The second quarter of 2017 was good for many in our industry, but has been extraordinary for Bitfinex. Our business achieved many milestones despite the headwinds from our recent banking difficulties. Q2 saw the final BFX tokens retired, three successive months of record-breaking net income, the exclusive trading launch of IOTA, the launch of many other token trading pairs, and our engagement of financial auditors. We have also substantially increased headcount by hiring additional personnel for customer support, compliance/verification, and software development.
Banking
As we have announced here and here , Bitfinex was being blocked by correspondent banks servicing our primary banks in Taiwan, including Wells Fargo, among others. We are not the only actor in the digital token space experiencing banking roadblocks. In response, we chose to take a more aggressive stance and challenge Wells Fargo on the propriety of their actions.
Although we were unsuccessful in our endeavor, we hope this legal challenge raises awareness about the chokehold that a small clique of correspondent banks has on a broad category of industries and economies. We think it is worrying that banks appear to reserve to themselves the power to crush whole markets, irrespective of their legality and their benefits to consumers and economies.
We are working on other payment avenues and channels, including third party payment processors, support for foreign currencies and trading pairs, and banking relationships in countries with friendlier correspondent banking connections. Just as with any of our past challenges, we are meeting this one head-on, and we have found and will continue to find solutions, just not that present themselves immediately.
We have been establishing a global network of fiat channels designed to be resilient against further aggressive action from correspondent banks. Additionally, we have opened an escrow-based relationship with a U.S.-based bank to service qualified corporate customers. Despite our customers’ desire for specific, public updates, we believe that, at this time, it would
be a mistake to be too forthcoming about the specifics of any particular fiat solution. In general, however, we can say the following:
● Big customers can get money in and out.
● Depending on jurisdiction, smaller, retail-type customers continue to present challenges.
● Even as we begin to normalize fiat operations, we will likely soon enforce substantial minimums on the deposit and withdrawal of fiat.
● Euro payments will be less problematic, as transactions may be routed through a UK-based (and FCA regulated) payment processor with whom we are working.
While our banking challenges are troublesome and distracting, please note that tens of millions of dollars are flowing in and out of Bitfinex daily. Although not available to everyone, these fiat flows have been sufficient to bring our markets back into alignment with other exchanges.
New † Fiat † Trading † Pairs
The banking problem is causing us to bring forward our plans to launch other fiat currency trading pairs. We see this as a huge opportunity for our customers and a way of expanding our reach. As soon as we are able to comfortably and reliably deposit and withdraw in other currencies, we will begin to add those trading pairs with a mechanism to allow customers to convert their USD balances. In particular, we have been live testing EUR and JPY pairs with some customers. We hope to publicly launch these soon.
New † Crypto † Trading † Pairs
We have recently added Ether as a base trading currency along with several new digital tokens. We have started the process of adding new trading pairs; new pairs include those driven by consumer demand and other projects that we think are interesting. Additionally, iFinex Inc. has made and will continue to make small “pre-ICO” type investments, which have also been or will be listed. Those include IOTA and EOS (via investment in Block.one). If you are aware of interesting projects where iFinex can be a valued strategic partner as an investor and/or as a listing exchange, please introduce us and we will consider the matter.
UÆSÆ † Retail † Customers
In light of the recent U.S. Securities and Exchange Commission report of investigation—and accompanying investor bulletin— about the DAO, and the ongoing costs, headaches and difficulties in dealing with U.S. retail customers, we have begun the process of disengaging from that market. Verified U.S. individuals represent <3% of our gross revenue, but consume far more than 3% of resources to verify, support, and provide fiat solutions. As such, we have just taken the step of no longer verifying any new U.S. individuals, which will have an immediate positive effect on our verification backlog. New U.S. corporate account verifications are still welcome. We will be taking further steps in the near future to address existing U.S. retail customers.
Ethfinex
We are proud to announce Ethfinex : an information and exchange platform for Ethereum-based trading and discussion. Ethfinex is a community hub for projects and crowdsales designed to facilitate learning and analysis, while offering access to the most liquid and advanced trading platform for Ethereum ERC20 tokens. iFinex owns 90% of Ethfinex at this time, but will be diluted over time by way of the Nectar token, given for free to customers as a reward for market-making. More information about Ethfinex can be found on our blog .
Auditors
As promised, we have retained a major accounting firm to perform ongoing auditing services for Bitfinex. Historically, we had difficulty getting appropriate firms interested in working with us because of perceived uncertainty in how to handle outstanding BFX Tokens. However, with the redemption of the final BFX tokens, that issue is now moot. Accordingly, we engaged a highly respected and reputable accounting firm, Friedman LLP. We have been working steadily towards a balance sheet audit date of June 30, 2017. It is a laborious process that will take some time, but we believe will be worth it for our stakeholders, customers, and the wider public.
We will present results from the audit as they are available.
Breakdown † of † Revenues
It is necessary to offer some commentary on our revenue breakdown. The bulk of our revenues come from trading fees and, to a lesser extent, from margin funding. These fees, however, are generated in different currencies and digital tokens, many of which have materially appreciated in value. It is our policy to “dollarize” crypto revenue through small passive limit orders.
However, it can be difficult to do this in a timely way during periods of extreme volatility where, for example, we accumulate substantial inventories from margin liquidation collateral.
Additionally, with the tremendous success of our OTC business, it has become necessary to maintain some inventory to make competitive markets for our OTC customers. We can say definitively that the sharp, across-the-board increases in digital token values have had a substantially positive effect on earnings. While we work hard to passively eliminate excess inventories to minimize downside exposure, there is a continuing risk of sustained downward pressure on these markets that may adversely affect future earnings.
Distributions
It is our policy to distribute all accumulated profits in excess of any reserves, working capital requirements, and funds needed for strategic projects. Management has determined that making distributions on a quarterly basis (instead of monthly) will be operationally better for Bitfinex and our stakeholders. For our direct shareholders, distributions will be made, as and when payable, to Bitfinex accounts.We will work with the current SPV shareholders to make distributions in an appropriate manner to their unitholders. Although our audit is not yet complete, we are confident enough in our balance sheet (along with a very strong July) to commit to a ~$17.5M distribution for Q2 to shareholders (i.e., $0.10 per share). The record date for the distribution is August 11, 2017. The distribution will be paid on August 15, 2017.
Equity † Market
We are planning to launch a private market for iFinex shares. This market will initially be limited to existing, non-U.S. shareholders, but may eventually include new, properly vetted persons that wish to become shareholders. We are also working on a solution that allows U.S. persons to participate in an OTC or IOI (Indication of Interest) style market. The exchange mechanics will resemble a typical order book, but with some compliance-related enhancements. The most notable difference will be in post-trade processing. This is necessary for us to interface with our share registrar. We are excited to bring a limited measure of liquidity and price discovery to our shareholders. We expect to launch this market during August, 2017. We expect to commoditize — and possibly white label — this private market infrastructure, as we believe it will be useful to other private companies.