When the Dust Settles: The Bitfinex Probe Reveals Structural Weaknesses

Just as an earthquake reveals structural problems in buildings, so the news of the Bitfinex probe has laid bare two fundamental weaknesses in crypto infrastructure as a whole.

Hong Kong-based Bitfinex is one of the sector's leading cryptocurrency exchanges in terms of overall trading volume, and shares ownership structure with US$-backed tether, which accounts for over 90 percent of the global stablecoin market.

Apparently, its payment processor Crypto Capital "Lost" $850 million of Bitfinex funds some time in 2018; to cover the shortfall and meet user withdrawals, Bitfinex drew on Tether funds without disclosing the arrangement.

In the crypto sector, these fault lines are: 1) the lack of high-level banking services; and, 2) the somewhat overlooked lack of auditing standards.

While some exchanges have managed to open and keep accounts at large and reputable banks, all will confirm that it was not easy and that it cannot be taken for granted - accounts can be closed at a moment's notice.

Bitfinex has had a long history of banking troubles, which on several occasions has fuelled rumors of insolvency as users struggled to withdraw funds.

What's more, the lack of reliable banking enhances the demand for a solution like tether, which enables clients and exchanges to transfer value without the need for payment processors.

The issue is starting to attract the attention of regulators who realise that investors are more likely to suffer where there is no strong banking support.

The sector's lack of authoritative support from reputable accounting firms can potentially do as much damage as the lack of high-level banking, in that it undermines confidence which in turn will slow down adoption and investment.

This will boost the confidence of investors - both retail and institutional - in demanding demonstrations of operational quality, which will in turn make the sector more resilient to quakes like the Bitfinex news, and to the aftershocks as more revelations come to light.