Bitfinex plans IEO to cover missing $850 million

The token sale is not entirely unlike Bitfinex issuing a loan to itself on its own terms.

After Bitfinex's $850 million accident, the exchange is planning an initial exchange offering (IEO) token sale to help cover the resulting shortfall. The IEO plan has been confirmed by several members of the Bitfinex team after Bitfinex investor Zhao Dong posted some of the proposed token sale details on Twitter.

The specs

Bitfinex's proposed coin is called LEO, derived from Unis Sed Leo (One, but a Lion), a Latin phrase used to reference quality over quantity. In a nutshell it offers a bunch of fee discounts and will be periodically bought back and burnt.

In more detail, according to the document which is still subject to change, LEO holders will have their taker fees reduced by 15% on all crypto to crypto trades, or 25% for all holders who held an average of 5,000 USDT or more worth of LEO. There will be growing discounts from there for larger sums held, in 50,000 USDT increments, to a cap of 21 million USDT of LEO. A portion of the trading fees incurred can also be paid with LEO.

It also says there will be an option for traders to essentially jump to higher tiers at a discounted price, by purchasing an amount of LEO determined by the difference between their current fee tier and the one they want to jump to.

Up to 1 billion LEO will be sold at a price of 1 USDT per token, and they will be bought back monthly at current market prices. The amount bought back each month will be equal to 27% of the gross monthly revenue of iFinex (the overarching Bitfinex parent company) from the previous month, until no more than 100 million LEO remain in the wild. LEO used to pay fees can also cover the buy-back amount. The token will initially be listed on Bitfinex, Ethfinex and EOSfinex.

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Some considerations

There are a few points worth unpacking.

Firstly, the size of the token sale is intended to be enough to cover the shortfall incurred from all the Crypto Capital drama, with some extra. So if it does all go off smoothly, Bitfinex won't necessarily have to keep drawing on Tether's reserves.

In that light, it's feasible for Tether to flip back from 74% collateralised to 100% almost overnight. This stands to introduce an abrupt and presumably beneficial change to the cryptocurrency ecosystem if and when the token sale pops off.

Secondly, the proposed buyback rate, at 27% of iFinex gross monthly profits per month, is pretty intense. That's an enormous investment in getting those tokens off the streets after issuing them. There's also talk of changing things up so that all tokens will be burnt in the end. In that light this token sale looks a lot like a bandaid to put over the $850 million shortfall, which Bitfinex will want to tear off as soon as the wound is healed. There's also talk of changing things up so that all tokens will be burnt in the end.

Funnily enough, the end result is functionally similar to Bitfinex issuing itself a loan, collateralised against its future profits, which is kind of like what it did by pulling a line of credit from Tether.

But this might be a more agreeable solution, and for practical purposes it's a fairly fascinating example of some of that new age crypto financing. By setting its own burn rate Bitfinex is essentially calculating its own loan repayment terms. With suitable regulatory frameworks around token sales, you actually have a very solid example of how cryptocurrency can be used to cut out the middleman (a financier) for the mutual benefit of Bitfinex which gets the money, and its customers who get discounts and speculation.

Opinion: Will it fly?

So to recap, a company that's currently under investigation from several law enforcement agencies for several different reasons, with a history of apparently unresolved conflicts of interest, suggestions of ties to money launderers and a several hundred dollar price premium on its Bitcoin, is planning to release a new token to cover up an almost $1 billion shortfall that wasn't disclosed until authorities forced the issue into the open.

Will anyone be crazy enough to bite?

Absolutely.

Firstly, there are a lot of people still trading on Bitfinex and using Tether. They're obviously not too deterred by current affairs, and they can still find practical savings from a Bitfinex token. For someone with the confidence that Bitfinex can continue operating through everything, the expectation is probably that their tokens are someday bought back at current market prices after saving a bunch of money on fees. It's not the most devastating worst case scenario imaginable.

Secondly, the presales have reportedly already begun and from a purely speculative perspective the shopping list of everything allegedly wrong with Bitfinex is just a risk that's compensated by profit potential. There's even a world view where the sheer riskiness and dodginess of everything is actually good for the value of LEO tokens. This is because one of the funny rules of investment is that returns tend to reflect the risks remarkably well. This isn't a rule specific to any one asset class, but rather seems to be some kind of crowd intelligence in action.

So as the theory goes, if LEO tokens ever make it out the door and manage to survive, they'll be destined to spike in value because that's the only way they can accurately reflect their own riskiness. It doesn't really make sense, but money often doesn't.

The trick is that perception of risk is subjective.

Where one person is turned away by the presence of phrases like "indictment" and "$850 million loss", another person might look at everything turned up in the Bitfinex investigations and figure that everything is running much more smoothly than they thought it was.

Disclosure: The author holds BTC at the time of writing.