‘Platform error’ blamed in sending BTC to Quadriga’s dead CEO’s cold wallet

Screen Shot 2019-02-21 at 3.02.45 AMThe 104 bitcoin (worth $468,675 CAD) that Canadian crypto exchange QuadrigaCX “inadvertently” sent to its dead CEO’s cold wallets on February 6—a day after the company filed for creditor protection—was due to a “platform setting error.”

Ernst & Young (EY), the court-appointed monitor in Quadriga’s Companies’ Creditors Arrangement Act (CCAA), included that news in its second report, released on February 20. At least now we know that the money wasn’t sent by somebody clumsily pushing a wrong button. Still, that single automated maneuver wiped out half the funds in Quadriga’s hot wallets.

The rest of the hot wallet funds, worth $434,068 CAD, are now safe from Quadriga. EY transferred the coins into cold wallets that it controls on February 14. Those funds include 51 bitcoin, 33 bitcoin cash, 2,032 bitcoin gold, 822 litecoin, and 951 ether. Of course, all this is a mere drop in the bucket compared to the $250 million CAD owed to Quadriga’s 115,000 creditors. And most of the funds are presumably lost forever.

Other news in EY’s report: As you recall, Quadriga elected a new board following the death of its CEO Gerald Cotten on December 9. The new directors included Cotten’s widow Jennifer Robertson, her stepfather Thomas Beazley and a man named Jack Martel, who nobody knew too much about. Apparently, Martel has stepped down.

But the real story here is that more money is urgently needed to fund the Quadriga CCAA process. Robertson put up $300,000 CAD to initiate the process. And since January, EY and Stewart McKelvey, the law firm working on behalf of Quadriga, have burned through nearly all of it.

Additional money, both for the CCAA process and for Quadriga creditors, will come from Quadriga’s payment processors—once the bank drafts are collected and signed over to EY, and EY can get a bank to accept the drafts, which is no easy thing to do. Banks just don’t seem to want to touch this money. 

Quadriga had no company bank accounts. Instead, it managed all of its fiat money via a complicated patchwork of third-party payment processors. EY has asked nine of those payment processors to hand over any funds they are still holding. 

Costodian, a company created by payment processor Billerfy specifically to manage Quadriga’s funds, is holding $26 million CAD in bank drafts. After the Canadian Imperial Bank of Commerce froze those funds in January 2018, the Ontario Superior Court of Justice took control of that money, and in December, the court released the funds back to Costodian in the form of bank drafts issued by the Bank of Montreal (BOM).

According to EY, Costodian has released four BOM bank drafts totaling $20 million. And  it is waiting for a court order before releasing two other bank drafts.

One of those is for roughly $70,000 USD. These are personal funds belonging to Costodian’s principal Jose Reyes. EY has determined that those funds do indeed belong to Reyes, but he still needs to sign the check over to EY for disbursement.

The other Custodian BOM bank draft is for $5 million CAD. Of these funds, Custodian claims that $61,000 CAD also represent Reyes’ personal funds. And that $778,000 CAD is due to Custodian in unpaid processing fees.

Quadriga creditors don’t agree that Costodian should be paid these fees. Rightfully so. Most of their money is gone, so why should Costodian get paid in full? To resolve the issue, EY notes that “a separate dispute resolution mechanism will be required during the course of these CCAA proceedings.”

In addition, Stewart McKelvey is holding 1,004 in bulk drafts totaling $6 million. These drafts were issued to 1009926 BC LTD, a payment processor run by a former Quadriga contractor. The problem is this: 1009926 BC LTD was dissolved in January 2018 for failure to file an annual report, so EY is looking to potentially restore the company.

EY is also negotiating with the Royal Bank of Canada (RBC), where it hopes to open accounts to deposit all of these checks. RBC, however, is proceeding slowly and with caution. According to EY, “a stranger to the CCAA proceedings, RBC has expressed hesitation to accept and disburse the BMO drafts, bulk drafts and future amounts, without direction and relief from the court.”

A hearing is scheduled for February 22 to give direction to the banks and to third-party payment processors, so the funds can be freed up.

After that, another hearing is scheduled for March 5 in Halifax, where angry Quadriga creditors are looking to stage a protestThey are urging the court to discontinue the CCAA proceedings and instead launch a criminal probe into Quadriga.  

Update (February 21, 12:30 ET): I made some changes to clarify the amount of personal funds that Custodian principal Jose Reyes claims belong to him in two BOM bank drafts.

Two law firms appointed to represent QuadrigaCX creditors

Screen Shot 2019-02-19 at 7.31.36 PMQuadrigaCX creditors now have a legal team to represent them in the crypto exchange’s Companies’ Creditors Arrangement Act (CCAA) proceedings.

Nova Scotia Supreme Court Judge Michael Wood appointed law firms Miller Thomson and Cox & Palmer to represent the more than 115,000 Quadriga creditors, who are owed a total of $250 million CAD. Most of that money— $180.5 million CAD—is stuck in cold wallets after the company’s CEO died in India. He was the only one who held the keys.  

To offer some background, a CCAA is a federal law in Canada that gives insolvent companies, such as Quadriga, time to restructure themselves and come up with a so-called plan of arrangement. It is not quite like a bankruptcy. A company can still operate and pay its employees during the proceedings.  

When Quadriga was granted creditor protection on February 5, the judge issued a 30-day stay, to keep any lawsuits at bay. The court also appointed Ernst & Young as a monitor to oversee Quadriga’s business and help Quadriga put together its plan of arrangement.

If that plan is accepted by the court and the creditors, Quadriga users will likely be able to recoup some of their losses more expediently. If the plan is rejected, the stay will be lifted, and creditors can forge ahead with their lawsuits.

In the case of Quadriga, because there are so many creditors, the court felt it appropriate to find them legal representation. Three teams of lawyer vied for that position on February 12. Justice Wood reviewed their credentials and made his final decision today.

In his ruling, he explained that he chose Miller Thompson/Cox & Palmer because both firms have extensive insolvency experience. In the coming weeks, Cox and Palmer, which has an office in Halifax, will take the lead on the civil procedure and court appearances, while Miller Thompson, which is headquartered in Toronto, will handle “project management, communication and cryptocurrencies.”  

The judge noted in his ruling that the firms’ proposal was “thought out carefully with a view to minimizing costs.” The team proposed an initial $250,000 cap on fees. They also said that they would communicate with creditors via social media, and that they would advocate for user privacy, something Quadriga users indicated was important to them. 

Appointing a representative counsel and a stakeholder representative committee in complex CCAA proceedings is not unusual, the judge said. Such measures are usually undertaken when the group of stakeholders is large and without representation, many of them would struggle to effectively participate in the CCAA proceedings.

He also agreed with Quadriga’s lawyer Maurice Chiasson and others that assembling a committee of users to represent the broader group of creditors was something that needed to happen quickly.

“The anecdotal evidence at the hearing is that many people are extremely upset, angry and concerned about dishonest and fraudulent activity,” he wrote. “There are reports of death threats being made to people associated with the applicants. All parties agree that this user group needs representation as soon as possible.”

Quadriga’s stay of proceedings expires on March 7. A hearing is planned for March 5 to update the court on what progress Quadriga and its monitor Ernst & Young have made.

Update: According to an email Ernst & Young sent to creditors, Quadriga will, in fact, seek to extend the stay of proceedings. The monitor writes that “the stay of proceedings may be extended for any period that the Court deems appropriate. There is no standard timeframe for the completion of proceedings under the CCAA.”

Ernst & Young is posting updates to the CCAA proceedings on its website.

News: Quadriga, Quadriga, Quadriga

The news keeps getting worse for QuadrigaCX creditors. The Canadian crypto exchange has apparently jettisoned another $468,675 CAD worth of bitcoin into deep space.

On February 6, literally, one day after Quadriga applied for creditor protection, the exchange “inadvertently” sent 104 bitcoin to its dead CEO’s cold wallet, according to an initial report released by court-appointed monitor Ernst & Young (EY).

When Quadriga CEO Gerald Cotten died in India on December 9, he carried into the afterlife with him the keys to the exchange’s cold wallets, where $180 million CAD—oops, make that $180.5 million CAD—worth of crypto is stored. Unless Cotten springs from the grave, any crypto in those wallets is as good as gone.

You have to scratch your head till it bleeds on that one. Why was anyone at Quadriga allowed to touch those coins after the company applied for creditor protection? EY is now moving to safeguard the remaining crypto, a stash now down to 51 bitcoin, 33 bitcoin cash, 2,032 bitcoin gold, 822 litecoin, and 951 ether, worth $434,068 CAD. So, yes, basically, more than half the money in the hot wallets is now gone.

[To get the full details on the history of the exchange, read my article How the hell did we get here? A timeline of Quadriga events.]

EY is also working to retrieve about $30 million worth of cash from nine Quadriga payment processors. So far, EY has yet to collect a dime, and one of the processors is stubbornly insisting that “it has the right to continue to hold funds in its possession pursuant to the terms of its agreement with the Applicants.”

Which payment processor would that be then? How about WB21? According to Robertson’s affidavit filed on January 31, WB21 is holding roughly $9 million CAD and $2.4 million USD of the exchange’s money. Even before EY took over, WB21 was “refusing to release the funds or respond to communications from Quadriga.”

A quick Google search reveals that WB21 has long been plagued by accusations that it is a scam. A year ago, Quadriga customers were complaining on Reddit that they were having trouble getting their wires from WB21. And, surprise, surprise, it also turns out, the U.S. Securities and Exchange Commission (SEC) is suing WB21’s CEO for fraud. (You can find the full SEC complaint here.)

Quadriga’s 115,000 creditors need proper representation. On February 14, three law firms appeared in court to vie for the position of representative counsel. Nova Scotia Supreme Court Judge Michael Wood said he plans to have a final decision next week.

All this legal stuff is getting expensive. So far, Robertson has put up $250,000 CAD of the $300,000 CAD she promised in her affidavit to fund the CCAA process. And the funds are being gobbled up quick. Quadriga’s lawyer Maurice Chiasson said the money will run out in two weeks, if not or sooner.

After that, where will the money come from? Likely, out of whatever funds EY pulls from those nine payment processors.

Meanwhile, more funny business is starting to surface. In her sworn affidavit, Cotten’s widow stated that she had no dealings with Quadriga prior to Cotten’s death. Yet, three Quadriga creditors (archive) claim they received wires from Robertson’s real estate company, Robertson Nova Property Inc. The wire transactions occurred in 2016 and 2017. This is interesting, given Jennifer only changed her name to Robertson in April 2017.

Screen Shot 2019-02-15 at 9.04.16 PMDid you know that if you wanted to cash out of Quadriga, you could opt to have actual boxes of cash dropped off at your door? That was an actual service (archive) Quadriga offered its customers. A few have suggested that the money may have come from bitcoin ATM machines that Quadriga operated.

Remember, Quadriga had no corporate banking. That is why, when you sold bitcoin for cash on the exchange or wired in money via one of Quadriga’s payment processors, your online wallet was credited with QuadrigaCX Bucks—not real bucks.

But who knew? I’ve been speaking to Quadriga creditors and some of them had no clue that the “CAD” they saw in their online wallets was basically Quad Bucks. 

“Everyone knows CAD equals Quad bucks now, but I didn’t know that until after the implosion,” one creditor who preferred to remain anonymous told me. “I guess it was in the terms [and conditions], but it wasn’t marked Quad bucks.” 

Some traders also told me that bitcoin sold for a premium on Quadriga. That meant, you could buy bitcoin on another exchange, such as Kraken, and then sell it for a profit on Quadriga. As an added incentive to move your crypto onto the exchange, Quadriga also offered free cash withdrawals, as long as you did not mind waiting two weeks or so for the money to hit your bank account. You had to pay a fee for express withdrawals.

Finally, the Globe and Mail (outline) sent its investigative reporters to India, where Cotten and his wife celebrated their honeymoon just before Cotten died. People are still wondering if his death was staged. “That Mr. Cotten did indeed die is a certainty among police and medical professionals in India, and The Globe reviewed hotel, hospital and embalming records that give no suggestion of anything abnormal,” the Globe writes.

But why was Cotten’s body taken from the hospital where he died back to the hotel where he had been staying? (According to Cotten’s death certificate, Fortis Escorts Hospital was the place of death.) Partly because of this, Simmi Mehra, who works at Mahatma Gandhi Medical College & Hospital, refused to embalm the body.

She told The Globe: “That guy [a representative from the hotel] told me the body will come from the hotel. I said: ‘Why the hotel? I’m not taking any body from the hotel, it should come from Fortis.”

The Globe and Mail report also reveals tragic details of the oft-overlooked Angel House orphanage that Cotten and Robertson sponsored. Apparently, the money they donated only paid for building materials. Several doors are still missing from the structure, including one to the toilet. And the operator of the orphanage is sinking into debt.

The orphanage appears to be yet another example of the wake of destruction that Cotten, who otherwise lived as though money were no object, carelessly left in his passing.

 

 

News: QuadrigaCX has gone bust, Kik is fighting back, and Tether rose to 4th place, briefly

QuadrigaCX customers’ worst fears have come to pass. The Canadian exchange is officially insolvent, and all the crypto is gone—well, most of it anyway.

On January 31, after filing for creditor protection, Jennifer Robertson, the widow of the exchange’s now-deceased CEO Gerald Cotten, filed an affidavit with the Supreme Court of Nova Scotia. As it turns out, Cotten was the only person who held the keys to the exchange’s cold wallets—encrypted wallets where cryptocurrency is kept offline. When he died in December, all that crypto became inaccessible.

According to the affidavit, QuadrigaCX owes 115,000 customers some $250 million CAD ($190 million USD) in both crypto and fiat. Roughly $192 million CAD ($147 million USD) were in crypto assets, most of it in the cold wallets.

In addition to the lost crypto, $30 million CAD is currently held by payment processor Billerfy. Three other third-party payment processors are holding a combined $565,000 CAD. And another $9.2 million USD is stuck inside WB21—a money transfer service that, surprise, surprise, is being sued by the U.S. Securities and Exchange Commission (SEC) for fraud.

But here is where things get strange. Two weeks before he died, Cotten signed a will leaving $100,000 CAD for his two dogs, according to the Globe and Mail (archive.)

I’m not insinuating any foul play here, but let’s go over what we have: Cotten and Robertson supposedly got married two months before his death. Cotten writes up a will to make sure his dogs are taken care of and Robertson takes ownership of 43% of the shares of Quadriga Fintech Solutions, the parent company of QuadrigaCX, should anything awful happen to him. Once that’s all said and done, something awful happens. Cotten goes off to India to help needy children (so nice of him) and dies.

Screen Shot 2019-02-03 at 7.47.19 AM

A month later, Robertson posts an announcement on the exchange’s website telling everyone the company’s CEO is dead. He was a kind, honest, upstanding, guy…after all, he sponsored an orphanage. And then later: Oh, and by the way, all the money is gone, because only Gerald knows where he put it.

[Update: A new twist to this plot may be developing. One Reddit user claims to have found the QuadrigaCX litecoin cold wallet addresses—and the funds appear to be on the move.] 

Elsewhere in the news, Canadian social media startup Kik plans to fight an expected SEC enforcement action over an initial coin offering (ICO). (Read my coverage here.) Kik raised $100 million in 2017 by selling its kin token. In a response to a Wells notice from the SEC, Kik argues that its token is a currency, therefore, it cannot be a security, and besides, the company never marketed kin as an investment anyway.

You could almost go along with that, as long as you completely ignored this 2017 Youtube video of Kik’s CEO Ted Livingston telling everyone how rich they could become if they owned kin. “We’re gonna put [kin] inside Kik and it will become super valuable on day one, we think.” Oops! (Read the full coverage in The Block.)

Two “professional hacking groups” are behind the majority of publicly reported hacks of crypto exchanges and other cryptocurrency organizations, according to a crypto crime report published by blockchain data analytics firm Chainalysis. The two nefarious groups so far have raked in $1 billion of hacking revenues for themselves. Of course, even thieves don’t keep their holdings in bitcoin. They converted everything to fiat.

If you thought SingularDTV was a dreadful name, the blockchain entertainment company has come up with something even more bad. SingularDTV has changed its name to Breaker. The company has a new logo, too—a circle comprised of small lines swirling inward meant to represent the “the hive mind,” a type of groupthink that decentralized projects like to associate themselves with.

Breaker owns Breaker Magazine, which changed its name to BreakerMag to avoid confusion. To go along with the new branding, Breaker (we’re talking about SinglarDTV now) also released a cringe-worthy video that starts with a man gyrating his hips and saying, “It’s like this,” and then devolves into a woman ripping a pink beauty mask off her face. As if the name change wasn’t awkward enough.

Nicholas Weaver, a researcher at International Computer Science Institute, gave a talk at Enigma, a USENIX conference, called “Cryptocurrency: Burn it with Fire!,” where he argued the entire cryptocurrency and blockchain space is effectively one big fraud. Here are the slides to the presentation. The video is not up yet, but Weaver gave a similar talk in April 2018. (It’s funny, watch it.)

For a brief period, tether (USDT), the stablecoin associated with the crypto exchange Bitfinex, rose to become the fourth largest crypto by market cap at $2 billion. It has dropped back down to sixth place now, but who knows, maybe it will rise up again. (Read my tether timeline to learn why tether is so important to crypto markets.)

Banking giant JP Morgan says bitcoin is now worth less than the cost to mine it. “The drop in Bitcoin prices from around $6,500 throughout much of October to below $4,000 now has increasingly pushed margins further and further negative for just about every region except low-cost Chinese miners,” the bank’s analysts said. (Bloomberg)

Despite all the hype, decentralized exchanges (DEX) are not attracting much interest. According to a report in Diar, DEX volume is at an all-time low—something that’s unlikely to change, mainly due to poor usability issues. Another reason to avoid DEXs:  anyone can list any token they like—even if it’s not a legitimate one.

Binance has come up with yet another harebrained business scheme. The Malta-based crypto exchange now allows customers to buy crypto using their credit cards. I can’t see this working out too well. Banks generally distance themselves from all things crypto, and many won’t allow you to put crypto on credit cards. And even if they do, weird things happen. US-based crypto exchange Coinbase no longer accepts credit cards, but when it did, Visa actually overcharged buyers—though, it did eventually issue refunds.

An Italian bankruptcy court found Francisco Firano (aka “Francisco the Bomber”) personally liable for $170 million in losses related to the BitGrail hack in April 2018. (Last year, I wrote a story about the hack for Bitcoin Magazine.) The BitGrail Victims Group posted scans of the court documents along with an explanation of the court’s decision on Medium.

In a big win for nocoiners, David Gerard, author of “Attack of the 50-foot Blockchain,” wrote a op-ed for The Block titled “The Buttcoin Standard: the problem with Bitcoin,” where he basically takes apart bitcoin and criticizes the horrendous energy waste of proof of work. Gerard’s article was solid. But just as you might expect, bitcoiners objected en masse, and even attacked The Block cofounder Mike Dudas.

Most of the criticisms were attempts to discredit the author and consisted of vague comments, such as “[Gerard’s] thought process is fundamentally broken at the protocol level,” “I was hoping for a more astute criticism,” and “terrible journalism!

Apple cofounder Steve Wozniak, who used to go around comparing bitcoin to digital gold, admits he sold all his bitcoin at its peak. “When it shot up high, I said I don’t want to be one of those people who watches and watches it and cares about the number. I don’t want that kind of care in my life,” he said at the Nordic Business Forum. “Part of my happiness is not to have worries, so I sold it all and just got rid of it.” (Satoshi Times)

And finally, the police department in Lawrence, Kansas has been getting reports of bad actors calling people up at random to demand bitcoin.

The curious case of Tether: a complete timeline of events

Stablecoins—virtual currencies pegged to another asset, usually, the U.S. dollar—screen shot 2019-01-15 at 2.22.13 pmbring liquidity to crypto exchanges, especially those that lack ties to traditional banking. To put it more simply, if you are a crypto exchange and you don’t have access to real dollars, stablecoins are the next best thing.

Today, there are lots of stablecoins to choose from. But by far the most popular and widely traded is tether (USDT), issued by a company of the same name. Of the three stablecoin models, Tether follows the I.O.U. model, where virtual coins are supposed to represent actual money and be redeemable at any time. It all sounds well and good, but for one thing: How do we know that tether is fully backed? 

Currently, there are 1.9 billion tether in circulation. That means, there should be a corresponding $1.9 million tucked away in one or more bank accounts somewhere. Bitfinex, the crypto exchange closely linked to Tether, claims the money exists, but has yet to provide an official audit to support those claims. (We have seen snapshots of bank account balances at certain points in time, but these are not real audits.) 

More troubling still, the issuance of tether correlates with the rapid run up in price of bitcoin from April 2017 to December 2018 when bitcoin peaked at nearly $20,000. If authorities were to step in and freeze the assets underlying tether, it is hard to guess what impact that could have on crypto markets at large. 

A timeline of events reveals a full picture of the controversy surrounding Tether and Bitfinex, and provides a reference for anyone interested in researching the topic. 

[An earlier version of this timeline originally appeared in Bitcoin Magazine in February 2018. What follows is a rewritten, more comprehensive and up-to-date version.]

Timeline

2012 — iFinex Inc., the company that is to become the parent company for Bitfinex and Tether, is founded in Hong Kong.

2013 — Bitfinex incorporates in Hong Kong. The exchange is run by CSO Phil Potter, CEO Jan Ludovicus van der Velde and CFO Giancarlo Devasini. (Of note, Potter used to work at Morgan Stanley in New York in the 1990s, but lost the job after bragging about his opulent lifestyle to the New York Times.)

July 9, 2014 Bitcoin Foundation director and former Disney child actor Brock Pierce launches Realcoin, a dollar-backed stablecoin. Realcoin is built on a Bitcoin second-layer protocol called Mastercoin (now Omni). Pierce was one of the founding members of the Mastercoin Foundation before resigning in July 2014. He founded Realcoin along with Mastercoin CTO Craig Sellars and ad-industry entrepreneur Reeve Collins

September 5, 2014 Appleby, an offshore law firm, helps Bitfinex operators Phil Potter and Giancarlo Devasini set up Tether Holdings Limited in the British Virgin Islands.

September 8, 2014 — Tether Limited registers in Hong Kong.  

October 6, 2014 — The first tether are issued, according to the Omni block explorer.

November 20, 2014 — Realcoin rebrands as “Tether” and officially launches in private beta. The company hides its full relationship with Bitfinex. A press release (archive) lists Bitfinex as a “partner.” And in explaining the name change, project co-founder Reeve Collins tells CoinDesk the firm wanted to avoid association with altcoins. 

February 25, 2015 Tether begins trading, according to data from CoinMarketCap.

May 18, 2015 — Tether issues 200,000 USDT, bringing the total supply to 450,000.

May 22, 2015 Bitfinex claims it has lost 1,500 bitcoin (worth $400,000 at the time) when its hot wallets are hacked. The amount represents 0.05 percent of the company’s total holdings. Bitfinex indicates it will absorb the losses.  

December 1, 2015 — Tether issues 500,000 USDT, bringing the total supply to roughly 950,000. (The price of bitcoin has remained stable throughout most of 2015, but climbs from $250 in October to about $460 in December.)

June 2, 2016 The U.S. Commodity Futures Trading Commission fines Bitfinex $75,000 for offering illegal off-exchange financed retail commodity transactions in bitcoin and other cryptocurrencies and for failing to register as a Futures Commission Merchant as required by the Commodity Exchange Act. In response, Bitfinex moves its crypto funds from an omnibus account into multisig wallets protected by BitGo.

August 2, 2016 — Bitfinex claims it has been hacked when 120,000 bitcoin, worth about $75 million at the time, vanish. At the time, this is one of the largest hacks in bitcoin’s history, second only to Mt. Gox. Bitfinex never reveals the full details of the breach.

(Read chapter 8 of David Gerard’s book “Attack of the 50-Foot Blockchain” for an in-depth explanation of the hack.)  

August 6, 2016 Bitfinex spreads out the losses from the theft by announcing a 36% haircut for almost all of its customers. It even takes funds from customers who were not holding any bitcoin at the time of the hack. (Only bitcoin were stolen.) In return, customers receive an I.O.U. in the form of BFX tokens, initially valued at $1 each.

August 10, 2016 — Zane Tacket, Bitfinex community director, writes on Reddit (archive) that Bitfinex is offering a bounty of 5% (worth up to $3.6 million) for any information leading to recovery of the stolen funds. Also on this day, Bitfinex resumes trading and withdrawals after having been shut down for a week after the heist.  

August 17, 2016 In a blog post (archive) Bitfinex announces it is engaging Ledger Labs, the blockchain forensic firm founded by Ethereum creator Vitalik Buterin, to investigate the breach. Bitfinex only hires Ledger to do a computer security audit, but it leads customers into thinking Ledger is going to perform a financial audit as well. A financial audit is key to knowing whether Bitfinex was solvent at the time of the hack.   

“We are also in the process of engaging Ledger Labs to perform an audit of our complete balance sheet for both cryptocurrency and fiat assets and liabilities.”  

A footnote added to the blog post on April 5, 2017 makes a correction:

“Ledger Labs has not been engaged to perform a financial audit of Bitfinex. When in initial discussions with Ledger Labs in August 2016, we had initially understood that they could offer this service to us…. We are in the process of engaging a reputable, third party accounting firm to audit our balance sheet, but this continues to take longer than anticipated and than we would want. We apologize for any confusion in this matter.”

October 12, 2016 — Bitfinex tries to reach out to the hacker by offering secure communication channels. In a blog post (archive), titled “Message to the individual responsible for the Bitfinex security incident of August 2, 2016,” Bitfinex writes “We would like to have the opportunity to securely communicate with you. It might be possible to reach a mutually agreeable arrangement in exchange for an enormous bug bounty.” Though, it is not clear why a hacker would be interested in such an offer. 

[Note: The following paragraph does not explain RRT tokens accurately. They were not shares, but an incentive to get BFX holders to convert to shares. Standby for an update.]

October 13, 2016 — Bitfinex gives its customers the option (archive) to convert BFX tokens to a newly created asset called Recovery Rights Tokens (RRT) that gives them equity shares in Bitfinex parent company iFinex Inc. In the words of Bitfinex CFO Giancarlo Devasini: “The fastest way to get back your money is to convert your token into shares and then sell your shares to another shareholder.” 

After having watched BFX tokens slip below $1—one Redditor (archive) reported the price of BFX dropping to as low as $0.30—many BFX holders anxiously accepted the deal. As a result, roughly a third of all BFX tokens are converted 1:1 to RRT tokens. This effectively turns many Bitfinex customers into iFinex shareholders.

December 31, 2016 — In the year 2016, Tether issued 6 million USDT, six times what it issued the prior year. 

March 31, 2017 Wells Fargo cuts off services to Bitfinex and Tether, according to court documents in a lawsuit Bitfinex later files against the bank. Bitfinex is not a direct customer of Wells Fargo, but rather a customer of four Taiwan-based banks that use Wells Fargo as an intermediate to facilitate wire transfers.  

April 3, 2017 — In a blog post (archive), Bitfinex announces plans to redeem any outstanding BFX tokens. “After these redemptions, no BFX tokens will remain outstanding; they will all be destroyed.” 

Meanwhile, Potter reveals in an audio that all of the remaining BFX tokens have been converted to tether. Effectively, this means that none of the victims of the Bitfinex hack in August 2016 got back their original funds. What they got instead was RRT or USDT.

April 5, 2017 — Two days after announcing it has “paid off” all its debt to customers, Bitfinex files a lawsuit against Wells Fargo for interrupting its wire transfers. Tether is listed as a plaintiff. In addition to an injunction order, Bitfinex seeks more than $75,000 in damages. (See here for a complete list of documents associated with the lawsuit.)

April 10, 2017 A pseudonymous character known as “Bitfinex’eddebuts online. In a series tweets, he begins accusing Bitfinex of creating USDT out of thin air to pay off debts. At this point in time, the number of USDT in circulation is 55 million, and the price of bitcoin has begun a steep ascent that will continue to the end of the year.

April 11, 2017 — Bitfinex voluntarily dismisses the lawsuit against Wells Fargo. In an audio Potter effectively admits the lawsuit was frivolous, stating the company was only hoping to “buy time.”

April 17, 2017 — Banks don’t like to associate with Bitfinex. Following a notice about wire delays, Bitfinex announces (archive) it has been shut off by its four main banks in Taiwan. Bitfinex is now left to move between a series of banks in other countries without telling customers where it is keeping its reserves.

“We’ve had banking hiccups in the past, we’ve just always been able to route around it or deal with it, open up new accounts, or what have you…shift to a new corporate entity, lots of cat and mouse tricks,” Phil Potter tells customers in an audio.

April 24, 2017 — Tether’s dollar peg is maintained via market making and instilling confidence in the value of the coin. Amidst reports that Bitfinex has been cut off from Wells Fargo and shut off from Taiwanese banks, USDT temporarily dips to $0.91.  

May 5, 2017 After finally clarifying (archive) to customers that it only engaged Ledger Labs for a security audit, not a financial audit, Bitfinex hires accounting firm Friedman LLP to complete a comprehensive balance sheet audit. “A third-party audit is important to all Bitfinex stakeholders, and we’re thrilled that Friedman will be helping us achieve this goal,” Bitfinex writes in a blog post (archive).

August 5, 2017 — Bitfinex’ed publishes his first blog post: “Meet ‘Spoofy.’ How a Single Entity Dominates the Price of Bitcoin.” In it, a video shows a Bitfinex trader putting up a large order of bitcoin to push up the price, and then withdrawing the order. This form of market manipulation is known as spoofing. 

Mt. Gox, the now-defunct exchange that handled 70 percent of all bitcoin transactions before collapsing in 2014, also manipulated its markets. Former Mt. Gox CEO Mark Karpeles admitted in court to operating a “Willy Bot.” An academic paper titled “The Willy Report” showed the bots were responsible for much of bitcoin’s 2013 price rise.

September 28, 2017 — Friedman LLP issues a report alleging that Tether’s USD balances ($443 million) match the amount of USDT in circulation at the time. Falling short of an audit, the report does not disclose the names or the locations of banks. 

According to the report, “FLLP did not evaluate the terms of the above bank accounts and makes no representations about the Client’s ability to access funds from the accounts or whether the funds are committed for purposes other than Tether token redemptions.”

August 7, 2017 — In a  blog post (archive), Bitfinex announces that over the next 90 days, it will gradually discontinue services to its U.S. customers. Effective almost immediately, U.S. citizens are no longer able to trade Ethereum-based ERC20 tokens, which are commonly associated with initial coin offerings (ICOs).

The news follows regulatory crackdowns in the U.S. (The previous month, the U.S. Securities and Exchange Commission issued an investigative report that deemed that tokens issued by the DAO—an investor-directed fund built on top of Ethereum that crashed spectacularly—were securities.) 

November 7, 2017 Leaked documents dubbed “The Paradise Papers” reveal Bitfinex and Tether are run by the same individuals. Up until now, Tether and Bitfinex insisted the two operations were separate, though they were widely suspected to be the same.

November 19, 2017 Tether is hacked when 31 million tether are moved from the Tether treasury wallet into an unauthorized Bitcoin address. Tether initiates a hard fork to prevent those funds from being spent.

After this hack, Tether notes on its website (archive) that redemption of USDT for real dollars is no longer possible. (Although, it is worth nothing here, that there is no record of anyone having redeemed their USDT for dollars at any point before this either.)

“Until we are able to migrate to the new platform, the purchase or sale of Tether will not be possible directly through tether.to. For the time being, though, we invite you to use the services of any one of a dozen global exchanges to acquire or dispose of Tethers for either USD or other cryptocurrencies. Such exchanges and other qualified corporate customers can contact Tether directly to arrange for creation and redemption. Sadly, however, we cannot create or redeem tether for any U.S.-based customers at this time.”

November 30, 2017 — Bitfinex hires scrappy New-York based PR firm 5W led by Ronn Torossian. 5W issues a press release saying that an “audit” from Friedman LLP is forthcoming. The agency also tells journalists they can view Bitfinex’s bank accounts if they sign an non-disclosure agreement first. No journalist takes the bait.

December 4, 2017 Bitfinex hires law firm Steptoe & Johnson and threatens legal action against critics. The exchange does not specify who exactly those critics are, but the obvious target is Bitfinex’ed, the cynical blogger, who continues to accuse Bitfinex of manipulating markets and printing more tether than it can redeem.

December 6, 2017 The U.S. Commodity and Futures Trading Commission subpoenas Bitfinex and Tether, Bloomberg reports. The actual documents are not made public.   

December 16, 2017 — The price of bitcoin reaches an all-time high of nearly $20,000, marking the end of a spectacular run-up. A year prior, one bitcoin was only $780.

December 21, 2017 Without making any formal announcement, Bitfinex appears to suddenly close all new account registrations. Those trying to register for a new account are asked for a mysterious referral code, but no referral code seems to exist.

December 31, 2017 — In the year 2017, Tether issued roughly 1.4 billion USDT.

January 3, 2017 — A change to Tether’s legal terms and conditions (archive) states: “Beginning on January 1, 2018, Tether Tokens will no longer be issued to U.S. Persons.”

January 12, 2018 After a month of being closed to new registrations, Bitfinex announces it is reopening its doors, but now requires new customers to deposit $10,000 in fiat or crypto before they can trade. Bitfinex does not officially say this, but customers also can no longer make fiat withdrawals of less than $10,000. 

January 27, 2018 — Tether parts ways with accounting firm Friedman LLP. There is no official announcement—Friedman simply deletes all mention of Bitfinex from its web site, including past press releases.

A Tether spokesperson tells CoinDesk: “Given the excruciatingly detailed procedures Friedman was undertaking for the relatively simple balance sheet of Tether, it became clear that an audit would be unattainable in a reasonable time frame.”  

January 31, 2018 — As the price of bitcoin plummets, tether issuance takes on a frenzied pace. In January, Tether issues 850 million USDT, more than any single month prior. Of this, roughly 250 million were created during a mid-month bitcoin price crash.

March 28, 2018 — Bitfinex weighs a move to Switzerland. Bitfinex CEO Jean-Louis van der Velde tells Swiss news outlet Handelszeitung, “We are looking for a new home for Bitfinex and the parent company iFinex, where we want to merge the operations previously spread over several locations.”

February 20, 2018 — Dutch bank ING confirms Bitfinex has an account there. Two members of parliament in the Netherlands lodge questions for the finance minister after Dutch news site Follow The Money first disclosed the relationship on February 14.

May 23, 2018 — Phil Potter steps down from his role as Bitfinex chief strategy officer. “As Bitfinex pivots away from the U.S., I felt that, as a U.S. person, it was time for me to rethink my position as a member of the executive team,” he says in a statement.

May 24, 2018 — Bloomberg confirms previous speculations that Bitfinex has been banking at Puerto Rico’s Noble Bank since 2017. Tether founder Brock Pierce is a cofounder of Noble Bank, along with John Betts, a former Wall Street executive.

Bitcoin is a small world, and these individuals had other past dealings. In 2014, Betts led a group called Sunlot Holdings to try and acquire the failed Mt. Gox. Pierce, along with former FBI director Louis Freeh were also involved in that effort. (Freeh’s name is relevant as it will appear again on this timeline.)

May 24, 2018 — The U.S. Justice Department launches a criminal probe into bitcoin markets. The focus is on practices like spoofing, where a trader tries to fake out other traders with a large buy or sell order, and wash trading, where a trader (usually a bot) simultaneously buys and sells assets to increase trading volume. The criminal probe will bring in other agencies, including the U.S. Commodity and Futures Trading Commission.

June 1, 2018 — Looking to reassure its customers, Bitfinex hires Freeh Sporkin & Sullivan (FSS), a law firm co-founded by Louis Freeh (the same Freeh who held an advisory role at Sunlot Holdings, the group that tried to acquire Mt. Gox) to confirm that Tether has $2.55 billion in its banks, enough to cover the USDT in circulation at the time.

This is not an official audit as FSS is not an accounting firm. Moreover, there may be a conflict of interest here. Eugene Sullivan, senior partner at FSS, is also an advisor to Noble Bank, where Bitfinex/Tether does its banking.

“The bottom line is an audit cannot be obtained,” Stuart Hoegner, Tether’s general counsel, tells Bloomberg. “The big four firms are anathema to that level of risk…. We’ve gone for what we think is the next best thing.”

June 25, 2018 — Bolstering suspicions that tether is being used to prop up the price of bitcoin, two researchers at the University of Austin, Texas, John Griffin and Amin Shams, release a paper titled “Is Bitcoin Really Un-Tethered?” 

“Using algorithms to analyze the blockchain data, we find that purchases with tether are timed following market downturns and result in sizable increases in bitcoin prices.” 

June 27, 2018 — Several Bitfinex customers report delayed and rejected wire deposits. A representative of Bitfinex named “Garbis” takes to Reddit (archive) to explain that the situation was caused by a change in banking relations.

October 1, 2018 — Reports circulate that Noble Bank is up for sale as a result of having lost several of its big customers, including Bitfinex and Tether. (I don’t know this for sure, but my guess is that Noble’s custodial bank in New York likely told Noble to end its relationship with Bitfinex.)  

October 6, 2018 — According to a report in The Block, Bitfinex appears to be banking at HSBC —a bank that has previously been fined $1.9 billion in 2012 for money laundering—under the shell account “Global Trading Solutions.” 

October 7, 2018 — Bitfinex pushes back on claims that it is insolvent. “Bitfinex is not insolvent, and a constant stream of Medium articles claiming otherwise is not going to change this,” Bitfinex writes in a blog post (archive). As proof, it publishes three bitcoin cold wallet addresses that collectively hold about $1.5 billion in assets.

October 10, 2018 — Four days after reports comes out that Bitfinex is banking at HSBC, Bitfinex temporarily suspends all cash deposits, suggesting that the exchange is once again on the hunt for a new reserve bank.  

October 14, 2018 — Amid concerns over Tether’s solvency and the company’s ability to establish banking relationships, tether’s peg slips again, this time to $0.92, according to CoinMarketCap, which aggregates prices from major exchanges. On a single crypto exchange Kraken, tether momentarily slips to $0.85.  

October 16, 2018 — Tether appears to be holding reserves at Bahamas’ Deltec Bank. According to earlier rumors, the bank account was set up by Daniel Kelman, a crypto lawyer who was actively involved in trying to free the remaining Mt. Gox funds.

Further, Bitfinex appears to be banking through the Bank of Communications under “Prosperity Revenue Merchandising,” a shell company created June 5, 2018. The Hong Kong bank is owned in part by HSBC and uses Citibank as an intermediate to send deposits to Deltec in the Bahamas.

October 24, 2018 — In a blog post (archive), Tether announces it has “redeemed a significant amount of USDT” and will now burn 500 million USDT, representing those redemptions. According to the firm, the remaining 446 million USDT in its treasury will be used as a “preparatory measures for future USDT issuances.”

November 1, 2018 — Tether confirms it is banking with the Deltec in the Bahamas and provides an attestation letter from the bank that the account holds $1.8 billion, enough to cover the amount of tether in circulation at the time. The attestation has a mysterious squiggly signature at the bottom with no name attached to it. 

November 30, 2018 — Recall that in May 2017, the U.S. Department of Justice together with the U.S. Commodity and Exchange Commission (CFTC) began looking into illegal manipulation of bitcoin prices. And then in December 2017, the CFTC subpoenaed both Tether and Bitfinex. Now federal prosecutors have supposedly “homed in on suspicions that a tangled web involving Bitcoin, Tether and crypto exchange Bitfinex might have been used to illegally move prices,” according to Bloomberg

November 27, 2018 — In a blog post (archive), Tether says its customers can once again redeem tether for actual dollars. But again, there are no reports or evidence of anyone having been able to redeem tether ever. 

December, 18, 2018 — Bloomberg reports it has seen Tether bank statements from accounts at Puerto Rico’s Noble Bank and the Bank of Montreal, taken over four separate months. The article suggests that Tether held sufficient dollars to back the tether tokens on the market. But again this is not a real audit. What stands out is that $61 million in the Bank of Montreal is listed under Stuart Hoegner, the firm’s general counsel.

December 31, 2018 — In the year 2018, Tether issued more than 1 billion tether.

January 16, 2019 — Bitfinex opens a data center in Switzerland, according to Swiss news outlet Handelszeitung. The report states that previously, Bitfinex was relying on Amazon cloud servers.

(This timeline is a work in progress. I’m updating it to continually to clarify and add more information. If you see anything that is missing, inaccurate or needs further clarification, let me know. You can also DM me on Twitter.)

News: ETC hit by 51% attack, Tron is a marketing machine, and India’s banks want nothing to do with bitcoin

screen shot 2019-01-12 at 10.30.16 pmEthereum Classic was hit by a 51% attack. A private pool got hold of more than half of the network’s computing power and used that to rewrite history and double spend nearly $1.1 million ETC, the platform’s native currency. Coinbase noted the attack on January 5, and followed with a detailed analysis of what happened.

Here is the irony: Ethereum Classic was founded on the principle of immutability, meaning good or bad, legal or illegal, whatever transactions happen on the network, happen, and you have to live with it. The project took over the pre-fork chain after Ethereum forked to reverse transactions in the DAO hack. If Ethereum Classic wants to stand on that hill, it may have to suffer the consequences, which so far, have not been terrible. ETC was $5 at the time of the attack and is now at $4.66.

Bitcoin saw its 10-year anniversary on January 9. CoinDesk threw a whopping party in New York City, which, judging by photos, was well attended by a lot of white men. For bitcoiners, 10 years is a mark of resilience. But it is worth noting, for the most part, you still cannot buy groceries or pay rent with bitcoin. And if you bought bitcoin a year ago ($14,000) and sold today ($3,700), you would have lost two-thirds of your investment — so much for store of value.

KodakOne announced it generated $1 million in “post-licensing claims” on a beta of its platform. Breaker’s David Z. Morris did a softball interview with KodakOne’s Cam Shell, omitting tough questions like, “How in god’s name did you manage to come out with a beta version of the platform while stiffing all your developers?” I followed up with a story of my own as did Decrypt Media’s Ben Munster and David Gerard, explaining that the $1 million is completely hypothetical money.

Justin Sun, the CEO of blockchain platform Tron, has been unveiled as technically incompetent. Tron recently bought file-sharing client BitTorrent, Now it wants to launch a BitTorrent token. But, in a Breaker interview (another story by Z. Morris, but this one, really good), former BitTorrent executive Simon Morris said there is no way Tron can handle the transaction volume. Simon also said Sun has no technical know-how and Tron is basically little more than a marketing machine.  

Rumors swirled a week ago that the co-CEOs of Chinese crypto miner maker Bitmain, Wu Jihan and Zhan Ketuan were going to step down. Turns out, the rumors are true, and Wang Haichao, Bitmain’s director of product engineering, has stepped in to replace them as CEO. In December, CoinDesk reported that Bitmain may be letting go of half of its 3,100 workforce. None of this bodes well for the company’s upcoming IPO.

If you want to trade bitcoin in India, you better keep that information well hidden from your bank. The country’s banks are sending out notices warning customers that they will close accounts without notice, if customers are found dealing in cryptocurrency.

The Texas Department of Banking released a supervisory memorandum on January 2 in regard to treatment of virtual currencies under the Texas Money Services Act. According to the memo, Texas considers pegged stablecoins, like tether, money, which means that anyone dealing with them may need to apply for a Texas money transmitter license.