Bitfinex Bail-In Versus Central Bank Bailouts

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Bitfinex’s “bail-in” scheme after a major theft raised questions regarding its risk and fund management. What can we learn from the recent bail-in event? To answer, a look at the result of the bail-in, and how it differs from central bank bailouts is necessary.

Also read: Bitfinex ‘Leaning Towards’ Bail-In, Haircut for All BTC Traders

With central bank bailout schemes in place around the world, many who are new to the concept of Bitcoin tend to see fiat money in banks as being safer due to its “backing”. However, governments and central banks can refuse any “hand-out” to save failing banks in the event of a crisis.

Understanding Central Bank Bailouts

Financial Bailout logoWealth is transferred but never destroyed. With this idea in mind, central bank bailouts are simply a transfer of funds from one place to another –tap the reserves and borrow if they need more, and transfer to the failing banks. 

Central bank bailouts prevent the failing banks from going bankrupt. This is often perceived as some form of security by consumers even when the banks have failed to manage their “profit and loss” properly.

Then What Is a Bail-In?

Bail-ins occur when governments and central banks decide not to take responsibility for the failing banks’ mismanagement of funds. New laws and regulations have been passed in some countries to give failing banks the right to their depositors’ money to save the banks from bankruptcies.

The Centre for Research on Globalization said the following:

… the money confiscated from bank accounts would be used to meet the failed bank’s financial obligations. In return, the holders… would become stockholders in a failed financial institution…

Does Bitfinex’s bail-in differ from the banks’? The short answer is “no”. Putting aside the criticisms and all, let’s put some focus on the saving grace.

Bitfinex Bail-In’s Saving Grace

According to BnkToTheFuture CEO Simon Dixon in a video interview with RT’s Max Keiser, he mentioned that instead of Bitfinex filing for bankruptcy like in the case of MtGox and its missing $450 million USD worth of bitcoin, Bitfinex was quick to address the issues.

Based on the current bitcoin value, consumers would more-or-less break-even from the 36% haircut Bitfinex imposed. BFX tokens would also have compensated more than 50% of the total damage amounting to $70m during the hack. In addition, the losses incurred in the hack are actually tax deductible.

Bitfinex also promised to exchange any bitcoins it recovers from the hack to compensate victims holding its recovery right tokens (RRTs).

More of the Bittersweet Lesson

No doubt the Bitfinex bail-in was a forceful implementation, but thankfully, the nature of bitcoin versus that of fiat money has made this bail-in somewhat workable. At the very least, Bitfinex was honest to admit that a theft had taken place. That’s unlike the “legal theft” going on behind some of the world’s corrupt banking systems.

Also, compared to the Mt Gox case, despite the massive amounts of money spent on legal fees, most victims still have not seen any resolution. Hence, Bitfinex differs in a way that the bail-in action did quicken up the loss recovery processes.

As mentioned earlier, wealth can be transferred but never destroyed. MtGox’s missing bitcoins were not burned, just “transferred”.

Finally, bitcoin and cash in banks alike are not yours unless you hold (the key to) them. Bitcoin is not unsecured; It is the coding of systems and management’s prompt reaction in such situations that matters.

Do you agree with Bitfinex’s bail-in scheme? Should other companies and institutions follow its example? Let us know in the comments.


Image Credit: The News Chronicle, Treasury Peer


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