Bitfinex and Tether have settled with the office of the New York attorney general in an investigation that began two years ago.
The sister companies will pay $18.5 million in penalties to the state for violations of the Martin Act, according to a statement issued by the NY attorney general. Per the terms of the settlement agreement, Bitfinex and Tether are banned from trading in the state and must submit quarterly reports to ensure they are complying with the prohibition.
Tether claimed that tethers were backed by real dollars, when they were not backed by real dollars, the NY attorney general alleges.
“Bitfinex and Tether recklessly and unlawfully covered-up massive financial losses to keep their scheme going and protect their bottom lines,” NY Attorney General Letitia James said in a statement. “Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie. 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.”
The investigation was made public in April 2019, when the NY attorney general revealed that Bitfinex, an unregulated crypto exchange, dipped into Tether’s cash reserves to cover up the fact that it had lost access to $850 million held by its Panamanian payment processor Crypto Capital. Having lost access to those funds, Bitfinex struggled to meet customer withdrawal requests.
Tether and Bitfinex neither admit or deny the findings in the settlement. And their attitude is one of “We have put this matter behind us now.” Here is their official statement, which emphasizes that they have repaid their loan to Tether—an estimated $750 million—though they still won’t say how much they “borrowed” exactly.
Per the terms of the settlement, the office of the NY attorney general cannot bring any claims or lawsuits against Tether or Bitfinex for matters relating to findings in the petition. However, it still has the right to enforce the settlement, if the companies fall short.
And falling short is something that could well happen.
If you read closely, these provisions are a big ask from two companies that have been highly secretive about their financial dealings from the get-go. To continue on, they will need to submit to an impossible level of transparency.
For the next two years, Tether and Bitfinex will have to show proof that they segregate client, reserve, and operational accounts. The NY attorney general claims the firms have commingled funds in the past—and at one point, $61.5 million of Tether’s reserves were kept in a trust account held by its general counsel at the Bank of Montreal.
On a quarterly basis, the two firms have to publish the categories of assets backing tethers—e.g., cash, loans, securities, etc. They will also need to specify the percentages of each category, and spell out whether a category constitutes a loan or receivable.
This is something Tether has never done before. It has never been clear about what is backing tethers, whether those are third-party loans, cryptocurrencies—such as bitcoin—shares in a Bahamian bank, or whatever.
Tether and Bitfinex also need to provide the office of the NY attorney general a list of their payment processors, along with location and contact information for those entities, and information regarding what due diligence procedures they are putting in place to ensure the payment processors don’t leave them high and dry as before. They will also need to provide that same information to their customers upon request when associated with a deposit or withdrawal.
Crypto payment processors run shadowy operations, and this stipulation is going to make Tether and Bitfinex a difficult client. Recall, the firms had no formal agreement with Crypto Capital when they handed over $1 billion for safekeeping.
Crypto media outlets and bitcoiners are painting the Tether and Bitfinex settlement like it is a big win and $18.5 million is pennies for a company that has so far issued $34 billion worth of tethers—but I could not disagree more.
The NY attorney general is effectively saying, pay the fine and go right ahead with your legitimate business. The problem is, Tether and Bitfinex may have no legitimate business—and fulfilling these obligations may turn out to be impossible.
NYAG/Tether, Bitfinex settlement reveals commingling of funds, years of shenanigans
NYAG to crypto companies: ‘Play by the rules or we will shut you down’
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