Tether(USDT) and Bitfinex investigated by SEC: What happened and how it ended

A market of high volatility and extreme risks

First of all, investors and crypto firms should be aware that cryptocurrencies market is considered to be an extremely risky market as the New York Attorney General Letitia James has issued an investor alert against the “wild price swings and extreme risk” of crypto trading.
New York Attorney General Letitia James has issued her starkest warning yet to all participants in the industry since in the previous few weeks we have experienced a high volatility in the crypto markets and also two high-profile legal cases involving crypto firms in New York stage.
Moreover, in the absence of central, comprehensively-regulated exchanges, James warned that those targeted by fraudsters may have “no recourse” to help from law enforcement in the state.

The Tether and Bitfinex court case

James’s alert to cryptocurrency business operators comes in the wake of last week’s settlement with Bitfinex and Tether after they were found to have misrepresented the degree to which Tether (USDT) coins were backed by fiat collateral. The conclusion of the landmark case required the firms to stop servicing customers in the state of New York and to pay $18.5 million in damages to the state.

Tether is a controversial cryptocurrency with tokens issued by Tether Limited. It formerly falsely claimed that each token was backed by one United States dollar, but on 14 March 2019 changed the backing to include loans to affiliate companies.

Bitfinex is a cryptocurrency exchange owned and operated by iFinex Inc., which is headquartered in Hong Kong and registered in the British Virgin Islands. Their customers’ money has been stolen or lost in several incidents, and they have been unable to secure normal banking relationships.

A court case began about two years ago, between crypto firms Bitfinex and Tether, has been settled with the New York Attorney General’s office. Specifically, Tether and Bitfinex have agreed to pay 18.5 million dollars in penalty to the state of New York, according to a statement from New York Attorney General Letitia James, as part of the settlement.

In April 2019, the NYAG’s office alleged that Bitfinex used Tether’s funds to secretly cover $850 million lost to payment processor Crypto Capital. The lost funds allegedly triggered withdrawal problems for Bitfinex’s customers in late 2018. Bitfinex at the time had said that it did not lose money. Instead, Crypto Capital’s funds had been seized by government authorities in Portugal, Poland, and the U.S. Bitfinex has been seeking to recover those funds since then.

According to Jason Weinstein, a partner at Steptoe & Johnson and counsel to Bitfinex and Tether, the NYAG office’s findings were limited only to the nature and timing of certain disclosures. Moreover, both crypto firms admitted to no wrongdoing.

Mr. Weinstein, a former federal prosecutor, claimed that contrary to online speculation, there was no finding that Tether ever issued tethers [USDT] without backing, or to manipulate crypto prices. However, the NYAG’s office said that at least from June 1, 2017 until September 15, 2017, USDTs were “not backed ‘1-to-1’ by USD held by Tether in a bank account.

More precisely, the funds ostensibly backing tethers had been held in an account under the control of its General Counsel, with the balance accounted for as a ‘receivable’ from Bitfinex.

No one reviewing Tether’s representations would have reasonably understood that the $382,064,782 listed as cash reserves for tethers had only been placed in Tether’s account as of the very morning that a U.S.-based accounting firm verified the bank balance.
Letitia James also said in a statement that Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie and that Bitfinex and Tether recklessly and unlawfully covered-up massive financial losses to keep their scheme going and protect their bottom lines,” she further said, adding: “These companies obscured the true risk investors faced and were operated by unlicensed and unregulated individuals and entities dealing in the darkest corners of the financial system.”

According to the general counsel of Bitfinex and Tether, Stuart Hoegner, they decided to proceed with the settlement amount in order to put this matter behind and be able to focus on their business. He also claimed that the firms share the Attorney General’s goal of increasing transparency and consequently they would like to disclose — both to the Attorney General’s Office and to the public — additional information about Tether’s reserves on a quarterly basis” for the next two years.

by Styliana Charalambous
Head of Market Research