Bitfinex and Tether Fraud Allegations: Analysis, Market Response, Community’s Reaction

On Thursday (April 25), New York Attorney General ("NYAG") Letitia James announced that she had obtained a court order against iFinex (the operator of crypto exchange Bitfinex) and Tether (the issuer of the stablecoin of the same name) to stop these two companies from any "further violations of New York law." This article summarizes the main highlights of the facts as presented by the NYAG, how the crypto markets have reacted, and early responses from some prominent members of the crypto community on Twitter. 

The “Facts” As Presented by Assistant Attorney General Whitehurst’s Affirmation

According to the affirmation filed (at the New York Supreme Court) on Thursday by Brian M. Whitehurst, who is an Assistant Attorney General ("AAG") in the office of NYAG James, here are the main "facts" of the case against Bitfinex and Tether, as beautifully summarized by highly-respected New York-based crypto trader/analyst Alex Krüger (@krugermacro on Twitter):

  • "Bitfinex has a $850M 'hole" since late 2018"
  • "The $850M are 'stuck' with Crypto Capital, a third party payments processor used by Bitfinex"
  • "Crypto Capital argues the $850M have been seized by govt authorities of various countries"
  • "Bitfinex mgmt believes Crypto Capital's principals may be engaged in fraud"
  • "USDT were seemingly fully backed by USD until Nov/2018"
  • "Between Nov/2018 and Mar/2019, Tether transferred $625M to Bitfinex => Tether ceased to be fully backed by USD"
  • "In Mar/2019 Bitfinex 'returned' the $625M to Bitfinex"
  • "Since Mar/2019 Bitfinex is covering the hole with a $900M line of credit from Tether"
  • "The line of credit (which pays 6.5% p.a.) is secured by iFinex shares"
  • "Bitfinex has accessed $700M from the line of credit"
  • "Per the NY AG, Bitfinex and Tether are engaged in fraud"

And here are some other interesting observations from Alex:

Bitfinex's Response 

A few hours after the NYAG's press release came out, Bitfinex issued its response in the form of an announcement posted to its website:

"Earlier today, 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.

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. We are and have been actively working to exercise our rights and remedies and get those funds released. Sadly, the New York Attorney General’s office seems to be intent on undermining those efforts to the detriment of our customers.

Bitfinex and Tether have been fully cooperative with the New York Attorney General’s office, as both companies are with all regulators. The New York Attorney General’s office should focus its efforts on trying to aid and support our recovery efforts.

Both Bitfinex and Tether are financially strong – full stop. 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."

Crypto Markets' Response

Naturally, this news has hurt the price of pretty much all cryptoassets with the main exception being stablecoins that are Tether's main competition, such as USD Coin (USDC) and TrueUSD (TUSD), which have gone up between 1 and 2 percent against USD. 

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ETH - 24 Hour CC Chart - 26 Apr 2019.png

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What is most interesting about the crypto markets' reaction is that Tether's price has barely been affected this time, unlike in October, when the USDT price reached a low of $0.86. The fair value of Tether is $0.75 at a minimum since Tether seems to be backed 75% by "currency and cash equivalents" and 25% by a loan collateralized by iFinex shares, which used to be worth around $10, but worth around $2 a few hours ago:

This means that the collateral of 60,000,000 iFinex shares might only be worth around $120 million at the moment, whereas the line of credit is for $900 million.

This tweet sums up nicely what one can say about Tether's current fair value:

Crypto Community's Reaction

Here are some of the more interesting early reactions from the crypto community on Twitter:

 

Featured Image Credit: Photo via Pixabay.com

Wrapped Bitcoin Has Exploded Since Entering MakerDAO's System

After over a year of existence, the market capitalization of (Ethereum-)Wrapped Bitcoin (WBTC) has seen a steady rise since roughly March. Starting on about May 10, the USD value of bitcoins wrapped in WBTC smart contracts surged from about $10 million to over $35 million at the time of writing.

massive growth(source: DefiPulse.com)

This change in the WBTC chart represents a parabolic explosion of use, whereas the system had before rarely held more than $5 million worth of value on its network.

One explanation for this rise since March is of course the rise in general asset prices of cryptos like Bitcoin and Ethereum.

Another, more dynamic explanation for the surge, especially in May, is the recent addition of WBTC to the MakerDAO ecosystem. As covered by CryptoGlobe on May 4, Maker holders recently voted to allow WBTC as a form of collateral for minting DAI, a decentralized stablecoin.

DAI is created when another Ethereum-supported digital asset is locked in a smart contract against it. The underlying asset can eventually be released, and both the formation and dissolution of the locked smart contract is performed by paying a fee in MKR, MakerDAO’s native token (which also gives voting rights on the system). In addition to Ethereum (ETH) itself, Basic Attention Token (BAT) and USDC can also be used to mint DAI.

A complex system of balances is designed to keep DAI equal to one US dollar—although, since there is no central authority controlling supply, the peg is not always perfectly 1:1.

Featured Image Credit: Photo via Pixabay.com