Tether Ltd. Restricted from Using Its Reserves By NYAG

New York Supreme Court Judge Joel M. Cohen has ordered digital asset exchange Bitfinex and Tether Ltd. to submit documentation regarding the issuance of a loan and a line of credit.

Tether Ltd., the issuer of the world’s most dominant stablecoin, USDT, had reportedly extended a line of credit to Bitfinex so that the exchange operator could maintain its business operations - after losing $850 million. As reported, the funds were being managed by Crypto Capital Corp., a Panama-based payments processing service provider. However, Crypto Capital has claimed its funds (under management) were seized by authorities in Portugal, Poland, and the US.

In April 2019, Crypto Capital’s managers, Ravid Yosef and Reginald Fowler, were indicted by the US Department of Justice (DoJ) for allegedly offering illicit banking services to various crypto-related firms.

“Legitimate Law Enforcement Concerns” Should Be Addressed

Last week, a preliminary hearing on the matter had been held in New York City and an opinion released on Thursday (May 16th, 2019) had ordered Tether’s management to stop loaning USDT reserves (or other assets) to Bitfinex.

At present, the New York Attorney General (NYAG) is conducting an investigation into the business operations of IFinex, Inc., the parent company of both Bitfinex and Tether, Ltd. Commenting on the matter, Judge Cohen remarked: 

The Court finds that the preliminary injunction should be tailored to address OAG’s legitimate law enforcement concerns while not unnecessarily interfering with Respondents’ legitimate business activities.

Notably, Judge Cohen has ordered Tether’s management to not loan any type of asset to Bitfinex or other parties that may be working with the exchange. However, Tether may continue to conduct normal business activities, which may also involve working with Bitfinex.

The OAG has also ordered that Tether not distribute any assets from its reserves to its employees or any other third party. Tether’s management may, however, pay its employees for any work done that is related to the company’s day-to-day, or normal, business operations.

Bitfinex To “Vigorously Defend Any Action” By NYAG

As noted in court papers, the injunction will expire in 90 days, but the OAG may file a petition in order to extend the deadline. Court documents also state that neither Bitfinex nor Tether’s management be allowed to make any changes to the loan documents that the OAG has requested.

In response to the Judge’s orders, Bitfinex stated:

We believe that the court’s decision today leaves no doubt that both Tether and Bitfinex are entitled to run their businesses in the ordinary course, even during the short period when this now narrowed preliminary injunction is in place.

Bitfinex’s management also believes the OAG acted in “bad faith” as it overlooked the exchange’s “previous historical, and voluntary cooperation with them.”

The exchange further noted:

We will vigorously defend against any action by the New York Attorney General’s office, and we remain committed, as ever, to protecting our customers, our business, and our community against their meritless claims.

CME Looks to Double Bitcoin Futures Limit, but Is This Wise?

The Chicago Mercantile Exchange (CME) has a new request for its regulator, as it looks to double open position limits on bitcoin futures contracts in the face of significant interest.

Nasdaq reports that the CME has already petitioned its regulatory body, the Commodity Futures Trading Commission (CTFC), asking for an increase from 1000 contracts per spot month to 2000 per investor. Each contract represents five BTC, so essentially, at its peak,  a single investor's total position may edge towards a monumental 10,000 BTC.

This is in direct response to the contract's recent growth which is currently depicting record levels of activity, citing $370 million being traded per day. A spokesperson for the CME noted that the idea to increase limits was proposed on the continued maturity of the market:

Based on the significant growth and acceptance of our financially-settled CME Bitcoin futures markets, as well as our analysis of the underlying bitcoin market.

However, as Nasdaq writes the increase in the upper limit of positions is somewhat superfluous. As of July, the number of open interest contracts reached an all-time high of just 6100; given this, it seems the CME may be future-proofing.

Open to Manipulation?

However, concerns remain about the limit increase, as without them, the potential for manipulation rises; often to the detriment to the underlying asset. Although, as per the CTFC website, the threat of manipulation from bitcoin futures contracts is "low":

In general, position limits are not needed for markets where the threat of market manipulation is non-existent or very low.

Instead, Nasdaq posited that this might point to a lessening on the CTFC's strict rule of bitcoin; as well as a maturing of the market in general.

Nevertheless, some believe the CME's bitcoin futures contracts do pose a significant threat to the price of BTC; with some suggesting that blatant manipulation continues unchecked within the market.

As reported, there seems to be a correlation between the expiry dates of CME bitcoin futures contracts and a lull in the price point of BTC. In several instances, a significant drop in bitcoin's price has coincided with a closure from the CME. The most recent example of this occurred on Labor Day, September 2, when bitcoin rose an extraordinary 8% shortly after the CME shut.

Crypto analyst, Alex Kruger, highlighted this, noting the large gaps which formed on the CME chart, from the price discrepancy before and after closing.

This has become a pretty accepted practice within the market. Kruger has even gone to the lengths of compiling statistics each time this phenomenon transpired:

On these occasions, bitcoin cited an average 4.6% price discrepancy following the close of the CME.

Whether this is a coincidence or the market is indeed being actively manipulated is as yet unclear. Either way, with the increase of these limits it might be only a matter of time until we know for sure.

Featured Image Credit: Photo via Pixabay.com