Bitfinex is a leading exchange by volume and operates numerous business lines, including the Ethfinex DEX, derivatives trading, and the Tokinex IEO platform. The Hong Kong-based iFinex Inc. operates both Bitfinex and Tether, a USD-pegged stablecoin that is presently the largest stablecoin by market capitalization and volume, serving as a prominent trading vehicle across Bitfinex and many other exchanges. Many industry observers have long speculated that the outstanding Tether supply lacked full backing by USD and noted that Tether has never released a comprehensive audit; an early 2018 Smith + Crown report considers this issue in detail. Such speculation came to a head in April 2019, when the New York Attorney General charged iFinex with fraud, alleging that $850 million was missing from the reserves and had been seized from the Panama-based payments processor Crypto Capital, which iFinex partnered with to handle customer-withdrawal requests after losing alternative banking relationships. Bitfinex is working to recover the lost funds from Crypto Capital, and resolve the associated legal matter with the NYAG. In an effort to cover the shortfall from the Tether reserves, Bitfinex issued the LEO token in May 2019, raising $1 billion in two weeks in a private sale. This chronology provides further detail on the events leading up to the issuance of LEO.
Bitfinex’s issuance of the LEO token bears resemblance to its response to a 2016 hack it suffered in 2016, in which 120k BTC ($72 million at then prices) was stolen. In response, Bitfinex created BFX tokens, issued to affected users at a ratio of 1 BFX to 1 USD lost. Over the next 8 months, Bitfinex then repurchased or swapped for iFinex stock all outstanding BFX. All BFX holders who swapped for iFinex equity also received the Recovery Right Token (RRT), worth $1 from any funds recovered in the future. Thus, all funds lost in the hack were effectively refunded via iFinex stock and RRTs.
The LEO private placement reportedly had no discount options or insider allocations, with all investors paying $1 per token and were external to the Bitfinex organization. Broadly, LEO resembles Binance’s BNB in functionality. Within the Bitfinex ecosystem, LEO has a variety of uses and defined buyback terms:
- iFinex commits to spending 27% of consolidated gross revenue to purchase LEO on the open market, until no tokens are in commercial circulation. Bitfinex claims in the LEO whitepaper to have made $418 million in gross profit in 2018, though this figure includes an unknown amount from Ethfinex, whose revenue does not count for the LEO buyback. LEO used to pay trading fees counts towards this 27% figure.
- 95% of any recovered funds (net of legal and operational expenses) from Crypto Capital will be used to purchase and buyback LEO within 18 months of recovery, though there is no guarantee of any recovery.
- 80% of any recovered funds from the 2016 Bitfinex hack will be used to purchase and buyback LEO within 18 months of recovery. Notably, this portion of the buy back is after all funds paid to RRT holders. Purchases with either category of recovered funds can be made at any point in the 18 month period, not necessarily immediately following fund recovery.
- 15% reduced trading fees for all holders, including extra discounts for large holders. Up to 25% of trading fees will be taken in LEO, burned, and counted toward the 27% revenue target.
- 5% discount on P2P lending fees.
- 25% discount on deposit and withdrawal fees.
LEO exists as a metatoken on both Ethereum and EOS; users can convert between chains at a 1-1 ratio through Bitfinex. Bitfinex has released a real-time transparency initiative to monitor LEO burns.
Signals are projects that have sufficiently demonstrated relevance in the industry in some form, for at least a finite period of time, as collectively agreed upon by Smith + Crown’s team of professional blockchain researchers. Our team has concluded that Bitfinex LEO qualifies as a signal at this time.
That said, this project has demonstrated characteristics that we find concerning and feel a responsibility to communicate upfront. Those concerns are as follows:
Accusations of fraud and legal uncertainty surrounding a pending NYAG lawsuit regarding the management of Tether reserves.
Status as Signal is always subject to revision based on the best available evidence of a project’s performance and industry trends. It is imperative that you gather your own facts, evidence and make your own educated assessment of this, and every blockchain-based project. This disclaimer, research profile, and other Smith + Crown content is meant to highlight considerations that help you arrive at your own independent conclusions.