CFTC Fines Tether, Bitfinex

The US Commodity Futures Trading Commission (CFTC) has fined two related companies, Tether Holdings and Bifinex, $42.5 million for making untrue or misleading statements in the case of the former, and violation of a previous CFTC order in the case of the latter, specifically dealing with US persons.

The fines follow the two firms being banned from operating in New York by the state’s attorney general earlier this year and are related to the same offences. Tether will pay a fine of $41 million, while Bitfinex will stump up $1.5 million.

The Tether order finds that the firm is n breach of its claims that the Tether token is 100% backed by corresponding fiat assets. From at least June 1, 2016 to February 25, 2019, Tether misrepresented to customers and the market that Tether maintained sufficient US dollar reserves to back every USDT in circulation with the “equivalent amount of corresponding fiat currency” held by Tether and “safely deposited” in Tether’s bank accounts, CFTC says. In fact, it adds, Tether reserves were not “fully-backed” the majority of the time. In fact, CFTC says, Tether was 100% backed by appropriate fiat assets just 27.6% of thr time across a 26-month period.

The company also failed to disclose that it included unsecured receivables and non-fiat assets in its reserves, and it falsely represented that it would undergo routine, professional audits to demonstrate that it maintained “100% reserves at all times” even though Tether reserves were not audited. Instead of holding all USDT token reserves in US dollars as represented, Tether relied upon unregulated entities and certain third-parties to hold funds comprising the reserves; comingled reserve funds with Bitfinex’s operational and customer funds; and held reserves in non-fiat financial products. The order further finds that Tether and Bitfinex’s combined assets included funds held by third-parties, including at least 29 arrangements that were not documented through any agreement or contract, and that Tether transferred Tether reserve funds to Bitfinex, including when Bitfinex needed help responding to a “liquidity crisis.”

In addition, the order finds that Tether failed to complete routine, professional audits during the relevant time period. According to the order, Tether retained an accounting firm to perform a review of Tether reserves on a date Tether selected in advance, and Bitfinex transferred over $382 million to Tether’s bank account in advance of that review.

The Bitfinex order finds that from at least March 1, 2016 through at least December 31, 2018, Bitfinex traded with US persons that were not eligible contract participants and operated as an FCM without CFTC registration.

According to the CFTC order, the substantial majority of margin trading was financed through Bitfinex’s peer-to-peer funding program through which Bitfinex customers who held fiat or cryptocurrency in their Bitfinex account would “lend” those funds to other Bitfinex customers who would then use those funds to buy, sell, and trade on the Bitfinex platform.

During the relevant period, Bitfinex force-liquidated certain customer positions and acted as the counterparty to certain transactions. In so doing, it violated the terms of a 2016 CFTC order, which had directed the company to cease and desist from offering, entering into, executing, or confirming the execution of illegal, off-exchange financed retail commodity transactions, and from accepting orders and receiving funds in connection with retail commodity transactions.

“This case highlights the expectation of honesty and transparency in the rapidly growing and developing digital assets marketplace,” says acting CFTC chairman Rostin Behnam. “The CFTC will continue to take decisive action to bring to light untrue or misleading statements that impact CFTC jurisdictional markets.”

CFTC acting director of enforcement, Vincent McGonagle, adds, “The CFTC is committed to carrying out its statutory charge to promote market integrity and protect US customers. The CFTC will use its strong anti-fraud enforcement authority over commodities, including digital assets, when necessary. The CFTC will also act to ensure that certain margined, leveraged or financed digital asset trading offered to retail US customers must occur on properly registered and regulated exchanges. Moreover, as the Bitfinex order reflects, the CFTC will take decisive action against those who choose to violate CFTC orders.”