illegal activity among the Directors of the company:

This is Josh Rossi, VP of Business Development at Bitfinex, some of my initial comments were referenced below. The word “trade” has multiple meanings, and is thrown around a lot, and I just want to clarify a few points that have come up.

  1. The bio information that was linked to is based on an old bio that was incorrectly written on the beta site. Phil was managing a fund that was invested in cryptocurrencies, but ceased day to day trading activities upon starting his role at Bitfinex, which roughly coincided with the fall of Mt Gox.
  2. The entire management team monitors our personal accounts, in order to prevent abuse, and we all act as checks and balances on each other. The idea that someone who works in Bitcoin shouldn’t be able to own or adjust his position in bitcoin is silly. Bitcoin is not a publicly traded company, it is an asset. Any orders Phil may have placed would have been limit orders, and subject to the rest of the management teams monitoring. To be very clear, Phil has not been actively trading since joining the team at Bitfinex. That being said, and given the volatility of bitcoin, it is necessary to adjust one’s exposure. We spend a lot of time trying to build the best exchange, and we definitely do hold and are bullish on bitcoin. There is a difference between a “trade” in the sense of being a day trader or actively trading positions, and executing a limit order, which is basically a passive buy or a sell of the asset in question.
  3. We have become the number one USD exchange, specifically, because we have made it our top priority to provide a fair and even playing field. We engage with our clients and the community and try to be as transparent as possible. We hold ourselves, and each other to the highest ethical standards.

Basically, we are very excited about the future of cryptocurrencies, and are honored that we can be a part of the core infrastructure. We are in it for the long haul, Bitfinex has been around for quite a while. We have consistently proven that we will not sell out our future for a quick buck now.

Many of the Bitcoin community’s members appeared to accept that explanation.

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