A closely followed legal case involving Bitfinex and Tether with major implications for the cryptocurrency industry has been resolved.
The New York attorney general’s office (NYAG) arranged with Bitfinex a 22-month investigation into whether the cryptocurrency exchange sought to cover the loss of $ 850 million in customer and corporate funds held by a payment processor.
The NYAG office announced the agreement on Tuesday, formally ending the investigation initiated in April 2019. Under the terms of the agreement, Bitfinex and Tether will not admit irregularities, but will pay $ 18.5 million and provide quarterly reports describing the composition of the Tether reserves for the next two years. Most significantly, these reports will correspond to the information that Tether has already provided NYAG about its reservations. NYAG will not present any charges as part of the agreement.
In a statement, New York Attorney General Letitia James said: “Bitfinex and Tether have covered up massive financial losses in a reckless and illegal manner to keep their scheme running and protect their financial results. Tether’s claims that its virtual currency has always been fully backed by US dollars were a lie. “
The deal could help resolve, in one way or another, an issue that has long plagued the entire $ 1.6 trillion global cryptocurrency market. By requiring Tether to provide a greater level of transparency than ever about the support of its USDT stablecoin – a key piece of the cryptography pipeline – the arrangement could replace whispers and conjecture with regular data. Depending on the level of detail provided, investors may have better tools to assess the claim that the company is printing unsupported tokens to artificially raise the price of bitcoin, the market thermometer.
According to the agreement, NYAG claims that Bitfinex and Tether held a portion of Tether’s reserves in custody for several months in 2017 and did not disclose their problems with Crypto Capital Corp. in a timely manner in his discoveries indeed. NYAG also found flaws in a Bitfinex blog post published after the survey’s first announcement, where the exchange said the funds held by Crypto Capital were “seized and safeguarded”.
‘Resolve allegations’
Charles Michael, a partner at the law firm Steptoe & Johnson LLC who represented the companies in the investigation, said the deal “resolves allegations about public disclosures” about Tether’s loan to Bitfinex.
“To the credit of the Attorney General’s Office, after two and a half years of investigation, its findings are limited only to the nature and timing of certain disclosures,” said Michael. “And contrary to online speculation, there has been no discovery that Tether has issued unsupported strings or to manipulate crypto prices.”
However, the agreement said: “As of November 2, 2018, tethers were no longer backed 1 to 1 by US dollars in a Tether bank account, because a substantial part of the backing of the Deltec account was transferred to Bitfinex to offset the funds taken by Crypto Capital, while the corresponding funds transferred from Bitfinex’s Crypto Capital account to Tether’s Crypto Capital account were adversely affected by the shares of Crypto Capital. “
The $ 18.5 million that companies are paying as part of the deal “should be seen as a measure of our desire to leave this issue behind and focus on our business,” said Bitfinex and Tether General Counsel Stuart Hoegner , in a statement.
He said Tether “voluntarily” provided NYAG with information about Tether’s reserves and will continue to do so for two years.
“We proposed that, as part of the settlement agreement, we would disclose – both to the Attorney General’s Office and to the public – additional information about Tether’s reserves on a quarterly basis,” said Hoegner.
The disclosures will include the breakdown of cash and cash equivalents that are in reserves. It is not clear whether this will take the form of certificates or some other type of update, or whether a third party auditor or law firm will write the reports. The agreement only said that the disclosures will correspond “substantially” to what the companies provided to NYAG during their investigation. Bitfinex and Tether must also disclose any information about funds transfers to each other.
“Setting aside the Attorney General’s characterization of these disclosure issues as misrepresentations or violations of any legal obligation, the Attorney General’s Office concluded, in essence, that Bitfinex and Tether could have done better to publicly disclose these events,” he said. Michael.
22 months
New York Attorney General Letitia James announced the legal inquiry in spring 2019, revealing that Bitfinex had lost access to nearly $ 1 billion and covered the losses using funds from its sister company, Tether. Tether, which shares ownership and key executives with the exchange, lent Bitfinex $ 550 million and extended a credit line.
The NYAG investigation secured an injunction to freeze this credit line, prevent any additional funds transfers and force companies to hand over any documentation about the deal, which both companies objected to in court. A judge ruled in favor of NYAG, which subsequently also won an appeal.
Ultimately, the companies delivered more than 2.5 million documents, said Hoegner.
“The loan was made to guarantee the continuity of Bitfinex customers. Since then, it has been repaid in advance and in full, including interest. At no time did the loan affect customers or Tether’s ability to process redemptions, ”said Michael.
The NYAG survey did not dampen demand for USDT, the stable dollar-indexed currency issued by Tether. Since the beginning of the case, the value of dollar-indexed tokens in circulation has grown from $ 2 billion to over $ 34 billion, according to the Tether transparency page.
Bitcoin’s price has recently dropped, reaching a new record of more than $ 58,000.
“We are pleased that our customers have demonstrated loyalty and commitment to our business in the past two years, while this investigation was ongoing. … We hope that both companies will continue to lead the industry and serve our customers, ”said Hoegner.
Millions lost
Since the case entered the public sphere, Bitfinex has tried to recover funds held by Crypto Capital held by law enforcement officers in Portugal, Poland and the United States. It is not clear how long it may take for these cases to be resolved, given the different jurisdictions and the ongoing proceedings against Crypto Capital operators.
Last year, Bitfinex filed for subpoenas in three different states, seeking to depose banks that may have kept funds for the payment processor.
At the time, Hoegner told CoinDesk, through a spokesman, that efforts were “aimed directly at obtaining more information” about Crypto Capital and its funds. “Bitfinex is a victim of fraud and is enforcing its rights on funds taken by Crypto Capital through legal measures initiated in several countries.”
The exchange obtained some of these subpoenas. The Bitfinex settlement is among the largest in the history of cryptography. Builder EOS Block.one entered into a deal with the SEC for $ 24 million in 2019 on allegations that its symbolic $ 4 billion sale was an offering of unregistered securities. Telegram, then an aspiring digital currency issuer, also made a deal with the SEC for $ 18.5 million after raising $ 1.2 billion for the TON network, which was eventually dropped.
UPDATE (February 23, 2021, 13:15 UTC): Updated with additional context.