A Theory on Tether and the Bitfinex IEO

May 5 · 5 min read

The Background

I’ll start with some bitcoin news and facts. Much of this is common knowledge for crypto fanatics like myself so it’s primarily for anyone out of the loop. You may have to strap on your tinfoil hat for this. I did.

In 2016 Bitfinex was hacked for 119,756 bitcoins which at the time were worth about $70 million. The debt was paid back through the issuance of BFX tokens in the infamous “36% haircut” but critics claim the repayment was really just a series of accounting tricks and never actually paid off.

Blockstream employees escrowed a multisig contract between Bitfinex and individuals claiming to have information on the hack which ultimately failed to produce results. Blockstream has been accused of colluding with Bitfinex in the past to manipulate the price of bitcoin. Bitfinex reps have admitted they’re invested in Blockstream. More recently, Blockstream employees have offered what some might call an unusual defense of Bitfinex and Tether. Whatever their exact relationship is both companies would appear to have a significant interest in protecting each other.

On April 25th of this year Bitfinex was sued by the NYAG claiming they covered up an $850 million loss. On that same day the hacked coins moved for the first time in years. A week later on April 30th Reginald Fowler was arrested in relation to the missing $850 million.

On May 4th it was announced by a known shareholder that Bitfinex will offer a $1 billion IEO and the 119k hacked coins are being offered as collateral if they are ever recovered. $600 Million of the $1 billion has already been raised in private and the remaining tokens will be offered to smaller investors. At today’s price of roughly $5700 each that stash of 119k hacked bitcoins is conveniently valued at more than $675 million.

In addition to the hacked Bitfinex coins there are $30 million Tethers quarantined because of a supposed external hack in November 2017. These Tether have a very interesting blockchain analysis compiled in an easy to understand graphical display by Elementus using data originally posted by SpeedflyChris on Reddit. This analysis directly links the Tether hack to the 2015 Bitstamp hack and lots of other stuff. It’s well worth a read but the most interesting of these links are to a token on the Omni chain named Lioncoin (was this a practice run for LEO token?) which not only received coins from the Bitstamp hack but also from a number of older Bitfinex wallets. Someone asked SpeedflyChris if the Tether hack could have been an inside job and he goes on to discuss how it could be that or possibly the hacker had access to the main Tether issuance address. Wait, what?How many people have or have had the ability to issue Tether? Can a hacker issue Tether or would that have to be an insider?

Could one person or maybe group of persons be involved in the Bitstamp, Bitfinex and Tether hacks but also issue Lioncoin on the OmniProtocol?

The Theory

What if the 2016 Bitfinex “hack” was some type of inside job just like the 2017 Tether “hack” appears to be? There are many possibilities as to what exactly took place and of course they may have occurred for different reasons. There could have been a rogue employee trying to enrich themselves or possibly some kind of internal power struggle. They could also have been planned in advance and designed to provide cover for some future losses or even planning to cover-up outright theft.

Regardless of why the Bitfinex “hack” took place it was a failed effort because the 119k coins have become a useless liability. Those coins are tainted and unusable and they can’t just be tumbled or atomic swapped for some other coin. They’re burned. The only way to regain any value from them is to have the “hacker” return them to Bitfinex which is the only company that can legally use them. The “escrow” would need to be taken care of by “trusted partners” with a direct interest in protecting all parties.

Why wait till now to return the hacked coins? Well in 2016 they were only worth about $70 million and easily covered with the 36% haircut which ultimately increased trust in Bitfinex and allowed for an even larger scam. Today those same coins can be used to cover nearly 10 times the amount of losses. Yes, they could have earned more selling at the peak but dumping that many coins on the market would destabilize the price and the coins would still be dirty and unusable for legitimate trading. Be delaying things they would have had plenty of time to bleed out as much cash as possible and cover their tracks across the globe.

Whoever controls the hacked coins could have sent some as proof of access to secure the support of the private investors and shareholders now trumpeting this new IEO plan to save iFinex. The hacked coins can now be conveniently “recovered” and used to cover the $600 million investment that the private shareholders never actually have to put up.

This means only the smaller investors put up any actual cash for the IEO which further enriches the shareholders. The IEO would be lauded as a huge success in much the same way the 36% haircut was but in reality it was never paid in full and only a select few will actually benefit from it.

The Conclusion

Bitfinex and Tether are in deep legal trouble and the IEO is being rushed as a cash grab that might also help secure them a ”too big to fail” label from a hoard of smaller investors. Their cries for help won’t mean shit to authorities and they may well shut Bitfinex and Tether down just in time to crush all hope of any recovery for investors. The collapse of Tether and the billions lost would decimate smaller investors and could setback public opinion of bitcoin for years to come.

To end with I’ve probably spent way more time thinking about this then a normal person should. Much of this will very likely be torn apart upon review by more intelligent and better informed people but I’ll probably stick to the main theory that Bitfinex, Tether and Blockstream are all part of a conspiracy to neuter bitcoin.

I know that Correlation!= Causation, so please prove me wrong with facts.

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