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The Department of Justice (DOJ) announced this week that two people have been arrested for attempting to launder money stolen in an exchange hack in August 2016.Almost 120,000 BTC was stolen from the Bitfinex crypto exchange .At the time, that Bitcoin (BTC) was worth about $71 million.Today it is worth almost $4.5 billion.
In addition to the arrests of Ilya Lichtenstein and Heather Morgan, the DOJ has seized $3.6 billion of the stolen crypto.The DOJ says this is the largest financial seizure by U.S.law enforcement.It’s big news, especially as it shows the degree to which illicit cryptocurrency transactions can be traced.
But the bigger question for the crypto community is what will happen to those recovered funds.
Get ready for some legal wrangling Bitcoin has increased by over 7,000% since the hack took place.
If you’d lost $100 worth of BTC on Aug.2, 2016 — the day of the hack — that BTC would be worth around $8,000 today.Bitfinex made a number of moves at the time to reimburse investors for the dollar amount they’d lost, and it believes it has already made investors whole.The crypto exchange now plans to establish its rights to the stolen Bitcoin.
The DOJ said there will be a court process by which victims can reclaim the stolen assets.
But that process will be complicated and time consuming.Here’s why: Some of the hack victims want a piece of the $3.6 billion pie, not the dollar amount at the time of the theft.
A tale of three tokens In the months following the hack, Bitfinex attempted to cover investor losses.One of the methods it used was to create tokens.Unfortunately, those attempts could now make it harder for the Bitfinex victims to claim the recovered crypto.
Let’s break down Bitfinex’s token creation:
BFX token (BFX): Bitfinex created a kind of debt token called BFX tokens at a ratio of 1 BFX for each $1 lost.
During the eight months following the hack, tokenholders either sold their BFX for $1 each or exchanged them for shares in Bitfinex’s parent company, iFinex.Recovery Right Token (RRT): Hack victims who took shares in iFinex also received a new token called Recovery Right Token.Bitfinex committed to distributing any recovered funds to RRT holders at $1 per RRT.In 2019, Bitfinex said there were around $30 million worth of RRT tokens in distribution.UNUS SED LEO (LEO): In 2019, Bitfinex created its own utility token called UNUS SED LEO to raise money.In LEO’s whitepaper, Bitfinex commits to using 80% of any funds recovered from the hack to buy back and burn LEO tokens.Burning crypto tokens is a bit like a stock buyback.It takes coins or tokens out of circulation, which pushes up the price because there are less of them on the market.
If Bitfinex succeeds in claiming all of the seized $3.6 billion of Bitcoin, it has said it would use part of that money to pay RTT holders $1 per token.
The token is currently trading at $0.9, up about 200% on news of the seizure.This payment would cost around $30 million.
Bitfinex would then use 80% of the remaining funds to buy and burn LEO tokens.This would equate to around $2.9 billion — about half of LEO’s current market cap.LEO’s price also jumped on the news.But there’s no guarantee that the original hack victims are current LEO token holders.
Hack victims are seeking legal advice If Bitfinex succeeds, it will be the exchange and the current LEO token holders who reap the rewards from the DOJ seizure, not the hack victims.If the RRT token holders only receive $1 per token, they won’t benefit at all from Bitcoin’s massive price surge.
This is why a number of hack victims are seeking legal advice.They don’t want the dollar equivalent to what was lost — they want their Bitcoin back.
But it isn’t yet clear what they agreed to in the iFinex share/RRT token deal.Nor is it clear whether Bitfinex has the right to commit to use the seized funds to boost the price of its LEO utility token.
For now, it’s too early to say how this will play out.If it goes to court, it could take years to resolve.
And given Bitcoin’s price volatility, the seized Bitcoin could be worth a lot more — or a lot less — by the time anyone is able to access it.
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Emma Newbery owns Bitcoin.
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