Cryptocurrency exchange hacks have always been a big issue facing this industry. One of the main reasons for repeated hacks are the insufficient security measures at these exchanges. Although better security measures are implemented now with most exchanges, hacks are still commonplace. Usually, nothing good comes out of these hacks, but in an extremely rare instance, law enforcement agencies were able to recover some of the lost Bitcoin and return it to the exchange.
2016 hack
Bitfinex became the victim of hackers in August 2016. A group of anonymous hackers used a bug in the multisignature system or multisig, which was supported by the company’s partner, BitGo. The hackers deceived the algorithms used by BitGo in an unknown way, which forced them to approve transactions and withdraw about 120,000, which was worth the equivalent of $72 million at that time. The users were confronted by Bitfinex founders about the fact that financial losses would be distributed among all the users, 36.067 percentage of users whose coins would be frozen.
Bitcoin recovery
After some hard work by US law enforcement agencies, the government was able to return some of the lost Bitcoin, 27.66270285 BTC to be exact worth around $104,000. This was revealed by the company in a blog post on Monday.
The hack, which happened in August 2016 was the largest loss of Bitcoins by an exchange since Japan’s Mt. Gox when the exchange lost a total of 119,756 BTC and shocked the community. To compensate for the losses the exchange generalized the losses across all accounts of users and credited BFX tokens to customers at a ratio of one dollar stolen to one BFX coin.
“Within eight months of the security breach, all BFX token holders had their tokens redeemed at 100 cents on the dollar or exchanged their tokens for, directly or indirectly, shares of the capital stock of iFinex Inc. All BFX tokens were destroyed within this process,” Bitfinex said in Monday’s post. After any unconverted or outstanding BFX token holders have been reimbursed, as per the recovery plan, the funds recovered will be distributed to RRT (recovery right token) holders, up to 1 dollar per RRT.
“As all BFX tokens have been redeemed and destroyed, the full amount of recovered Bitcoins today is being distributed pro rata to the RRT holders,” Btfinex stated.
Issues and questions
A lot of questions were raised afterward. The decision by the company to pass on the loss incurred by the hack to all the users was both controversial as well as unorthodox. All customers received an IOU (I Owe You) token, and in return, Bitfinex clients’ portfolio balances were reduced by a steep margin. Once the company had sufficient liquidity, the buyback programme commenced and those tokens were bought at a market price to the buyback program.
Most analysts were expecting a long time frame buyback by the company but contrary to this belief, it was a quick operation. Within a few months, Bitfinex followed through on its promises and made sure that all customers received the money they were owed. The speed at which these tokens were bought back still raises some questions, as tens of millions of dollars were spent in the process.
This is surely a confidence boost to investors, usually, nothing is recovered after a hack. Some hacks even lead to the closure of exchanges. In the event of a future hack, the victims can point out to this incident as an example. Such actions will boost confidence in the industry and thus ensure a better future.
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