13 December 2019
Bitfinex crypto  exchange has faced criticism over its governance as it shares management with Tether, a digital token that is pegged to the US dollar. Photo: Reuters
Bitfinex crypto exchange has faced criticism over its governance as it shares management with Tether, a digital token that is pegged to the US dollar. Photo: Reuters

Bitfinex and Tether operators sued for suspected fraud

New York state authorities are suing the operators of cryptocurrency exchange Bitfinex and digital currency Tether, accusing them of using illicit transactions to cover up a loss of about US$850 million in funds from clients and corporates.

The accusations center on iFinex, which runs the Bitfinex trading platform, one of the largest cryptocurrency exchanges in the world by trading volume.

According to a legal filing, Bitfinex raided the reserves of Tether in order to pay out customers demanding withdrawals from the exchange.

The news dealt a fresh major blow to the credibility of the cryptocurrency sector. Bitcoin, the largest cryptocurrency by market cap, tumbled over 7 percent to around US$5,100 level on Thursday. As of 11:50 am Hong Kong time on April 26, Bitcoin was trading US$5,325, as per data.

Designed to be pegged to the US dollar, Tether, also called in its short form USDT, is among the most actively traded digital tokens, as many crypto traders and investors treat it as a surrogate for dollars to move in and out of different cryptocurrencies, and also as an instrument for betting on the direction of other cryptocurrencies.

Tether has received criticism from the community, as the issuer has yet to provide conclusive evidence of its holdings to the public, justifying its claim that each token is backed by a dollar in its bank accounts. In addition, there are also questions about Tether’s relationship with Bitfinex, as both have the same CEO in the person of JL van der Velde.

According to the civil case brought by New York Attorney General Letitia James, by mid- to late-2018, executives at Bitfinex and Tether suspected Crypto Capital Corp, a Panamanian payment processor to which it had transferred funds and used as an intermediary to wire dollars to traders, had lost, stolen or absconded with the money, and Bitfinex hasn’t been able to find or recover roughly US$850 million.

After the US$850 million loss, Bitfinex and Tether executives carried out a series of conflicted corporate transactions, as Bitfinex gave itself access to up to US$900 million of Tether’s cash reserves, which Tether continued to represent to the market to be backed its tokens one-to-one, according to the legal filing.

Both Bitfinex and Tether have not disclosed anything about Bitfinex’s loss of funds and the arrangement in Tether’s cash reserves to investors and the public.

Justice Debra James in Manhattan issued an order barring iFinex and Tether from any further violations of state law while the case proceeds, and they must retain all documents tied to the probe. Also, law enforcement appeared to increasingly scrutinize other stablecoin initiatives available in the market, Forbes reported, citing crypto research firm Chainalysis.

Critics of tether have raised concerns over the past year about whether its issuer actually holds US$1 in reserve for each Tether token issued, as it claims. However, as they are more easily transferable between crypto exchanges and other online platforms, Tether tokens were dominating in the field of “stablecoins”, which are designed to be pegged to a stable asset, such as gold or the dollar, serving as a hedge against the price volatility of cryptocurrencies.

The Gemini dollar by Gemini Trust Company and Paxos Trust Company’s Paxos Standard, which has received approval from New York’s state Department of Financial Services, are among the emerging dollar-linked digital currencies in the market, but they have not come close to challenging Tether’s popularity.

In June 2018, a research paper released by the University of Texas found evidence that Tether may have been used to manipulate the price of Bitcoin and six other large cryptocurrencies. It cited a case where newly-issued Tether was quickly moved to Bitfinex and then shifted to other exchanges, where it was used to buy Bitcoin, propping up the price, according to the research.

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