Tether and Bitfinex Accused of Covering up $850m Loss, Sparks a $10b Loss in One Hour

Tether is on the spotlight, again. This time, the largest stablecoin in the market is at the center of an alleged $850 million cover-up. The New York attorney general Letitia James obtained a court order yesterday enjoining iFinex Inc., the operators of Bitfinex as well as Tether Limited, accusing the two, and their related entities of defrauding New York crypto investors.

Bitfinex has been struggling to find a banking partner since Wells Fargo cut ties. The search has taken the exchange across the globe, with links to such banks as ING and HSBC. However, the search wasn’t successful. Bitfinex was then left no choice but to entrust $1 billion to Crypto Capital Corp, a Panamanian firm.

A few months later, the AG alleges that Bitfinex and Tether discovered that Crypto Capital had either lost or stolen the money. Despite their efforts, they weren’t able to recover $850 million.

The AG cited some correspondence between one of the senior executives at Bitfinex and Crypto Capital. In it, the Bitfinex executive tells the Panamanian firm that the exchange is under pressure to produce the $850 million. This was after experiencing an unprecedented spike in client withdrawals. The executive, whose name the AG withheld, even implied that it could be extremely damaging for bitcoin. He allegedly stated:

Please understand all this could be extremely dangerous for everybody, the entire crypto community. BTC could tank to below 1k if we don’t act quickly.

At the time, bitcoin was trading at over $6,500.

James told the Manhattan Supreme Court:

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.

Market Bleeds

Bitfinex never signed any formal contract with Crypto Capital, she continued. This is despite handing the firm over $1 billion.

Bitfinex knew it had to move quickly to cover up the loss. It thus allegedly transferred over $700 million from Tether’s reserves to Crypto Capital. This was done without any notice to the shareholders. Even worse, the two entities conspired to hide these transactions when the Office of the Attorney General set out to investigate them.

The court order requires that Tether and Bitfinex cease all transactions involving the dissipation of the U.S dollar assets that reportedly back Tether tokens. Further, it bars the companies from destroying any material relevant to the case.

Unsurprisingly, the market bled after the AG announced the investigation. Just one hour after the announcement, the crypto market had lost over $10 billion according to data from CoinMarketCap. Currently, bitcoin is trading at $5,295, down 3.5 percent in the past 24 hours. And according to one expert, it could go below the $5,000 mark before long.

Stephen Innes, an executive at SPI Management told Bloomberg:

These latest allegations not only bring Tether’s credibility into question, they cast a dark cloud over the entire industry. While the market remains tentatively supported above the key psychological $5,000 mark, given the waves of pessimism hitting the market this morning it wouldn’t surprise me if this major support level gives way.

The AG Acted in Bad Faith, Bitfinex Says

Bitfinex responded quickly, posting a press release on its website shortly after the AG’s announcement. The exchange claimed that the AG’s claims were “written in bad faith” and were full of false assertions. The exchange further denied the $850 million loss, disregarding it as mere hearsay.

Bitfinex will not take the accusations lying down, the press release stated.

And both Bitfinex and Tether are committed to fighting this gross overreach by the New York Attorney General’s office against companies that are good corporate citizens and strong supporters of law enforcement. Bitfinex and Tether will vigorously challenge this, and any and all other actions, by the New York Attorney General’s office.

But not everyone is convinced that the AG is on a witchhunt. Certainly not the CEO and co-founder of Paxos, Charles Cascrilla. Chad, as he is popularly known believes that stablecoins must be fully compliant with the existing laws. In a statement shared with NullTX, he told us that in the long run, fully regulated stablecoins like PAX are the only ones that will stand the test of time.

The news today reinforces our belief that regulation and oversight create confidence and stability for the industry. The industry is trading billions of dollars worth of cryptocurrencies daily – and relying on exchanges and stablecoins that have no licensing, no registration, no oversight, is bad for business and reckless in the long term. We knew this was coming – and we’ve been expecting the tide to turn.


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