Bitfinex and Tether, Fined, Banned, in New York
Posted by Colin Lambert. Last updated: February 24, 2021
The office of the New York attorney general (OAG) has ordered crypto platforms Bitfinex and Tether to end all trading activity with New Yorkers.
In a release, the OAG observes that Stablecoins, specifically, are virtual currencies that are always supposed to have the same real-dollar value. “In the case of Tether, the company represented that each of its stablecoins were backed one-to-one by US dollars in reserve,” the office states. “However, an investigation found that iFinex – the operator of Bitfinex – and Tether made false statements about the backing of the tether stablecoin, and about the movement of hundreds of millions of dollars between the two companies to cover up the truth about massive losses by Bitfinex.”
An agreement has been signed with iFinex, Tether, and their related entities that requires them to cease any further trading activity with New Yorkers, as well as pay $18.5 million in penalties, in addition to requiring a number of steps to increase transparency.
“Bitfinex and Tether recklessly and unlawfully covered-up massive financial losses to keep their scheme going and protect their bottom lines,” says New York Attorney General Letitia James. “Tether’s claims that its virtual currency was fully backed by US dollars at all times was a lie. These companies obscured the true risk investors faced and were operated by unlicensed and unregulated individuals and entities dealing in the darkest corners of the financial system. This resolution makes clear that those trading virtual currencies in New York state who think they can avoid our laws cannot and will not.
“Last week, we sued to shut down Coinseed for its fraudulent conduct,” James continues. “This week, we’re taking action to end Bitfinex and Tether’s illegal activities in New York. These legal actions send a clear message that we will stand up to corporate greed whether it comes out of a traditional bank, a virtual currency trading platform, or any other type of financial institution.”
The OAG’s investigation found that, starting no later than mid-2017, Tether had no access to banking, anywhere in the world, and so for periods of time held no reserves to back tethers in circulation at the rate of one dollar for every tether, contrary to its representations. In the face of persistent questions about whether the company actually held sufficient funds, the OAG says Tether published a self-proclaimed ‘verification’ of its cash reserves, in 2017, that it characterised as “a good faith effort on our behalf to provide an interim analysis of our cash position.” In reality, however, the OAG argues that the cash ostensibly backing tethers had only been placed in Tether’s account as of the very morning of the company’s ‘verification.’
The OAG continues by observing that on November 1, 2018, Tether publicised another self-proclaimed ‘verification’ of its cash reserve; this time at Deltec Bank & Trust Ltd. of the Bahamas. The announcement linked to a letter dated November 1, 2018, which stated that tethers were fully backed by cash, at one dollar for every one tether. However, the very next day, on November 2, 2018, Tether began to transfer funds out of its account, ultimately moving hundreds of millions of dollars from Tether’s bank accounts to Bitfinex’s accounts. “And so, as of November 2, 2018 – one day after their latest ‘verification’ – tethers were again no longer backed one-to-one by US dollars in a Tether bank account,” OAG states. “As of today, Tether represents that over 34 billion tethers have been issued and are outstanding and traded in the market.”
The report further finds that in 2017 and 2018, Bitfinex began to increasingly rely on third-party “payment processors” to handle customer deposits and withdrawals from the Bitfinex trading platform. In 2018, while attempting to “move money [more] efficiently,” Bitfinex suffered a massive and undisclosed loss of funds because of its relationship with a purportedly Panama-based entity known as Crypto Capital Corp. Bitfinex responded to pervasive public reports of liquidity problems by misleading the market and its own clients, OAG argues, adding that on October 7, 2018, Bitfinex claimed to “not entirely understand the arguments that purport to show us insolvent,” when, for months, its executives had been pleading with Crypto Capital to return almost a billion dollars in assets.
On April 26, 2019 – after the OAG revealed in court documents that approximately $850 million had gone missing and that Bitfinex and Tether had been misleading their clients – the company issued a false statement that “we have been informed that these Crypto Capital amounts are not lost but have been, in fact, seized and safeguarded.”
The reality, however, says OAG, was that Bitfinex did not, in fact, know the whereabouts of all of the customer funds held by Crypto Capital, and so had no such assurance to make.
In April 2019, the OAG sought and obtained an injunction against further transfers of assets between and among Bitfinex and Tether, which are owned and controlled by the same small group of individuals. That action ultimately led to a July 2020 decision by the New York State Appellate Division of the Supreme Court, First Department, holding that Bitfinex and Tether – and other virtual currency trading platforms and cryptocurrencies operating from various locations around the world – are still subject to OAG jurisdiction if doing business in New York. It also found that tether and other virtual currencies were “commodities”, and noted that virtual currencies may also constitute securities.
Under the latest ruling, Bitfinex and Tether must submit to mandatory reporting on core business functions. Specifically, both will need to report, on a quarterly basis, that they are properly segregating corporate and client accounts, including segregation of government-issued and virtual currency trading accounts by company executives, as well as submit to mandatory reporting regarding transfers of assets between and among Bitfinex and Tether entities.
Additionally, Tether must offer public disclosures, by category, of the assets backing tethers, including disclosure of any loans or receivables to or from affiliated entities. The companies will also provide greater transparency and mandatory reporting regarding the use of non-bank “payment processors” or other entities used to transmit client funds.