Banking and Finance Law Daily NY AG ends virtual currency trading platform Bitfinex’s illegal activities
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Tuesday, February 23, 2021

NY AG ends virtual currency trading platform Bitfinex’s illegal activities

By Nicole D. Prysby, J.D.

Bitfinex and virtual currency issuer Tether must pay $18.5 million in penalties.

New York Attorney General Letitia James announced that her office has reached an agreement with Bitfinex and Tether Limited, resolving allegations that the companies deceived clients by overstating available reserves and by hiding $850 million in lost funds. Under the terms of the settlement agreement, iFenex, Inc., the operator of Bitfinex, Tether, and related entities will cease any further trading activity in New York, pay $18.5 million in penalties, and take 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," said James, who also stated that "Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie."

NYAG allegations. Bitfinex operates an online platform for exchanging and trading virtual currency. It also allows users to store virtual or fiat currency and convert virtual currency into fiat currency and withdraw the funds. Tether issues a so-called "stablecoin" called tether. Tether represented that each of its stablecoins were backed one-to-one by U.S. dollars in reserve. However, an investigation by the Office of the Attorney General (OAG), which began in 2019 (see Banking and Finance Law Daily, Apr. 26, 2019), found that iFinex and Tether made false statements about the backing of the "tether" stablecoin, and moved hundreds of millions of dollars between Bitfinex and Tether in an attempt to hide massive losses suffered by Bitfinex. In fact, starting no later than mid-2017, Tether held no reserves to back tethers in circulation at the rate of one dollar for every tether, contrary to its representations.

Specifically, the OAG alleged that in March 2017, Wells Fargo, which had been acting as the correspondent bank to fill orders for U.S. dollars, stopped processing U.S. dollar wire transfers from Bitfinex and Tether accounts, forcing the companies to find alternative banking arrangements. Tether did not have a significant bank relationship until September 2017. Between March and September 2017, it could not directly process any fiat deposits for purchases of tethers, or exchange tethers. Because of Tether’s inability to conduct significant banking activity during this time, it could not itself hold dollars sufficient to back the hundreds of millions of new tethers that had entered the market.

Between June 1, 2017 and Sept. 15, 2017, Bitfinex held approximately $382 million of Tether’s funds in a comingled account, which should have been held by Tether as "backing" for tethers then in circulation but was not. On the morning of Sept. 15, 2017, Tether opened an account at Noble Bank. Later that day, Bitfinex transferred $382 million from Bitfinex’s account at Noble Bank into Tether’s account at Noble Bank. Tether requested an auditor verify Tether’s assets as of 8:00 p.m. EST that day. No one reviewing Tether’s representations would have reasonably understood that the $382 million listed as cash reserves for tethers had only been placed in Tether’s account as of the very morning that the auditor verified the bank balance.

In 2019, Bitfinex suffered a liquidity crisis after its third-party payment processor, Crypto Capital Corp., which held $1 billion in Bitfinex customer deposits, was frozen by the government of Poland. Bitfinex then borrowed $625 million from Tether, meaning that tethers were again no longer backed 1-to-1 by U.S. dollars, because a substantial portion of the backing had been transferred to Bitfinex. Bitfinex pleaded with Crypto Capital to release funds to it, while making public representations that its banking remained stable. At no time did Bitfinex or Tether disclose to the market that Tether had transferred at least $625 million to Bitfinex, or that Bitfinex had experienced critical liquidity issues because of the loss of approximately $850 million to Crypto Capital. On April 19, 2019, Bitfinex issued a statement, which included a representation that "we have been informed that these Crypto Capital amounts are not lost but have been, in fact, seized and safeguarded." At the time that statement was made, Bitfinex did not in fact know the whereabouts of all of the customer funds held by Crypto Capital. Bitfinex still cannot represent whether any of the unrecovered funds might be returned to Bitfinex or its clients.

Settlement. Under the terms of the settlement agreement, Bitfinex and Tether will pay $18.5 million in monetary relief to New York, maintain procedures designed to ensure that their products and services are not used by New York persons and entities, provide compliance reports to the OAG, publish reports regarding Tether’s reserves, and provide a list of payment processors they utilize.

Companies: Crypto Capital Corp.; iFinex Inc.; Tether Limited; Noble Bank; Wells Fargo

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