“I Drink Your Milkshake”: How Bitfinex’s BFX Attempts to Drink Up Your Claims.

After its hack, Bitfinex unilaterally and “ratably ”imposed its users’ bitcoin losses across its entire user base, and offered victims of the hack something called a BFX token. Although the BFX token appeared in the accounts of Bitfinex’s users, it was not (and still is not) clear what exactly a BFX token is. Is it a crypto asset? Is it debt? Is it equity? But what is clear, however, is that parties who divest themselves of their BFX tokens arguably also waive their rights to bring legal claims against Bitfinex for the hack. Trader beware.

The BFX token first showed its face a few days after the hack. The early press releases suggested that BFX was a debt instrument convertible to Ifinex, Inc. stock, or otherwise redeemable by Bitfinex. (see https://www.bitfinex.com/posts August 6, 2016).

Bitfinex then pivoted, and suggested that BFX is a token that would be tradeable (https://www.bitfinex.com/posts August 7, 2016), and pegged its value initially at $1.00 USD (https://www.bitfinex.com/posts August 8, 2016). It was also clarified at that time that US Persons would not be able to trade the BFX token.

Later, Bitfinex released terms related to its BFX token. The terms, however, do not answer many critical questions about what exactly is the value of the BFX token.

To demonstrate this commitment, the Bitfinex Group is crediting to your account a token evidencing a limited-recourse, contingent obligation of the Bitfinex Group. The token is a notional credit, is dependent on the Bitfinex Group’s recovery of Losses, and is subordinated to any claims against the Bitfinex Group not related to the Losses. Recovery may include any of the following: recovery of stolen property; funds raised in one or more financings; and available cash from ongoing operations. The token has been issued to you without reduction of or other release or waiver of any claims you may have against the Bitfinex Group. Similarly, the Bitfinex Group has not waived any claims or defences it may have under the Terms of Use or otherwise should you choose to assert any claims independent of the token. The obligation evidenced by the token bears no interest and is not entitled to dividends, distributions, or other income amounts of any kind. The token is intended to be redeemed to the extent of its ratable share of the recoveries and may in any event at any time be redeemed by the Bitfinex Group at the Bitfinex Group’s sole option for its face value less the amount of any prior redemptions.

The token and your rights pursuant thereto may not be assigned except with notice to, and the prior consent of, the Bitfinex Group, on terms to be determined by the Bitfinex Group. Additional information about requirements for BFX token transfers.

So, let’s take this apart (i.e. “will it blend”):

• First, Bitfinex states that it is providing “a token evidencing a limited-recourse, contingent obligation of the Bitfinex.” “Limited recourse” debt is debt in which the creditor has limited claims on the loan in the event of default. “Contingent” means it may or may not occur depending on future events which themselves may or may not occur.
• The token is a notional credit, is dependent on the Bitfinex Group’s recovery of Losses, and is subordinated to any claims against the Bitfinex Group not related to the Losses. “Notional credit” here refers to the total amount of BFXs value at its spot price or price available immediately or “face value”. The notional value is calculated by multiplying the units in one contract by the spot price. This likely allows Bitfinex to value its issuance of the BFX against its books at the amount it wants (which in this case was the full value of the loss), and of course, that value changes (either up or down) after issuance when market forces attack.
• “Subordinated to any claims against the Bitfinex Group not related to the Losses” means that the value is secondary to other claims (whatever they may be) against Bitfinex unrelated to the hack, and thus, that other claims will be repaid first.
• “Recovery may include any of the following: recovery of stolen property; funds raised in one or more financings; and available cash from ongoing operations.” Bitfinex thus says they “may” use funds recovered from their investigations, operations, or any subsequent refinancing efforts to repay victims of the hack, but makes no promise to do so.
• The token has been issued to you without reduction of or other release or waiver of any claims you may have against the Bitfinex Group. Similarly, the Bitfinex Group has not waived any claims or defences it may have under the Terms of Use or otherwise should you choose to assert any claims independent of the token.” Everyone can still sue everyone and use all defenses available. (Remember this part for later)
• “The obligation evidenced by the token bears no interest and is not entitled to dividends, distributions, or other income amounts of any kind.” This is an attempt to make the BFX token look unlike a security.
• “The token is intended to be redeemed to the extent of its ratable share of the recoveries and may in any event at any time be redeemed by the Bitfinex Group at the Bitfinex Group’s sole option for its face value less the amount of any prior redemptions.” Bitfinex can decide to accept the BFX tokens back from account holders when they want and at that time to pay BFX token holders the same pro rata share of any monies recovered at its sole option for “its face value” less the amount of prior redemptions. Face value is unstated but was previously explained to be $1.00 USD. It is unclear as to whether “face value” refers to current trading price or initial valuation. The concept of multiple redemptions (assuming redemption means trading in the BFX token for something else) is likewise unclear.
• “The token and your rights pursuant thereto may not be assigned except with notice to, and the prior consent of, the Bitfinex Group, on terms to be determined by the Bitfinex Group.” Bitfinex wants to control transfer of the token and will likely attempt to keep it within its own trading platform. How does a trader give “notice” and obtain “prior consent”? What terms will apply specifically?

Good news. Bitfinex gave us that info too:

“Tokens have been issued in connection with certain property that was stolen from iFinex Inc. (“iFinex”) and from BFXNA Inc. (collectively, the “Bitfinex Group) on August 2, 2016 (the “Losses”). You can read more about the tokens here. A token may be transferred only on notice to, and with the prior consent of, the Bitfinex Group. The Bitfinex Group has determined that a token may be transferred on the following terms with prior notice to the Bitfinex Group:

A U.S. person may only transfer the token to another iFinex customer, but may not purchase tokens.

A customer who is not a U.S. person may purchase and transfer tokens without restriction if, in connection with each trade, the customer verifies to the Bitfinex Group’s satisfaction that the customer is not a U.S. person.

To transfer a token to another person, a transferor must assign to the transferee any claims that the transferor has against the Bitfinex Group on account of the Losses.

By transferring a token to another person, all transferors thereby assign to the respective transferees any claims that the transferor has against the Bitfinex Group on account of the Losses.”

Here’s where Bitfinex tells you under what circumstances this token is transferable, and where it drinks your milkshake:

• US persons can transfer within Bitfinex but cannot “purchase” any BFX.
• Non US persons can buy and sell and transfer BFX tokens with others provided the other is not a US person
• Claims against Bitfinex ride along with transfers of BFX.

A few issues:

• How is “prior notice” to the Bitfinex Group accomplished?
• “Transfer” and “purchase” are not defined. Is a transfer of 5 BFX from USPersonA in exchange for 1 USD from USPersonB a “purchase” or “transfer”? (Early reports suggest that non-US persons and US persons alike are able to simply sell BFX at Bitfinex without any knowledge or restriction of the counter-party on their transaction).
• Is the mandatory “assignment of rights” performed automatically somehow on the Bitfinex platform or must it be evidenced by some other writing?
• Do people trading the BFX token understand that trading the token is a waiver of their right to bring Claims against Bitfinex? Should this be buried at the bottom of a disclosure page?

This of course suggests that BFX tokens can be dumped at a far below initial offering price valuation on the platform and the platform itself can buy out not just its own debt at a discount, but all causes of action against it as well!

For Bitfinex, BFX and this clause, if it holds up in Court, would permit them to generate a debt instrument out of pure imagination, give it a totally arbitrary valuation, dump it on victims, let the market value it as a contingent notional asset (i.e. unlikely to realize value) and then, when the holders try to get any value of it by trading, they lose both the difference between the arbitrary valuation and the actual realizable value (which really represents the loss they take from the hack), AND THEY LOSE THEIR RIGHT TO SUE. For Bitfinex, this permits them to buy back the debt at a fraction of cost and get full releases against the issued value.

This is Bitfinex buying back its own debt at fractions of its own exposure, and getting waivers of claims from victims (whether knowingly or not) in the process. One hell of a milkshake

Is this legally enforceable? That’s an interesting question. Click-wrap agreements are coming under increasing scrutiny, right Uber?

As of August 17, 2016, Bitfinex reported that “ We are actively engaged with efforts to convert certain qualifying token-holders to shareholders of Bitfinex and to redeeming the remaining BFX tokens through a combination of new capital and earnings.”

Are you one of the BFX token holders who was repaid or given any iFinex Inc., stock? Did you know you were releasing claims? Did you do it anyway ? If so- contact me at @propelforward. I’d love to hear your story.

***correction as to meaning of Notional price applied above on 8/19/16.