Bitcoin Bail-Ins and Yuan Bets - <AUTHOR> http://www.bloomberg.com/view/articles/2016-08-08/bitcoin-bail-ins-and-yuan-bets <comment><USER2> > It is easy to make fun -- and I do make fun -- of bitcoin/blockchain > enthusiasts for naively re-creating everything that has existed for decades > or centuries in the traditional financial system.

From a "blockchain enthusiast"'s perspective, this is exactly why Bitfinex and other centralized Bitcoin businesses are idiotic. If we're just implementing centralization on top of Bitcoin's decentralized structure, Bitcoin has literally no benefits over the traditional financial system. It's actually worse, because when a major traditional financial institution gets hacked, they reverse the charges instead of going bankrupt. Bankruptcies happen all the time in the Bitcoin world because creating a centralized Bitcoin puts a target on the business that grows as the business grows, and the damage when they get hit is irreversible.

The benefit of Bitcoin is decentralization, and businesses that don't understand this are always going to come across as naive. Sometimes so naive that they fail.

<comment><USER3> > From a "blockchain enthusiast"'s perspective, this is exactly why Bitfinex > and other centralized Bitcoin businesses are idiotic.

Speaking as a fellow "Bitcoin enthusiast" who's been involved in it for five years, exchanges are useful for selling Bitcoin. The key is to limit your exposure to hacks by leaving your money with them for as little time as possible. So my balances are always sitting at zero, right up until I want to sell some, at which point I deposit it, wait the six required confirmations (roughly an hour), immediately sell it, then immediately initiate a withdrawal. Even assuming a very pessimistic situation of the exchange I'm using suffering a full loss every year, that still puts my % loss from hacks at well under 1%. That's a risk worth taking considering how much more inconvenient all other ways of selling Bitcoin are.

<comment><USER4> sounds like a PITA.

<comment><USER3> It's really not though? All I have to do is two things spaced roughly an hour apart (from the comfort of my own home). Buying a money order or mailing a check are more involved.

<comment><USER5> _I keep my money as cash, in a vault that I had to design and build from scratch in my own home. It 's probably not secure against robbery, but it's how I have to store my money to avoid the fact that all the banks are being robbed blind all the time. When I do actually have to transfer money to someone, I go to a bank where I keep a zero-balance account, make a deposit and physically stay there until it clears. Then I initiate the transfer, and as soon as that clears I immediately withdraw any leftover funds from the account and go back home to put it in my vault._

If someone had seriously proposed this as a way they use traditional cash + banks, you'd be laughing at them.

<comment><USER6> Many laughable things become fine with technology. Look at various encryption or network protocols. If someone had seriously proposed to Caesar that to keep their messages truly safe they needed to work out the math of a one time pad for every communication (or maybe more practically by modern standards, AES), they'd be executed. Rather than dismiss things on analogy, look at things as they actually are. The total amount of friction for the bitcoin equivalent is very little which makes it not a problem at all.

<comment><USER2> If I have to transfer my money into an exchange, wait for it to clear, and then immediately transfer it out into a wallet with a long random address with a random key that I then have to protect, that's not "very little friction" compared to traditional banking. There are many benefits to cryptocurrency, but ease of use is not one of them, and when you claim it is, you come across as out-of-touch with the average user.

</comment></comment></comment></comment></comment></comment></comment><comment><USER7> Ohh a Matt Levine post, so I guess the top 10 comments will be people recommending that everyone subscribe to his daily news letter:)

On a serious note....

> Engineers at Sydney-based Metamako LP and Exablaze Pty. Ltd., and Chicago- > based xCelor LLC are rolling out switches that take around four > nanoseconds—four billionths of a second—for messages to transit from one > side to the other, sending data from exchanges to electronic traders.

Wow, can anyone shed some light on how they time this? What sort of clock, I'm assuming its some fancy hardware that you use to benchmark at the 4 nano second level? Or do you just claim this and assume that no one can prove you wrong?

As to Bitfinex, on the weekend a few friends and I were batting around ideas on how to reliably trade bitcoins without having to worry about being robbed by the exchange^H^H^H^H^H err worrying about the exchange being hacked and passing their mistake onto you.

The top ideas we had were:

\- only trade on US domiciled exchanges, the US government tends to poke their nose into everything and this is one case where you benefit.

\- phone the exchange before you start trading. If you can't get someone on the phone, that's a very bad sign:)

\- Similarly, if the C level executives of the exchange aren't well known and always around at the regular bitcoin industry conferences then that's a bad, though this fails the Mt Gox test.

\- we tried to figure out if you could pull the coins out each night and put them back in each day, but even then, you'd run the risk of the hack happening while you had coins held by the exchange.

But we came to the conclusion that there just isn't any sane way to trade bitcoins currently where you can eliminate "exchange risk". If anyone does know of a way please let me know.

<comment><USER8> How about a decentralized exchange, like, say, Bitsquare?

<comment><USER9> Far too slow for any real trading. Exchanges exist for trading quickly, they must be centralized due to this.

<comment><USER8> > Far too slow for any real trading.

Maybe if you're a day or mechanical trader. Although, I personally don't know if that's actually true. Have you tried it? Can you share any data or citations?

> Exchanges exist for trading quickly

Agreed

> they must be centralized due to this.

Have you encountered any definite proof of your conclusion?

<comment><USER9> > Maybe if you're a day or mechanical trader.

Or swing trader or any kind of trader looking to time the market. Trading requires the ability to execute in near real-time. Block chain transactions and worse, fiat transfers between parties, takes far too long for trading to be effective.

> Have you encountered any definite proof of your conclusion?

They must be centralized to obtain the necessary speed _because currently block chain transactions are too slow_. Proof is unnecessary, logic is more than ample. One can't trade effectively if ones capital is hung up in "transit" between parties. Exchanges exist specifically to provide fast trading. There wouldn't be any exchanges if block chain transactions were fast enough.

<comment><USER8> Swing trading does not require the ability to place an order in near real time. You need to have done your DD and generally you just place your order the day before you expect your event.

We don't know that blockchain transactions are inherently slow and we haven't verified that no decentralized architectural/algorithmic/structural solutions exist to coordinating trades. In fact, I can think of one or two. So I'm asking you for data, not hypothesis. Do you have any info from your research about trade order execution times on p2p exchanges over time or userbase size? Or is it just your conclusion from anecdote?

</comment></comment></comment></comment></comment></comment><comment><USER3> I don't believe this is accurate:

> So when hackers stole about 36 percent of the bitcoins at Bitfinex, they > didn't just steal 36 percent of each customer's bitcoins: They stole, > basically, all of the bitcoins owned by 36 percent of the customers, and > none of the bitcoins held by 64 percent of the customers. (Weighting > customers by account size; you know what I mean.)

I think that all, or almost all, of Bitfinex's Bitcoins were stolen. Certainly more than 36%! The hackers generated all transactions and then simultaneously broadcast them. There's no reason they wouldn't or couldn't have gone after every last Bitcoin that was accessible to them. Bitfinex did not realize the attack was occurring in time and did not send out any counter-transactions to attempt to spend all of their coins first (realistically they had on the order of seconds to minutes for this). We know that Bitfinex wasn't using cold wallet storage like they should have, instead opting for some multi-sig scheme using BitGo that didn't actually work, so essentially all of their Bitcoins were available to be stolen, and were.

What's happening is that the 36% haircut is across _all_ values in all accounts, including fiat currencies that were on deposit such as USD, as well as other cryptocurrencies that Bitfinex trades such as Ethereum. So Bitfinex lost all of their Bitcoin, which represented 36% of the total value on deposit with them, most of the rest of which was fiat currencies.

<comment><USER10> Just to fill in a couple gaps: The attack lasted approximately 3 hours, starting by draining the largest accounts and moving down from there over time. It's known not all of them were stolen. I've seen estimates (by outsiders) that approx. 60+% of bitcoins were stolen. It was certainly more than 36%.

Edit: Sources:

[https://www.reddit.com/r/Bitcoin/comments/4wizdn/txid_and_bi...](https://www.reddit.com/r/Bitcoin/comments/4wizdn/txid_and_bitcoin_addresses_connected_to_the/d67dtk3)

[https://www.reddit.com/r/Bitcoin/comments/4wmpzt/bitfinex_as...](https://www.reddit.com/r/Bitcoin/comments/4wmpzt/bitfinex_assets_remaining/)

<comment><USER3> Thank you for filling in the details.

</comment></comment></comment><comment><USER11> Socialising the losses couldn't work with us customers. Since bitfinex' biggest market is in the US I don't see how this (bitfinex tokens) could fly without many lawsuits

<comment><USER12> But I thought Bitfinex was a global exchange... Does an exchange just need to have a few US customers to face US lawsuits?

<comment><USER13> Yep. If you're open for business to US citizens, or even really just moving USD around, you can't escape the USA's jurisdiction. And it appears Bitfinex compiled fully to AML/KYC laws for US customers dealing in USD, so everything's definitely documented.

"In prosecuting money laundering offenses, the US Department of Justice takes the position that jurisdiction exists over a financial transaction if the laundering is completed by a US citizen anywhere in the world, or by a foreign national or non-US corporation if the criminal conduct occurs in part in the United States—even if the foreign individual or company never themselves took an action in the United States, or intended for an act to occur there... US enforcement authorities increasingly operate on the assumption (unless convinced otherwise) that they have jurisdiction for such offenses whenever a suspect transaction is denominated in US dollars. [http://www.whitecase.com/publications/insight/how-us-laws- ca...](http://www.whitecase.com/publications/insight/how-us-laws-can-apply)

[https://www.mayerbrown.com/files/Publication/577b946b-8ad0-4...](https://www.mayerbrown.com/files/Publication/577b946b-8ad0-445d-b566-8b4a9682c373/Presentation/PublicationAttachment/ad366972-a841-447e-bd23-86883403a000/understanding- reach-jurisdiction.pdf)

<comment><USER12> Wow, thats pretty staggering. I'm sure I read an article (maybe just a tweet) by Andreas Antonopoulos stating that by complying to KYC/AML that they left themselves more vulnerable to this hack.

<comment><USER14> The issue comes into play that Bitfinex owned the private keys of all wallets in their possession, and the winners of positions were shown an accounting ledger through Bitfinex as opposed to having possession of their own coins. Now I can not pretend I know what happened behind the scenes with the back and forth between Bitfinex and the CFTC, but I can say that based on all evidence, Bitfinex was unable to pay out all positions within the required 28 day period. Verbiage within the original CFTC complaint suggests that the primary cause of this was Bitfinex's accounting system that was at fault.

<comment><USER13> Bitfinex could have moved to a cold storage system to make the bulk of their bitcoins secure, but doing so would have required them to register as a futures merchant and submit to additional auditing (which makes perfect sense, you can't expect to dump people's money into a shared pool only you have the books for). They chose to remain unregistered and use their multi-sig hot wallet system because the on chain transaction is enough for "proof of delivery". I'm sure someone could argue that qualifies as "The CFTC forced them to act insecurely", but Bitfinex gets zero sympathy from me for doing shit they profited from at the expense of their customers, while taking money from customers to socialize the loss.

</comment></comment></comment></comment></comment></comment><comment><USER15> A big contributor to the GFC was pension funds ("dumb money") buying CDOs with rates that were way too low for the risks. Do I need to be worried about the same thing for cat bonds?

</comment><comment><USER16> The bitfinex hack stinks. A lot...

Still waiting for a proper post-mortem/post-hack. They must be gaining precious time and lawyering up before all the details are released and SHTF...

</comment><comment><USER14> BFXCoin isn't totally without precedent, as BitcoinBuilder (created in the wake of MtGox) was recognized by the Japanese courts.</comment>