By CCN.com: The valuation of the crypto market dropped by $8 billion in a matter of minutes after the office of New York Attorney General’s office filed a lawsuit against iFinex, alleging Bitfinex of mismanaging $850 million in Tether funds. Bitcoin fell by 7.5 percent at its day’s low point.
Following the filing of the lawsuit by the Attorney General against iFinex, the bitcoin price dropped from $5,500 to $5,085 as many investors panic sold.
But, the bitcoin price has recovered swiftly to $5,170, closing the day with a 5 percent loss.
According to the lawsuit, Bitfinex granted itself access to $900 million of Tether’s treasury in an attempt to “hide” its apparent loss of $850 million.
Bitfinex sent $850 million to a company based in Panama called Crypto Capital Corp, failed to get the money back, and took a loan from Tether to sustain the exchange’s operations.
The Attorney General’s office alleged that the covert operation of iFinex and the mismanagement of funds could be considered as fraud.
The official document read:
Issued pursuant to General Business Law section 354, a provision of New York’s Martin Act that confers broad powers on the Attorney General to investigate and halt fraud in connection with securities or commodities, the court order bars the operators of Bitfinex from further draining the cash reserves of Tether, or taking personal distributions or dividends from the reserves.
Tether’s lack of public audits and transparency have always been the focal point of critics of the stablecoin. But, some have suggested that the scandal proved Tether did have sufficient cash reserves to back its stablecoin at a 1:1 ratio with the U.S. dollar.
Previously, many skeptics claimed that Tether was not backed by the U.S. dollar.
Technically, Tether is backed by the U.S. dollar and as said by Bitfinex in its official statement, “both Bitfinex and Tether are financially strong – full stop.”
The practices of iFinex, Tether, and Bitfinex are what led the Attorney General’s office to pursue the lawsuit, not whether Tether is backed by the U.S. dollars or not.
In that sense, while mostly negative, the Tether scandal proved that at least until November 2018, Tether was backed by cash.
Tether has been a key stablecoin that acts as the fundamental pairing for most cryptocurrencies. Although the lawsuit portrayed potential malpractices of the company, it showed to a reasonable extent that it is backed by U.S. dollars.
As Kasper Rasmussen, the director of marketing at iFinex, told CCN.com:
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.
Analysts remain cautious about the short-term outlook on the cryptocurrency market.
Some traders have suggested that purchasing bitcoin’s dip on April 25 could be risky given that it is unclear how the case would move forward.
But, based on the reaction of the market in the past 12 hours, the crypto market is showing signs of recovery.
Click here for a real-time bitcoin price chart.
Last modified: June 14, 2020 9:35 AM UTC