Exchanges divided over LEO's regulatory future

By Ben Munster

How is Bitfinex’s LEO token faring, a week after the New York Attorney General’s Office hinted that it might be an unregistered security? 

Bitfinex says it sold one billion LEOs to investors in May, in an effort to increase liquidity after the NYAG discovered and made public—along with a surfeit of other unflattering details—an $850 million hole in its finances. 

But last week, the NYAG wrote in another damning court filing that the sale had “every indicia of a securities offering”—as is the case with traditional securities, Bitfinex has promised its buyers dividends, which depends largely on its own performance as a company. Bitfinex has also pledged 27 percent of its revenue to buying the tokens back from investors and then "burning" them—a means of artificially inducing scarcity and keeping the price up. 

Sounds very security-ey. So has there been a fallout? 

For exchanges listing the token, it could have been a cause for alarm—with federal regulators cracking down heavily on unregistered securities offerings, what savvy business wants to be seen hawking illicit LEOs?

Quite a few, it turns out. 

Only one exchange appears to have made any effort to distance itself from the LEO. IDEX, which bills itself as the “Number 1 Hybrid DEX on Ethereum,” announced soon after the NYAG’s filing that it had delisted the token, and that withdrawals would instantly cease. But IDEX is registered in Panama, and will not obviously fall foul of securities laws, so it’s unclear why the rush. (It may be because of the Martin Act, which permits US regulators to pursue foreign securities offerings. Regardless, IDEX did not respond for comment.)  

But most of the exchanges listing LEO are so far removed from US jurisdictional squabbles they don’t seem to care. While OkEX—a Malta-registered exchange that is one of the largest to list the token—vows to “constantly review the performance of listed projects to ensure a robust ecosystem," there are no qualms about continuing to list LEO. “As for now,” a spokeswoman told Decrypt, “LEO is without violation of our guidelines. However, we will continue to closely monitor the situation.”

A spokesman for C2CX, another non-US exchange that also lists LEO, was similarly nonchalant. “We do not accept US residents as customers, so the legal status of LEO in the US does not affect us,” he said. 

Still, there are lingering questions about the mechanism of the LEO token sale itself. The NYAG, in its submission last week, asked how Bitfinex could possibly hope to repay its investors while simultaneously maintaining liquidity for traders, given the massive hole in its finances.

According to a source familiar with the matter, Bitfinex has enough money to satisfy these seemingly conflicting tasks, and the LEO raise is just a short term fix for immediate cash-flow problems. “The company has lots of money and lots of revenue,” he said. “The $850 million is customer funds, so [the purpose of the LEO sale] is to make sure there is enough liquidity to cover customer withdrawals—it’s to cover liquidity/cash flow in the short term rather than recapitalize for the company.”

One such revenue stream is the exchange's burgeoning token sale platform, Tokinex. Bitfinex sells other crypto companies' tokens, levying a "success fee" if the sale goes well. One such offering took place today, reaching its $5 million goal in 35 seconds. The exchange itself supposedly doesn't invest in these sales, but staffers and executives might. "We only chose tokens we believe in, so some of the team do," said the source. "At the same terms as everyone else."

But efforts to keep LEO lucrative aren't washing with seasoned traders. Over the past week, the token has suffered a ten percentage-point drop in value, from $1.66 to $1.55—despite, as some disgruntled investors say, efforts to strip out the supply and control the price. (Around $4.6 million worth of LEO has apparently been burned so far.)

One trader, “Ivan,” noted on the Bitfinex Telegram group that the aggressive buybacks had failed to curb the price downtick, and said interest in the coin appeared “not so great.” Of course, it could just be correlated with the rest of the market—Bitcoin dropped by nearly $3,000 over roughly the same time period. But LEO’s descent began the moment the NYAG called it a security. Something’s gotta give. 

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