Bitfinex did not use cold wallets and 120,000 bitcoins were stolen. Experts say CFTC supervision is not unrelated

The theft of nearly 120,000 bitcoins from the Bitfinex exchange has caused a lot of discussion, with some prominent experts saying that the regulatory framework proposed by the CFTC may have hindered Bitfinex's use of cold storage and was one of the important factors leading to this tragedy.

On June 2, Bitfinex was investigated by the U.S. Commodity Futures Trading Commission (CFTC) for allegedly violating the Commodity Exchange Act by failing to register as a futures broker and was fined $75,000.

The CFTC stated at the time: " The Bitfinex platform allows users to borrow funds from other users and conduct leveraged and margin trading. In addition, Bitfinex did not actually hand over these bitcoins to traders. Instead, Bitfinex stored these bitcoins in wallets under its own control ," which violated the CFTC's commodity trading regulatory rules and forced Bitfinex to abandon cold storage.

It is precisely because of the regulatory framework proposed by the CFTC that Bitfinex (and other exchanges) are unable to store users’ coins offline (cold wallets). This may also be the only factor that led to this security breach and the loss of nearly $65 million in Bitcoin.

Is KYC/AML regulation justified?

In the United States, the enforcement of Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations is very strict, especially for companies that handle money transfers. Large companies like Bitfinex are required by law to record user data and store sensitive personal and financial information on their private servers.

On the Bitfinex exchange, users need to verify a series of documents and identification, such as passports and bank information, which are kept by the Bitfinex exchange. If regulators such as the CFTC require it, the Bitfinex exchange needs to provide them with this information.

Bitcoin expert Andreas Antonopoulos speculated that it was KYC and AML regulations that prevented the exchange from using cold storage.

“Did the CFTC force Bitfinex to stop using cold storage and switch to hot wallets?

Is this due to KYC/AML regulations, which increase the risk?”

There is no doubt that this Bitfinex incident once again reminds us of the importance of using cold wallets.