What Will Be The Major Cryptocurrency Weaknesses Exposed Within The Bitfinex And USDT Probe
Cryptocurrency Weaknesses Exposed With Bitfinex Probe
The recent news cycle has been buzzing with the probe into Bitfinex by the New York Attorney General, and this probe as revealed some weaknesses in the underlying structure of cryptocurrencies. This probe has been likened to an earthquake in the housing sector. Yes, many buildings might fall, but the buildings erected after the fact will be built better and smarter. The same can be said for the entire crypto ecosystem following this probe.
Bitfinex is a leading exchange based on trade volume and is under the same umbrella as the leading stablecoin on the market Tether. The problem was that the payment processor that Bitfinex uses “lost” over $850 million worth of funds sometime last year. This pushed Bitfinex to draw on Tether funds to meet the shortfall and to be able to meet user withdrawals. All this without disclosing what they had done.
There are two underlying problems that this probe is bringing to light, namely that there is a lack of high-level banking services and a poor state of auditing guidelines in the entire cryptocurrency sector.
Banking: Talked About Often, Still A Problem
Many might question why banking is a problem for the largest of exchanges, seeing as they are multi-million dollar companies that obviously have bank accounts. The problem is that these accounts are subject to be closed at a moments notice if the banks think anything even slightly off-putting is detected.
Things like money laundering, jurisdictional issues and even slight concerns over internal procedures at these exchanges can see their accounts closed almost immediately. There are smaller financial operations opening up to service the growing cryptocurrency sector, but these types of operations are hamstrung for very obvious reasons.
They lack the network and large balance sheets of established banks, along with the user base when certain key clients are undergoing a tough period, such as the recent crypto winter. Bitfinex itself has historically had trouble with banks. These have fueled rumors of the company's insolvency when its users have struggled to withdraw funds for weeks on end.
This is starting to be addressed in legislation through, with France leading the way. Recent regulations adopted by France guarantee a bank account to any company that submits to regulation and inspection. This will go a long way to alleviating any issues, particularly if the regulations are adopted by the rest of the European Union.
Auditing: The problem No Seems To Mention
Auditing in the cryptocurrency sphere is total without standards, and this is one reason institutional investors have historically been wary of cryptocurrency startups. Tether has seen its fair share of problems with auditing where very few people truly 100% believe that the coin is backed with enough dollars.
Here, a distinction needs to be made between attestation and an audit. An attestation is a confirmation by an independent body about an assertion at a specific point time. Looking to stablecoins, this could be the question “does X account have Y money that the company says it does?” and that would be confirmed for that particular day/week.
Attestations are an important part of stablecoins and many are requiring more oversight with regards to stablecoins. Gran Thorn, an auditor, confirmed that Circle does indeed have the required amount of backing. However, this needs to be done on a constant basis such as the “continuous attest” that TrueUSD is offering by partnering with an accounting firm in San Francisco.
These two problems need to be sorted out for cryptocurrency to truly be able to hold its own in today's market.