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Class Action Accuses Tether And Bitfinex of Market Manipulation (#GotBitcoin?)

A New York-based legal firm has filed a lawsuit against Tether and Bitfinex, accusing them of cryptocurrency market manipulation. Class Action Accuses Tether And Bitfinex of Market Manipulation (#GotBitcoin?)

“Largest Bubble In History”

Roche Freedman filed a class-action suit claiming that stablecoin firm Tether and its affiliate crypto exchange Bitfinex have been involved in defrauding investors, manipulating markets and concealing illicit proceeds, the firm’s founding partner Kyle Roche tweeted on Oct. 7.

In the tweet, Roche accused Tether and Bitfinex of creating the “largest bubble in history.”

Filed on Oct. 6, the complaint document states that Bitfinex and Tether primarily accomplished a “sophisticated scheme” involving “part-fraud, part-pump-and-dump, and part-money laundering.”

Suit alleges that backing asset claims were false

In the lawsuit, Roche Freedman argued that Tether’s claim of backing the number of its Tether tokens (USDT) by equal amounts of United States dollars was a lie. Instead, the firm says that Tether “issued extraordinary amounts of unbacked USDT to manipulate cryptocurrency prices.” The document reads:

“Because the market believed the lie that one USDT equaled one U.S. dollar, Bitfinex and Tether had the power to, and did, manipulate the market on an unprecedented scale to profit from boom-and-bust cycles they created.”

Tether And Bitfinex Expected The Lawsuit

The lawsuit filing comes two days after both Tether and Bitfinex published statements claiming that they had become aware of an unreleased paper “falsely positing that Tether issuances are responsible for manipulating the cryptocurrency market.” Urging that the paper contained “baseless accusations,” Tether and Bitfinex said that they will vigorously defend themselves if lawyers use the source to launch a lawsuit.

Updated: 11-4-2019

Large Bitcoin Player Manipulated Price Sharply Higher, Study Says

‘Stablecoin’ tether, Bitfinex exchange reportedly used to drive up cryptocurrency’s price in 2017 and 2018.

A single large player manipulated the price of bitcoin as it ran up to a peak of nearly $20,000 two years ago, a new study concludes.

The study reviewed the period between March 2017 and March 2018, when the price of bitcoin soared and its total market value rose to $326 billion. About half of that increase was due to the influence of a manipulation scheme, according to the study’s authors.

They said the unknown manipulator operated from a single account at Bitfinex, the largest cryptocurrency exchange at the time. The manipulator used another cryptocurrency, called tether, to boost demand for bitcoin, leading to the price surge.

It isn’t clear by how much or if the manipulator profited. Bitcoin traded at nearly $9,200 on Sunday.

The study—written by John M. Griffin, a finance professor at the University of Texas with a background in forensics, and Ohio State University finance professor Amin Shams —was accepted for publication by the influential Journal of Finance and will be published online Monday. An earlier version of the study argued tether was being used to manipulate bitcoin prices, but didn’t connect the scheme to one entity.

The paper doesn’t definitively conclude who the manipulator was. But it strongly suggests Bitfinex executives either knew of the scheme or were aiding it.

“If it’s not Bitfinex,” Mr. Griffin said in an interview, “it’s somebody they do business with very frequently.”

Bitfinex dismissed the study’s findings. Stuart Hoegner, the company’s general counsel, said it “lacks academic rigor” and offered no proof of its claims. “It is the global rise of digital currency that has driven the market’s demand for tether,” he said.

Bitfinex and the company that controls tether, called Tether Ltd., have common ownership and are run by the same executives. Both companies are being investigated for alleged fraud by the Justice Department and the New York Attorney General’s office.

Tether is similar to bitcoin, but with key differences: Bitcoin trades freely, while tether’s value is pegged to the dollar via an asset reserve. For every tether in circulation, there purportedly is $1 in the reserve. This kind of digital currency is called a stablecoin.

If the price of bitcoin was manipulated, this would undermine a key feature of the crypto market, said Mr. Shams. “The promise of a decentralized financial system was that it would be free from the influence of banks and governments,” he said. “Ironically, there are large, new entities that have gained centralized control.”

For their study, the two professors mapped the entire transaction history of bitcoin and tether, a process that involved sifting through more than 200 gigabytes of data. They then traced the movement of the two currencies.

That enabled then to show how tethers moved across various exchanges and were traded for bitcoins. Rather than showing a random pattern that would indicate broad demand, they instead found tethers flowed through tightly clustered pathways—starting with one large account at Bitfinex—indicating control by a single entity.

Tether has become primarily an asset used by crypto exchanges to facilitate trading. About 75% of all bitcoin trading is in exchange for tethers, according to data from research firm CryptoCompare.

According to Tether, it creates new units of tether whenever it gets orders from its customers. But the company has released only limited information to prove reserves exist. In April, the company revealed in a court filing that tether was only 74% backed by reserves.

If new tethers were being created in response to orders, then the price of bitcoin would reflect natural demand.

If tethers were being “printed” without backing, that could lead to artificial demand if they were used to purchase bitcoin. In some ways this is akin to central banks or governments printing money to stimulate economies, often leading to inflation.

The Griffin-Shams study set out to determine whether tethers were being printed in response to user demand. The authors laid out and tested a number of hypotheses to see if Tether’s claims of dollar backing for tethers could be proven or disproved. The study’s conclusion was tether was being printed regardless of customer orders.

One pattern was especially illustrative: The study looked at 95 nonconsecutive hours that comprised the largest percentage of tether dispersals. This showed a consistent pattern: In the three hours before those dispersals, the price of bitcoin was falling. Immediately after the dispersal, the price began rising. Those 95 hours accounted for 59% of bitcoin’s compounded returns between March 2017 and March 2018.

“Even a fairly small amount of capital can manipulate the price of bitcoin,” Prof. Griffin said.

To be sure, the data could have other interpretations: The authors, for instance, didn’t have access to Bitfinex’s and Tether’s bank accounts. That information would show definitively whether the companies were creating new units of tether in response to real customer demand.

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