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IEO research: Bitfinex IEO — At $1 billion, how the biggest IEO to date came into being

 

IEO landscape

 

Before Bitfinex, the biggest IEO in terms of funds raised was Breadwinner AG at $39 million according to InWara’s IEO database. But as per the latest marketing document released by Zhao Dong, one of the shareholders of Bitfinex, at $1 billion, the Bitfinex IEO has blown Breadwinner’s claim over this title completely out of the water. In addition to emboldening the latest IEO trend, Bitfinex’s revelation may have caused some interesting developments in the crypto space.

For example, for the first time since November 2018, the price of popular cryptocurrency Bitcoin has crossed the $6K mark and at the time of writing was trading at an average price of $6089, according to Coinmarketcap.

Excited?

Hold your horses, as this surge in Bitcoin’s price could be a consequence of the mass exodus of traders from the crypto exchange-Bitfinex rather than the start of a bull-run. 

Tether (USDT) which is owned by Bitfinex’s parent company accounted for as much as 80% of all BTC trading volume during the month of March, according to Cryptocompare. The price surge in BTC is likely because of traders exchanging USDT for BTC, fearing a price dump in the former.

Bitcoin’s price is trading at $6,237 (as of writing this article) on Bitfinex exchange. Bitfinex’s price data is skewed so much that Coinmarketcap is currently not considering it for calculating the weighted average of the token.

So why are hoards of traders exiting the exchange and why is Bitfinex launching a $1 billion IEO? But before we get into that, What’s an IEO?

 

Initial Exchange Offering-IEO expalined

IEO- Initial Exchange Offerings are the latest trend in the crypto fundraising space. It’s very similar to its predecessor ICO but offer some definitive advantages to various players in the space. To know more about IEO’s check out our article. In the backdrop of the declining ICO numbers IEO’s are quickly capturing the crypto-fundraising market. 

# of ICOs by quarter

IEO landscape

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ICO numbers have declined by as much as 72% YOY to just 285 this year (source). But on the hand, IEO’s have been gradually picking up pace with exchanges like Binance spearheading the movement. According to InWara’s IEO database as many as 80 IEO’s have been launched so far and a majority of them were launched this year.

IEOs, on the other hand, have been gaining momentum this year. The number of IEO projects surged to 100 projects this year and this rapid increase is fueled by the increase in IEO platforms or "launchpads" as they are known. In 2019, funds raised byIEO projects surpasedd funds raised by ICOs by as much as $370 million (source).


IEO research
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IEO projects have raised a whopping $1.474 billion just in 2019, an incredible amount considering the still nascent nature of the space. Even regulators are not sure how to classify IEOs but considering its close nature to ICOs, it might not be friendly.


So how did Bitfinex decide to laucnh its own IEO? You’ve probably heard of the Bitfinex- New York Attorney General (NY AG) fiasco? If not, let us break it down for you.

 

Bitfinex, Tether, Crypto Capital Corp and the missing $850 million

On April 25th, 2019, Attorney General Letitia James announced that her office received a court order against iFinex Inc (parent company of Bitfinex) for allegedly covering up the apparent loss of ~$850 million of client and corporate funds, according to a press release by the attorney general of the State of New York. 

Bitfinex is a cryptocurrency exchange owned and run by Hong Kong-based iFinex Inc and is among the top ten exchanges in the world by 24h trading volume, being placed 6th on the list according to InWara’s crypto exchange database.

IEO landscape

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Bitfinex has also invested in two crypto startups namely Netki and ShapeShift AG. Although not the the leader investor in these rounds, a total of $5.1 million was invested in these startups combined (source).

On the other hand, Tether is a stable coin also owned by iFinex Inc currently valued at whopping ~$2.8 billion, making it the most valued stable coin by market cap. A stable coin is a type of cryptocurrency whose value is pegged to a fiat currency or sometimes exchange traded commodities.

With Tether (USDT) it’s pegged to the US dollar, ie. 1 USDT is equal to $1. This is done to eliminate the extreme price fluctuations usually observed with crypto tokens. According to some estimates as much as 80% of all Bitcoin trading in done in USDT or Tether.

What’s the deal with the apparently missing $850 million? That’s where Crypto Capital Corp comes in. 

Crypto Capital Corp is a Panama based payments processor that has built a private fiat platform that can support any crypto blockchain. The company allows clients to deposit funds in a fiat currency of choice: USD, EUR, GBP or PLN and also allow them to purchase and sell cryptocurrencies through a couple of verified exchanges. 

In 2018, Crypto Capital Corp was handed over $850 million by iFinex Inc, so that they could handle Bitfinex customer’s fiat withdrawal requests. This move came on the heels of Wells Fargo denying Bitfinex access to its banking services. Thus Crypto Capital Corp became essential for the proper functioning of Bitfinex.

But the deal ran into trouble when Polish, American and Portuguese authorities seized several bank accounts linked to Crypto Capital Corp in connection with an ongoing investigation into links with malicious players.

 

Bitfinex’s $850 million (alleged) cover-up

iFinex compensated for the apparent loss of $850 million by leveraging funds from Tether. Since Tether is valued $2.8 billion the company should hold as much in cash. But as later revealed by a company lawyer, only 74% of USDT was backed by fiat equivalents or akin to $2.1 billion. There’s a good chance that some of these funds were transferred to Bitfinex account. 

According to Forbes, Bitfinex and Tether negotiated a deal wherein $625 million was transferred from Tether’s bank account to Bitfinex’s. On the heels of which, Bitfinex transferred $625 million from its Crypto Capital account to that of Tether. Despite its critical relation with crypto exchange Bitfinex, Crypto capital Corp has not mentioned Bitfinex on its website as a partner while other smaller exchanges have been mentioned.

 

The $1 billion Initial Exchange Offering (IEO)

So Bitfinex is down by $850 million and the money is not coming back anytime soon since it’s in Crypto Capital Corp’s seized bank accounts. The company is accused of colluding with drug mafias and is also being charged with money laundering charges on a global scale. Thus the ingenious idea to launch a token sale, specifically an Initial Exchange Offering. iFinex aims to raise a whopping $1 billion through the sale of 1 billion LEO tokens, according to the released company document.

iFinex Inc also revealed that the new token sale would take place under the name of Unus Sed Leo Ltd. The LEO token holders will instantly be able to use the tokens to receive benefits on iFinex’s trading platforms including Bitfinex, ETHfinex, and EOSfinex. Hence serving a utility function.

iFinex has taken meticulous steps so as to take ensure compliance with regulatory norms. In its marketing document, the company emphasizes on the “utility” part of LEO tokens.

In addition to this, the tokens will not be offered in the US, likely fearing conflicting notions of what counts as a security with the SEC. Also emphasizing on how the aforementioned document does not constitute any sort of general solicitation for investment in LEO tokens or as a solicitation to buy securities in any jurisdiction.

The benefits LEO token holders will receive is broadly divided into four categories-

  • Peer-to-peer lenders will receive a 0.5% discount for every $10,000 USDT in LEO tokens stored on average in a customer’s account during the previous month and will be capped at 5%.

  • Derivatives fees will be downgraded to a measly 0.01 basis points and also will be capped at 2 basis points for every $10,000 stored on average in a customer account during the previous month.

  • For token holders, a whopping 25% withdrawal and deposit fee will also be administered. But for those who hold more than $50 million in USDT, the first $2 million is free after which there is a 1% transaction fee. A small fee percentage when compared to traditional banking systems.

  • LEO holders will be able to avail a cool 15% reduction on taker fees for crypto-to-crypto and crypto-to-stablecoin pairs. While those who hold more than $5,000 USDT worth of the token will be able to avail a whopping 25% reduction.

 

The buy-back scheme

As many as 1 billion LEO tokens will be issued by iFinex’s newly formed subsidiary company Unus Sed Leo Ltd. But the company plans on buying back the tokens on a monthly basis at market price. 

How? 

iFinex plans on leveraging Bitfinex’s incredible profits. As much as 27% of the exchange’s monthly profits will be used to buy back the tokens. Also if Bitfinex is able to access the seized Crypto Capital Corp’s funds in the future, as much as 95% of it will be allocated to buying back LEO tokens within 18 months of the token sale. 

This shouldn’t be much trouble judging by the released unofficial marketing document. In 2017, Bitfinex raked in $326 million in net profit and this amount grew by 23% in 2018 to a whopping $404 million.

Zhao Dong, one of China’s biggest OTC traders also responsible for publishing iFinex’s “marketing document” and one of the shareholders of Bitfinex, implied that as much as a whopping $600 million has already been raised through the private sale of LEO tokens. The company is also planning on launching a public sale if all 1 billion of LEO tokens are not sold out in the private sale.

 

Final thoughts

In light of all all these developments, it’s important to note that this is not the first time Bitfinex has compensated for losses on its balance sheet by issuing tokens. Back in 2016, the company had raised $72 million by partially replacing customer funds with BFX tokens on the heels of the funds being stolen in a cyber attack. Although the stolen funds were never recovered, the BFX tokens were bought back using the profits from Bitfinex.

 

If you're interested in reading about Security Token Offerings/Digital Securities, check out our highly acclaimed STO report: Security Token Offering Ecosystem.

 

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