Bitfinex and Tether – The War Against the NYAG

Bitfinex is in trouble due to a preliminary injunction that prevents the company from accessing a $900 million line-of-credit for an indefinite period of time.

Tether provided a line-of-credit in order to get the business going as “the company needed money to cover losses it sustained by losing access to $850 million from payment processor Crypto Capital, according to the filing.

What Is The Injunction About?

The court order was issued on April 25th by the New York Attorney General’s office against iFinex Inc.

The court ordered the company to stop violating the law and defrauding state residents, speaking strongly against the actions of the company.

iFinex Inc operates both the corporations involved (Bitfinex and Tether). The former is a cryptocurrency exchange, while the latter is the name behind Tether, a stable digital coin.

Why Did The New York State Attorney General (NYSAG) Interfere in the Matter?

The officials took the matter in their own hands to ensure compliance. One of the representatives said:

“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.”

The office believes that several NY-based traders use the firm’s platform to carry out transactions, despite Bitfinex’s 2018 announcement to not entertain clients on the platform.

The 23-page document filed states that the company is committing fraud and an investigation regarding the matter is currently underway.

According to the document, “the company is transferring money out of Tether reserve funds to cover Bitfinex’s losses.”

The lawsuit further claims a relationship between Bitfinex and Crypto Capital, a Panama-based payment processor. According to the lawsuit, the company got in touch with Crypto Capital after failing to find a bank to partner with.

Moreover, the company failed to sign a proper contract or agreement with Crypto Capital despite all that was at stake.

The report further states that the company is involved in commingling client funds through its payment partner, Crypto Capital, i.e., the company mixed client funds with its own.

This came to light when the company started to face issues with client withdrawal requests in the last quarter of 2018.

According to the lawsuit, this was due to the theft or loss of about $851 million from Crypto Capital.

Where’s The Money?

According to the judgment,

“Bitfinex has already taken at least $700 million from Tether’s reserves.  Those transactions—which also have not been disclosed to investors—treat Tether’s cash reserves as Bitfinex’s corporate slush fund, and are being used to hide Bitfinex’s massive, undisclosed losses and inability to handle customer withdrawals.”

How Did iFinex React?

The company moved to vacate the order and declined to comply. It said:

“The New York Attorney General’s court filings were written in bad faith and are riddled with false assertions, including as to a purported $850 million “loss” at Crypto Capital. On the contrary, we have been informed that these Crypto Capital amounts are not lost but have been, in fact, seized and safeguarded.”

The company further added that “both Bitfinex and Tether are financially strong,” and that it intends to “fight this gross overreach.”

It questioned the decision to freeze funds stating it may “reduce liquidity on hand to satisfy the needs of Bitfinex’s customers and impede the normal operations of Bitfinex’s business.”

The company, however, confirmed that only 74% of the stablecoin (Tether) is backed with cash.

How Did the Decision Impact Bitfinex?

The decision had a massive impact on the exchange with customers withdrawing more than 1 million ether and 30,000 Bitcoin, according to the filing.

The order also hit different currencies with the market losing over $10 billion within hours of the announcement.

Defense Against Allegations

According to Bitfinex, the Martin Act does not apply in this scenario.

The Martin Act is a NY anti-fraud act that grants the Attorney General of NY powers to conduct investigations regarding securities fraud and bring criminal or civil actions against violators.

Since the Act uses “proper disclosure” as a precedent, there can be no case of fraud if the companies involved disclosed all the relevant details.

Moreover, the company in its defense also states that it is “normal” for currencies not to be 100% backed – as seen in the banking sector.

This saga is expected to continue, and the future of Bitfinex is a little hard to predict at this stage.

Michael Wight

Michael is a freelance writer with special interest in finance and technology. He regularly trades cryptocurrencies and loves to share his knowledge with others.

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