By CCN: The office of New York Attorney General Letitia James has officially obtained a court order to request iFinex Inc, the operator of bitcoin exchange Bitfinex and Tether, to cease operations in New York.
The Attorney General’s office found that Bitfinex allegedly handed over $850 million in co-mingled client and corporate funds to Crypto Capital Corp, a company based in Panama.
Bitfinex is said to have never received the funds from the Panamanian firm, leading to the loss of more than $850 million.
The Attorney General’s office alleged Bitfinex granted itself access to Tether’s treasury and mismanaged $900 million of the stablecoin’s cash reserves to “hide” the loss of $850 million.
Attorney General James said:
“Our investigation has determined that the operators of the ‘Bitfinex’ trading platform, who also control the ‘Tether’ virtual currency, have engaged in a cover-up to hide the apparent loss of $850 million dollars of co-mingled client and corporate funds. New York state has led the way in requiring virtual currency businesses to operate according to the law. And we will continue to stand-up for investors and seek justice on their behalf when misled or cheated by any of these companies.”
How Did It Happen?
The core problem with Tether is that it does not issue public audits like strictly regulated stablecoins such as Gemini Dollar and Circle’s USDC. As a result, investors are unaware of what the potential “receivables” could be and the dealings of Tether.
A public audit would have forced Tether to disclose the alleged $900 million transactions initiated by Bitfinex had it been recorded on the financials of Tether Limited.
Stablecoin with reserve = COUNTERPARTY RISK https://t.co/5Qj2JMguT9
— Andreas ☮ 🌈 ⚛ ⚖ 🌐 📡 📖 📹 🔑 🛩 (@aantonop) April 25, 2019
However, after Bitfinex allegedly sent $850 million to Crypto Capital Corp and did not get it back, it did not disclose the loss to investors and relied on Tether, which the New York Attorney General described as a “cover-up.”
The filings explain how Bitfinex no longer has access to more than $850 million dollars of co-mingled client and corporate funds that it handed over, without any written contract or assurance, to a Panamanian entity called ‘Crypto Capital Corp.,’ a loss Bitfinex never disclosed to investors. In order to fill the gap, executives of Bitfinex and Tether engaged in a series of conflicted corporate transactions whereby Bitfinex gave itself access to up to $900 million of Tether’s cash reserves, which Tether for years repeatedly told investors fully backed the tether virtual currency ‘1-to-1,’ the document read.
Lack of Public Audits Has Always Been a Problem For Tether
Since its creation in 2014, for more than five years, Tether has been a subject to consistent criticism from both investors and experts in the cryptocurrency sector for its lack of public audits.
Last month, CCN spoke to iFinex, the company that oversees Tether, about its new Terms of Service which read that every USDT is backed by cash and other receivables, but not 100% in cash.
“Every tether is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities (collectively, “reserves”),” the altered Terms of Service read.
Kasper Rasmussen, the director of marketing at iFinex, told CCN that Tether is still 100% backed even though it may include other assets.
“Tethers remain completely stable and 100% backed, so Tether’s reserves always equal or exceed the number of issued Tethers. The only change is that the composition of the assets that provide that backing includes a combination of cash, cash equivalents, and may also include other assets or receivables from loans issued by Tether,” Rasmussen said.
How Does It Affect Bitcoin?
Immediately after the release of the New York Attorney General’s report, the bitcoin price fell below $5,400, indicating a dip in the confidence of the crypto market.
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