Bitfinex Used Tether Reserves To Mask Missing $850 Million, Probe Finds (#GotBitcoin?)
State Attorney General Letitia James said Hong Kong-based iFinex Inc., which operates the Bitfinex cryptocurrency exchange and owns Tether Ltd., has been commingling client and corporate funds to cover up the missing funds, which occurred in mid-2018 and hadn’t been disclosed publicly.
The attorney general’s office said it has obtained a court order directing iFinex to stop moving money from Tether’s reserves to Bitfinex’s bank accounts, halt any dividends or other distributions to executives and turn over documents and information. The coverup drained at least $700 million from Tether’s reserves, according to the attorney general’s office.
David Miller, an attorney at New York law firm Morgan Lewis, which represents the companies, declined to comment, and representatives of Bitfinex and Tether weren’t immediately available.
The attorney general’s findings emerged from an investigation into cryptocurrency exchanges that it launched in 2018 and is continuing. A report in September warned that many exchanges lacked basic safeguards and left consumers vulnerable to exploitation by market manipulators.
A so-called stablecoin, Tether is purportedly backed one-to-one by U.S. dollars. Yet the firm has never released a public audit showing it has the reserves to back the coins in circulation, leading many to question whether the funds exist.
Tether has marketed the coin as a way to get both the safety of the dollar and the speed and anonymity of a digital currency. Its market value has risen steadily over the past two years, to $2.8 billion from about $10 million at the beginning of 2017.
It has become a major source of liquidity in the cryptocurrency market. About 80% of all bitcoin trading is done in Tether, according to data from research site CryptoCompare.
The attorney general said Bitfinex’s problems began in 2018, when it handed over $850 million to third-party payments processor Crypto Capital Corp. to handle customers-withdrawal requests. Over the months that followed, Panama-based Crypto Capital failed to process the orders, the attorney general said.
Representatives of Crypto Capital weren’t immediately available for comment.
By November of that year, according to people close to the attorney general’s investigation, Bitfinex determined that it had permanently lost access to the $850 million. To hide the missing funds, Bitfinex and Tether engaged in a series of maneuvers that drained Tether’s reserves, the people said.
A gap of that size would represent a major portion of Tether’s reserves. Tether currently claims on its website that the coins it issues are backed by reserves that include currency, cash equivalents and other assets and receivables. The language was altered in March; it previously claimed the reserves were 100% in currency.
Ny Attorney General Sues Bitfinex And Tether To Unearth “Fraud Being Carried Out” By The Firms
The New York State Attorney General (NYSAG) is suing Bitfinex, the cryptocurrency exchange, and affiliated firm Tether, the company behind the stablecoin of the same name.
The 23-page document, dated April 24, states that the NYAG’s office has reason to believe several New York-based traders transact on the firm’s platform, despite Bitfinex saying it would no longer cater to clients there in 2018. It said the AG has an investigation underway to expose “ongoing fraud being carried out by Bitfinex and Tether,” and has issued a request for any documentation tied to Bitfinex users in the state of New York.
Details from the suit paint a picture of Bitfinex and Tether engaging in “undisclosed, conflicted transactions to cover Bitfinex’s losses by transferring money out of tether reserve funds.” According to the Attorney General’s office (OAG) at least $700 million was drained from Tether’s reserves.
The lawsuit also claims Bitfinex partnered with Panama-based payment processor Crypto Capital to handle customer withdrawals after struggling to find a reputable bank to work with. Despite the significant amount of money at stake, Bitfinex did not sign a contract or formal agreement with Crypto Capital.
According to the lawsuit, Bitfinex also commingled client funds through Crypto Capital, meaning the firm mixed funds held on behalf of clients with its own capital. “According to documents provided to OAG by Respondents, by 2018, Bitfinex had placed over one billion dollars of co-mingled customer and corporate funds with Crypto Capital,” the suit notes.
“As explained to OAG attorneys by Respondents’ counsel, Bitfinex and Tether have also used a number of other third party payment processors to handle client withdrawal requests including various companies owned by Bitfinex/Tether executives, as well as other friends of Bitfinex … OAG believes that Bitfinex required the service of third party payment processors like Crypto Capital because, at the time, Bitfinex had no reliable bank that could or would work with it.”
In October 2018, Bitfinex began to struggle with client withdrawal requests. Per the NY State Attorney General, this was due to the loss or theft of ~$851 million in funds by Crypto Capital. To date, Bitfinex has not publicly disclosed the loss of funds
Update: Bitfinex has issued an official response, saying the “court filings were written in bad faith and are riddled with false assertions.” They further deny the loss of $850 million from Crypto Capital and instead claim the funds have been “seized and safeguarded.”
New York Court Rejects Bitfinex Appeal Over $850M In Lost Funds
New York’s Supreme Court has rejected Bitfinex and Tether’s appeal in the ongoing dispute between the firms and the NY Attorney General over $850 million in lost funds.
A New York Supreme Court has found that veteran cryptocurrency exchange Bitfinex and its related stablecoin company Tether (USDT) must face claims they concealed the loss of commingled corporate and client funds.
The claims were brought by New York Attorney General Letitia James, who has accused firms associated with Bitfinex and several associated companies of hiding more than $850 million in lost funds.
Bitfinex asserts that its funds were deposited with Crypto Capital — a Panamanian firm accused of providing shadow banking services to virtual currency exchanges — before being seized by government authorities in various countries. They are working to recover the money.
You Serve, So We Protect
The court rejected the firms’ claim that the court does not have jurisdiction over Bitfinex as it is not based in New York or serves local traders, asserting that several of its staff worked in New York and that USDT had been used by local residents.
“Today’s decision validates our office’s ability to use its broad and comprehensive investigative powers to protect New Yorkers,” Attorney General James stated. “Not even virtual currencies are above the law. We are pleased with the court’s decision, and will continue to protect the interest of investors in the marketplace.”
Tether Dominance Extends
The news comes as Tether’s influence over the crypto markets, with Messari recently estimating that the third-largest crypto asset now boasts a market capitalization of more than $10 billion.
According to CoinMarketCap, Tether is the single-most traded crypto asset representing 35% of all daily crypto volume. By contrast, Bitcoin (BTC) pairings equate to nearly 26% of trade activity.
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