New York’s Attorney General, Letitia James, announced on Thursday a court order against iFinex Inc.—the operators of cryptocurrency exchange Bitfinex.
The court order comes as a result of an ongoing investigation into cryptocurrency exchanges that began in 2018. It alleges that the Hong Kong-based exchange has been mixing corporate and client funds, while draining Tether reserves in order to hide a substantial sum of missing funds.
In a press release issued on April 25, Attorney General James explained:
“Our investigation has determined that the operators of the ‘Bitfinex’ trading platform, who also control the ‘tether’ virtual currency, have engaged in a cover-up to hide the apparent loss of $850 million dollars of co-mingled client and corporate funds.
“New York state has led the way in requiring virtual currency businesses to operate according to the law. And we will continue to stand-up for investors and seek justice on their behalf when misled or cheated by any of these companies.”
In November 2018, the Attorney General’s office issued subpoenas to Bitfinex and Tether, who claim to not operate in New York. Indeed, in August 2018, Bitfinex ceased business with US citizens altogether, presumably to avoid legal problems such as this.
In court papers filed by James’ office, it is described how Bitfinex sent over $850 million to Panama-based payment processors Crypto Capital Corp., which also does business with exchanges QuadrigaCX and CEX.IO. The filings explain that Bitfinex no longer has access to those funds, and used its access to Tether to cover up the loss.
Allegedly, Bitfinex has already taken $700 million from Tether’s reserves, which are being used to hide “massive, undisclosed losses and inability to handle customer withdrawals.”
The court order restricts iFinex from draining Tether’s reserves further, and compels the company to produce documents including details of any and all New York-based holders of the Tether stablecoin, as well as evidence of every purchase and issuance of Tether since the beginning of 2017.
As mentioned above, however, Bitfinex has ceased business with US citizens entirely. It is therefore unlikely iFinex will produce the requested documents, nor is it likely that Tether production will cease.
As of April 26, 2019, Bitfinex issued an official response. The exchange criticised the conduct of the New York Attorney General’s Office, claiming the filings were “written in bad faith and… riddled with false assertions, including as to a purported $850 million “loss” at Crypto Capital.” The exchange describes the missing funds as “seized and safeguarded.” Furthermore, the response concludes:
“Both Bitfinex and Tether are financially strong – full stop. And both Bitfinex and Tether are committed to fighting this gross overreach by the New York Attorney General’s office against companies that are good corporate citizens and strong supporters of law enforcement. Bitfinex and Tether will vigorously challenge this, and any and all other actions, by the New York Attorney General’s office.”
An Unstable Coin
Tether is a controversial stablecoin that is supposedly backed 1-to-1 by US dollars. However, a recent change of language on the official website now claims that all issued coins are backed by currency, cash equivalents, and other assets. It has long been a point of contention as to whether the coin is truly backed by reserves.
In December 2018, Bloomberg reported it had seen bank statements which indicated that over at least four separate months, Tether had enough cash reserves to back all USDT coins.
Earlier this month, Tether announced a partnership with TRON, introducing a TRC-20 version of USDT on the TRON blockchain. At the time of writing, up to 3.5% of all Tether has migrated to the platform. It is unclear whether the court order will affect this integration at all.
Could This Be A Misunderstanding?
Between mid-October and mid-November 2018, Tether burned over $1 billion worth of tokens in total, a large portion of which it announced on its official website. As a result, the total USDT supply was reduced from over $2.8 billion to just under $1.7 billion.
This is the same period of time in which Bitfinex were experiencing banking issues—having ended relations with Puerto Rico-based Noble Bank, losing access to the $850 million at Crypto Capital, and appearing to struggle processing user withdrawals. It is quite possible that the investigation simply misinterpreted the USDT redemption as Bitfinex accessing Tether reserves.