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The Inception of the Bitfinex | Tether | NY AG Conflict

POSTED ON 12-05-2019
4 months ago
8 minutes, 28 seconds READ

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The Inception of the Bitfinex/Tether/New York Attorney General Conflict

On April 25th, 2019, the New York Attorney General Letitia James “obtained a court order enjoining iFinex Inc, operate of the Bitfinex virtual asset trading platform, and Tether Limited, issuer of the ‘tether’ virtual currency” as stated in the official press release from the NYAG. Attorney General James stated that their “investigation has determined 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” and continued to justify these actions by stating that “New York has led the way in requiring virtual currency businesses to operate according to the law.”

Also detailed in the press release, it states that “today’s court order requires that the operators of the companies immediately cease further dissipation of the U.S dollar assets which back “tether” tokens while the Office’s investigation continues” as well as demanding further information and documents that may be requested. This is an interesting aspect of this situation where the NYAG Office is suggesting that the Tether Limited company should not be moving any funds, which would mean producing any more tethers, during this ongoing investigation. Throughout the wording expressed from the New York Attorney General, it seems as they are suggesting that Bitfinex/Tether stop moving around funds, and tread lightly while under tough scrutiny.

The press release from the New York Attorney General continues to state that “the filings explain how Bitfinex no longer has access to over $850 million dollars of co-mingled client and corporate funds that handed over, without any written contract or assurance, to a Panamanian entity called “Crypto Capital Corp.” a loss Bitfinex never disclosed to investors” and continues to state that “in order to fill the gap, executives of Bitfinex and Tether engaged in a series of conflicted corporate transactions whereby Bitfinex gave itself access to up to $900 million of Tether’s cash reserves, which Tether for years repeatedly told investors fully backed the tether virtual currency ‘1 to 1.’” It is important to take these statements with a grain of salt, as the story has since been clarified some by Bitfinex and other details have come to light. The purpose of the New York Attorney General’s actions was not to shut the Bitfinex exchange down or crash the tether currency, but protect investors from unethical business practices such as the potential type of fraud the NYAG is alleging in the press statement, court filings, and otherwise.

The press release and documents from the New York Attorney general’s office details that Bitfinex is essentially trying to cover up an $850 million dollar loss to a payment processor called Crypto Capital, and attempted to cover it up through using tether’s funds. On paper, $650 million U.S. dollars were transferred from tether’s bank account to bitfinex’s bank account. After this, according to accounting records, Bitfinex then transfers $650 million US dollars from its Crypto Capital bank account to tether’s Crypto Capital bank account. It is somewhat unclear if funds were actually moved in this process between Crypto Capital accounts, as it would be unclear how allegedly frozen funds/lost would move, and undoubtedly where the details start to get a bit sketchy.

Bitfinex Responds To Claims

Later on in the day on April 25th, Bitfinex released an official response. Bitfinex stated that “the New York Attorney General’s office released an order it obtained – without notice or a hearing – in an attempt to compel Bitfinex and Tether to provide certain documents and seeking certain injunctive relief.” Essentially the NYAG was attempting to catch Bitfinex off guard to try to obtain certain documents or financial statements.

Bitfinex continues in the statement to address the Crypto Capital loss, stating that they “have been informed that these Crypto Capital amounts are not lost but have been, in fact, seized and safeguarded” explaining how they do not have access to the funds that the NYAG is claiming they lost and covered up. Bitfinex goes on to say on top of that they “have been actively working to exercise our rights and remedies and get those funds released.” The Crypto Capital controversy seems to be a little deeper than the statements from both the NYAG and Bitfinex, and I will share those details in a little bit.

The official response from Bitfinex states that “Bitfinex and Tether have been fully cooperative with the New York Attorney General’s office, as both companies are with all regulators” and “both Bitfinex and Tether are financially strong – full stop.” To end on a strong note, Bitfinex states that “Bitfinex and Tether will vigorously challenge this, and any and all other actions, by the New York Attorney General’s office” as they felt it was a “gross overreach.” Overall, the response from Bitfinex was strong and appeared to clarify some of the questions brought to light from the New York Attorney general.

Crypto Capital Controversy

The United States District Court for the Southern District of New York unsealed an indictment detailing some information about two individuals who were charged for multiple financial felonies including bank fraud. The two individuals being charged in the controversy may shed some light on the missing $850 million at Crypto Capital. One of the individuals charged is Reginald Fowler (aka Reggie Fowler) former co-owner of the Minnesota Vikings. The other individual is a man named Ravid Yosef, from Israel. While these names may have little to no significance in terms of cryptocurrency involvement, once you take a closer look, this indictment reveals some interesting details.

The company that is owned by Fowler and mentioned in the indictment document is called Global Trading Solutions, LLC, which is “described as an agent for Crypto Capital” to reporter Robert-Jan den Haan from “The Block.” The indictment document released from the SDNY details how these two individuals were able to open bank accounts used for cryptocurrency processing, something many cryptocurrency companies throughout the US struggle with on a basic level. The Indictment document states that Fowler and Yosey opened the bank accounts through “falsely represt[ing] to those banks that accounts would be primarily used for real estate investment transactions even though Fowler, Yosef and others to transmit funds on behalf of an unlicensed money transmitting business related to the operation of cryptocurrency exchanges.”

This indictment and move from the SDNY is an interesting move and brings to light more information about Crypto Capital. It seems like Bitfinex may have unknowingly been involved in working with a fraudulent business, which caused them to lose funds. Bitfinex then potentially realized that they were not going to be seeing that money for a while from Crypto Capital, which caused them to begin moving funds from their own bank accounts to cover the losses. Regardless, there is a clear conflict of interest between Bitfinex/Tether doing specific business practices due to the fact they are largely run by the same group of people. It is important to note that Crypto Capital is a Panamanian company and essentially is revealed in this indictment to have been providing banking services to cryptocurrency companies (such as Bitfinex) without the proper licenses for multiple years.

Summarizing the Conflict

The conflict began with the New York Attorney General starting to look into the details of Bitfinex and Tether. Essentially, when their office saw a bunch of red flags, they accused Bitfinex/Tether of multiple fraudulent acts. The main concern of the NYAG is to protect and uphold the law, as well as protect investors. Bitfinex quickly responds to these harsh claims from the NYAG stating that the accused money that has been “lost” is tied up in a processor called Crypto Capital.

More details come to light as it turns out that the Crypto Capital controversy goes rather deep, involving more cryptocurrency companies than just Bitfinex. The Panamanian company Crypto Capital appears to be part of a large banking scheme, executed by two individuals mentioned earlier in the article. It is also clear now due to Bitfinex/Tether moving funds around amongst themselves to ensure Bitfinex is properly solvent, tether is no longer backed 1 to 1, and only 74% of the total USD reserve is present in the bank account according to a statement from the legal team of Bitfinex/Tether.

The NYAG has since frozen a line of credit offered by Tether to Bitfinex, and Bitfinex has responded asking why this has happened. Among this wild controversy, there is a rumor that Bitfinex shareholder Zhao Dong has been discussing that the company plans to release a token native to Bitfinex, which will be executed via initial exchange offering (IEO). While this is currently unconfirmed, it would be interesting to see in light of all the recent legal scrutiny. It seems like Bitfinex may have worked with a fraudulent company Crypto Capital, which caused them to attempt to recover some of their own losses, without telling investors or customers. The issue here is with the overall transparency of the situation with Bitfinex, and Crypto Capital. Another problem surrounding the situation is ensuring that the tether tokens are properly backed. Overall, it is a messy situation that will probably take some time to unfold, but even as of recently users of the Bitfinex exchange have reported no issues with usage or withdrawals, and tether has been holding its $1.00 peg.

Written by @DragonBTC.

DragonBTC is a technical analyst, writer, and Digital Den contributor who discovered bitcoin back in 2016. Read up more about DragonBTC, here.