NYAG to crypto companies: ‘Play by the rules or we will shut you down’

The New York attorney general issued a stern warning to crypto companies and crypto investors on Monday. Crypto firms doing business in the state must play by the rules or face consequences, she said. And to investors, she underscored the hazards of dabbling in the crypto markets.

The two-part warning from NY attorney general Letitia James comes on the heels of a settlement agreement with Bitfinex and Tether, wherein the two closely related companies agreed to pay an $18.5 million penalty. And an effort to shut down Coinseed, a crypto-trading app that prosecutors allege ignored securities laws and defrauded thousands of investors. 

An unstable market

In a warning to investors, the NY attorney general underscored the numerous risks of investing in bitcoin. Namely, volatility, difficulty in cashing out, conflicts of interest, market manipulation and limited protection from fraud.

“I’m warning New Yorkers and investors across the country that investing in this unstable market is not prudent and could cause devastating losses,” she said in a tweet.

“Many operators of virtual currency trading platforms are themselves heavily invested in virtual currencies, and trade on their own platforms without oversight. The financial interests of these operators may conflict with your interests,” she said.

She went on to add that “even if you purchase a well-established virtual currency from a more reputable trading platform, the price could crash in an instant.”

In effect she appeared to be saying that even if you are buying bitcoin on a regulated exchange, such as Coinbase in the U.S., your money could be here today, gone tomorrow.

Heed the law

In the second part of her warning, an industry alert, the NY attorney general warned crypto firms that deviation from the law will not be tolerated.

“If you don’t play by the rules, we will not hesitate to shut down your operations,” Attorney General James in a tweet.

Commodity broker-dealers, salespersons, and investment advisors in New York need to register with the Office of the Attorney General. And under the law, virtual currencies qualify as commodities—or securities. New York crypto firms that don’t register with the OAG, are in violation of the Martin Act.

Penalties include “permanent injunction from selling, offering to sell, or acting as a broker or investment advisor concerning securities or commodities in New York, as well as disgorgement of profits and restitution to victims.”

What does this mean?

Before the hammer comes down on Tether, which could cause a crash in the price of bitcoin and other cryptocurrencies, we can expect to see more warnings from regulators and prosecutors about the perils of investing in crypto.

If Tether is shut down and the price of bitcoin collapses as a result—regulators want to make sure that investors are well aware of the risks they face in buying bitcoin or any other cryptocurrency.

The NY attorney general isn’t the one done playing around. Treasury Security Janet Yellen issued a warning about bitcoin last week, saying it is inefficient for transactions and often used for “illicit finance.”

And if Gary Gensler is confirmed as the new chair of the SEC,* we may see a slap down on coins that fail the Howey test—including some of those listed on Coinbase, a firm that is planning to go public soon.

Updated March 2, 2021, to clarify that Gensler is Biden’s pick for chair. He still needs to be confirmed.

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News: NY gives Tether the boot, Tether leaks, Coinbase financials, MoneyGram dumps Ripple

February is coming to an end. I’m waiting to get vaccinated, so I can travel without worry again. Maybe I’ll go to some crypto conferences later this year? I still have fond memories of Coindesk’s Consensus in May 2018—when you could hear the rumble of lambos coming through midtown Manhattan—and sitting in a coatroom with scant Wifi and a broken water cooler. (It was a big coatroom, but a coatroom nonetheless, and that’s where non-Coindesk journalists were put.)

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So, what’s new? Tether now has close to 35 billion tethers in circulation—the last print was on Feb. 21 and nothing since. Also, the price of bitcoin is $46,300. That’s down 18% from last week. I’m not sure we will ever see bitcoin reach $57,000 again. The nonsense could ebb and flow for a while, but I do think the end is nigh for Tether.

NY shuns Bitfinex/Tether

Last week I said likely nothing earthmoving would happen in the NY attorney general’s probe of Bitfinex and Tether this month, other than maybe a status update, according to what Bitfinex said in its January letter to the court. I was wrong.

In an unexpected turn of events, Tether and Bitfinex reached a settlement with the NY AG.

According to the terms of the settlement, the sister companies agreed to a penalty of $18.5 million—without admitting guilt. They are also banned from doing business in New York, and they have agreed to an impossible level of transparency.

I wrote two stories on this—an overall story covering the details of the agreement and deeper observations. You should read both and also the settlement agreement, which is very readable. 

The bitcoiners are jumping for joy over the settlement because they interpret this to mean that Tether is liberated and we’re back to business as usual. This could not be further from the truth.  

The NY AG has given Tether enough rope to hang itself—with Tether agreeing to publish quarterly updates on what’s backing tethers. I mean, how crazy is this: Bitfinex and Tether are also supposed to reveal who their payment processors are. These payment processors are called shadow banks for a reason.

But the real punishment is not the fine imposed on Tether. The real punishment is that Tether and Bitfinex are banned from doing business in New York—the beating heart of finance and banking in the U.S.

They are prohibited from serving any person or entity in the state—defined as “any person known or believed to reside in or regularly conduct trading activity from New York,” and any business “that is incorporated in, has its headquarters in, regularly conducts trading activity in, or is directed or controlled from, New York.”

If the CFTC and the DoJ follow up—and you can bet they will—then Tether could soon be banned from the entire U.S.—a penalty much more significant than an $18.5 million fine.

In the meantime, the Tether printer has mysteriously paused. The settlement agreement was signed on Feb. 18, and the last Tether print was on Feb. 21 for 800 million USDT.

Why has Tether stopped printing? It may be that providing the transparency reports is proving more onerous than they expected. If they pop out another billion tethers, they have to show what is behind those—cash, a loan, crypto, or whatnot. 

But this is a problem. Tethers are the main source of liquidity on unbanked exchanges where the price of BTC is largely determined. If Tether stops printing tethers—or otherwise ceases to function—the price of bitcoin could take a serious dive.

Tether Leaks

Recently, a Twitter profile called @deltecleaks emerged and posted what looked like evidence of a database dump from Deltec, the Bahamian bank that Bitfinex and Tether have been using since 2018. That Twitter account was quickly suspended.

Then @LeaksTether appeared and posted several presumably leaked emails—conversations between Deltec and Tether execs.

These leaks are unverified. I am not completely convinced they are real, but I am also not convinced they are fake either.

Some of the alleged emails look interesting. Trolly wrote up a thread on one—in an email (archive) from Tether to Deltec, dated May 28, 2020, Tether asks for help in “presenting their reserves in the best possible light.” Their reserves, according to the email, are crypto and stakes in other crypto companies. Trolly calls this email a “crucial piece of the puzzle.”

Around the same time that the email was sent, crypto exchange Binance—one of Tether’s biggest customers—switched from BTC to USDT as collateral for leveraged trading. In return, Trolly believes Tether got a stake in Binance.

This could explain why USDT’s 1:1 peg never falters. Tether is in cahoots with the exchanges, who are in charge of maintaining the peg, Trolly believes.

In another allegedly leaked email, Tether talked about allowing the exchanges to “ignore the peg and move the price upwards.” If this is real, it means Tether is getting ever desperate to find ways to make money out of thin air.

Oddly, Deltec has removed the bios from their About Us page. (This is silly, because we have the archive.) And Tether has released its official word on the leaks, calling the leaks “bogus” and implying it is an extortion attempt.

Tether adds that “those seeking to harm Tether are getting increasingly desperate.” This is typical of Tether and Bitfinex. They blame “Tether FUDers” for all their problems—as opposed to being upfront and honest about their dealings.

David Gerard wrote a blog post, going into detail on the alleged leaks.

Coinbase releases financials

Coinbase is going public via a direct listing on Nasdaq under the symbol COIN. The San Francisco-based company published its  S-1 filing on Thursday, after confidentially submitting the filing to the SEC in December.

The filing lays out Coinbase’s finances, including a profitable 2020 driven by a huge surge in the price of bitcoin. Coinbase brought in $1.2 billion in revenue in FY2020 for a profit of $322 million—the first time it has turned an annual profit.

In 2019, Coinbase incurred a net loss of $30 million.  

Brian Armstrong, Coinbase CEO, also did well last year, taking home $60 million in salary, stock options and “all other compensation.” He also received $1.78 million to cover “costs related to personal security measures.”

There is no doubt that the skyrocketing price of bitcoin—boosted by 17 billion tethers issued in 2020 alone—helped Coinbase’s profits. But there are many unknowns ahead.

If the price of BTC continues to drop, if Tether gets taken out by the DoJ, or if the SEC cracks down on some of the coins Coinbase lists—many of which appear like they may not pass the Howey test—Coinbase profits could take a hit.

No doubt, Coinbase is timing its listing carefully. The exchange has received more than $500 million in funding, with backers including Andreessen Horowitz, Y Combinator and Greylock Partners. And the VCs will want to dump their Coinbase shares on retail suckers before the bitcoin market collapses.

MoneyGram dumps Ripple

MoneyGram was supposed to have been a big success story for Ripple. Now, it’s just another sign of Ripple’s failures.

Ripple agreed to invest up to $50 million in the money transfers business. In return, MoneyGram was shilling Ripple by saying it would use the startup’s XRP currency and platform in its back office for moving funds across borders.

MoneyGram was essential because it gave XRP a supposed use case, so Ripple execs could argue their business was legit and not simply a way for them to line their own personal pockets with $600 million.

Last year, MoneyGram received $38 million from Ripple, representing about 15% of its adjusted earnings. But after the SEC announced it was suing Ripple, charging that XRP was an unlawful securities offering, MoneyGram stepped back, saying it faced logistical challenges in using the platform—as well as legal risks.

Now MoneyGram is putting its Ripple partnership on hold. That means MoneyGram, which saw declining revenues from 2015 to 2018, is losing a key income stream. (WSJ, MoneyGram PR)

Other newsy bits

After stiffing his previous defense team, Reginald Fowler still appears to have no defense team. He was given until Feb. 25 to line up a new law firm, but so far, no attorney has filed a notice of appearance with the court. (Court filing)

A rumor is afoot that the SEC is investigating Elon Musk for his dogecoin tweets that helped pump the market. Musk says a probe would be “awesome.” More lulz for Musk. (Teslarati)

Fedwire, the system that allows banks to send money back and forth, went down for several hours on Wednesday. Bitcoiners thought this was marvelous, because bitcoin is decentralized, see? How quickly they forget bitcoin is valued in USD. (CNBC)

Grayscale’s GBTC premium went negative for the first time in years. (It was close to 40% at one point in December.) When the premium is down, the arbitrage opportunity for institutions in buying bitcoin dries up—and that means less real money flowing into the system. (Hedge funder Harris Kupperman wrote a blog post last year explaining how the arb works.) (Decrypt)

FT poked fun of Anthony Pompliano, cofounder of Morgan Creek. Pomp is forever shilling bitcoin but his tweets have been inconsistent. At one time he called Tether “the biggest racket ever.” Now he has changed his tune. Apparently, he’ll say whatever to make “number go up.” (FT)

Treasury Secretary Janet Yellen is warning people about bitcoin. She doesn’t think it’s used widely as a payment system. “To the extent it is used, I fear it’s often for illicit finance. It’s an extremely inefficient way of conducting transactions, and the amount of energy that’s consumed in processing those transactions is staggering.” (CNBC)

Jack Dorsey’s Square purchased another 3,318 bitcoins for $170 million. This adds to Square’s October purchase of 4,709 bitcoins. The company has already lost $10 million on its latest investment. (Coindesk, Square press release)

The Securities and Exchange Board of India tells company owners: before you IPO, sell your crypto. (Economic Times India)

Kraken is reportedly in talks to raise new capital. (Coindesk)

NYAG/Tether, Bitfinex settlement reveals commingling of funds, years of shenanigans

I wrote a quick article this morning about the New York attorney general settlement, wherein Bitfinex and Tether agreed to pay $18.5 million in penalties, stop servicing New York customers, and submit quarterly transparency reports. 

But there are more details to highlight. Namely, the settlement agreement reveals the games Bitfinex and Tether have played over the years—games they will keep on playing until someone puts an end to their shenanigans. 

It also reveals how the firms have long misled the public about Tether’s reserves. From 2014 until late February 2019, Tether advertised that tethers were fully backed 1:1 by cash in some bank accounts somewhere—but that was not true. 

Tether now has 34 billion tethers in circulation—a number that is growing by leaps and bounds every day.

Here are my random thoughts and notes from the 17-page agreement.

Phil Potter

In the agreement, the office of the NY attorney general writes: “During the time period relevant to the OAG’s investigation, and as late as early-to-mid 2018, one of Bitfinex and Tether’s senior executives lived in, and conducted his work from, New York.”   

I’m assuming this is Phil Potter, Bitfinex and Tether’s chief strategy officer, and one of its three top execs. Potter allegedly stepped away from the company in mid-2018, about the time the NY attorney general started its investigation. Though the public did not learn of the investigation until April 2019.

The fact that Bitfinex and Tether had one executive and large customers in the state—and no BitLicense—opened the door to the NY attorney general’s probe. Per the terms of the settlement, Bitfinex and Tether can no longer do any business in the state, which means New York crypto firms can no longer use tethers. 

Previously, although Bitfinex and Tether claim to have barred New York residents (retail investors) in January 2017, they still served eligible contract participants, meaning individuals or trading firms with assets in the millions.

Commingled funds

Tether and Bitfinex lost their banking in March 2017 when they were cut off by Wells Fargo, a correspondent bank. Subsequently, their banks in Taiwan also dumped them.  

Two months later, when Tether had 108 million tethers in circulation, Bitfinex opened an account at Noble Bank in Puerto Rico. (Noble Bank, by the way, was co-founded by Brock Pierce, the child star who also created Tether.)

Tether, however, did not open an account at Noble—or at any bank—until September 2017, according to the office of the NY attorney general’s findings.

Instead, Tether deposited the “vast majority” of its cash into a trust account held by its general counsel, Stuart Hoegner, at the Bank of Montreal in Canada. The account never held more than $61.5 million dollars.

The rest of Tether’s money was mixed in with Bitfinex customer money at Bitfinex accounts at Noble Bank. Between June 1 and September 2017—Bitfinex held hundreds of millions of dollars in Tether’s funds in its accounts, the prosecutor said.

Commingling of funds is a terrible idea—legally and logistically. (Failed crypto exchange QuadrigaCX also commingled funds. And its now-allegedly-deceased CEO used customer money like his own personal slush fund.) 

Mystery NY trading firm

Because Tether had no bank account between March and September 2017, it could not directly take money for tethers. At the same time, according to the NY attorney general, “neither the Tether website or Bitfinex allowed for the direct purchase or exchange of tethers in exchange for any other virtual currency, including the two most popular virtual currencies, bitcoin and ether.”

Between June and September 2017, “Bitfinex’s Noble Bank account received USD deposits from only two institutional trading firms, one of which was located in New York. Neither of those firms purchased tethers directly from Bitfinex or Tether during this time period.”

This part of the NY attorney general’s findings puzzles. Why were these trading firms sending money to Bitfinex if they were not getting tethers in exchange? What were they getting instead? And who was the New York firm?

Mike Novogratz’s Galaxy Digital is based in New York. And we know it was onboarding as a Bitfinex customer in October 2018, based on court documents that point to letters Galaxy sent to Bitfinex. But it is not clear if Galaxy was a customer of Bitfinex or Tether in 2017. (In April 2019, Novogratz claimed Galaxy had “zero exposure” to Bitfinex and Tether.)

Staging the Friedman audit

According to the office of the NY attorney general, until September 15, 2017, the only U.S. dollars held by Tether backing 442 million tethers in circulation was $61 million at the Bank of Montreal. 

Whatever other money Tether had was held in Bitfinex accounts.

In the summer of 2017, rumors were afoot that tethers were not fully backed. To quash those rumors, Tether and Bitfinex arranged for accounting firm Friedman LLP to perform an attestation on September 15, 2017.

They had to move quickly to set things up though.

On that morning, Tether opened an account at Noble Bank. And Bitfinex transferred $382 million from Bitfinex’s account at Noble Bank into Tether’s account at Noble Bank. Friedman conducted its verification of Tether’s assets that evening.

“No one reviewing Tether’s representations would have reasonably understood that the $382,064,782 listed as cash reserves for tethers had only been placed in Tether’s account as of the very morning that Friedman verified the bank balance,” the NY attorney general wrote. The attestation included the money at the Bank of Montreal as well. 

Friedman’s relationship with Bitfinex ended a few months later. 

It’s never a good sign when your auditor quits. Worse, there was no official announcement—Friedman simply deleted all mention of Bitfinex from its website, including past press releases.

Massive loss of funds

In 2017 and 2018, Bitfinex began to increasingly rely on Crypto Capital to handle its customer deposits and withdrawals. Oz Yosef, was Bitfinex’s contact at the Panamanian payment processor.

By 2018, Crypto Capital held over $1 billion of Bitfinex funds. That’s when the real trouble started.

In April 2018, the government of Poland froze a Crypto Capital bank account holding $340 million. Adding to that, Oz told Bitfinex that a Crypto Capital account in Portugal containing $150 million of Bitfinex client funds also had been frozen. 

These events threw Bitfinex into a liquidity crisis. And in the summer of 2018, Bitfinex began dipping into Tether’s cash reserves to fund customer withdrawals. Bitfinex told customers that rumors of its insolvency were false, but behind the scenes, the crypto exchange was pleading with Oz to release the money. 

(Later we learn that another $350 million in missing Crypto Capital funds were linked to 60 accounts held by Arizona businessman Reginald Fowler, who was indicted in April 2019 for bank fraud. Some of these accounts were frozen in 2018. Oz’s sister, Ravid Yosef, was also indicted for her role in assisting Fowler set up those accounts. She is still at large.)

(And in October 2019, Crypto Capital President Molina Lee was arrested by Polish authorities in connection with laundering money for Columbian drug cartels via Bitfinex.)

Deltec Bank & Trust

In October 2018, Bitfinex and Tether ended their relationship with Noble bank. Soon after, they announced they were banking with Deltec in the Bahamas. 

In a letter dated Nov. 1, 2018, Deltec said Tether’s account held $1.8 billion, enough to back the tethers in circulation at the time. The letter was signed but had no name under the signature. The signature itself was illegible.

The following day, Tether began moving hundreds of millions of dollars out of its bank account at Deltec to Bitfinex’s bank account at Deltec. And as part of a “loan arrangement,” between the two closely related firms, Tether assumed Bitfinex’s losses on its own balance sheet. (We can’t be sure of the total loan amount, but an estimate is $750 million.) 

Tether’s misrepresentation that tethers were fully backed continued to Feb. 2019 when it updated its terms of service to say that tethers are backed by “traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities.”

Bitfinex says it paid off the loan to Tether in January, and the firms now claim tethers are fully backed—but the question is, backed by what? Loans? Bitcoins? We’ll find out in 90 days when Tether and Bitfinex publish their first transparency report. Per the terms of the settlement agreement, the firms will need to publish these reports quarterly for two years.

Also, $18.5 million—the amount of the settlement—is no small number. We have no idea how much cash Tether and Bitfinex actually have on hand.

The bitcoin community is calling the settlement a win for Tether and Bitfinex. They say the fine is nothing but a slap on the wrist. In reality, it’s another way for Tether and Bitfinex to buy time. The NY attorney general has set its trap; now we wait.

Updated Feb. 24 to note that Novogratz claimed zero exposure to Bitfinex and Tether in 2019.

Also read: NYAG to crypto companies: ‘Play by the rules or we will shut you down’

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Tether, Bitfinex to pay $18.5M to NYAG, cease trading in New York

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.

Also read: NYAG/Tether, Bitfinex settlement reveals commingling of funds, years of shenanigans

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News: MicroStrategy needs more cowbell, Tether surpasses $34B, those laser eyes, Tether collapse doomsday scenario

I nearly ventured to Austin Wednesday, but my flight was canceled due to the storm, havoc, and general disaster in the area. I found another flight later in the day and was headed out the door, when I thought, nah. Turned out to be a good decision, since I probably wouldn’t have survived more than a day without wifi.

Last week, Tether issued another 2.2 billion tethers, so you can buy bitcoin with real cash at a higher price. As of today, Feb. 21, there are now $34 billion worth of tethers in circulation—all backed by Tether’s good word. Oh, and they just printed another 800 million this morning.

More lulz for Mr. Musk—this time a double entendre.

Bitcoin is over $57,000. Why? Because it is a Ponzi scheme, and people who put their money into a Ponzi or MLM scheme get excited when numbers go up because they think they are getting hilariously rich. When bitcoin reached $1 trillion market cap earlier this week, it was an occasion for celebration in the bitcoin world. All of the bitcoiners on Twitter gave themselves laser eyes—in the hopes of pushing bitcoin to $100,000—and posted pictures of raw, juicy steaks.

Market cap, as I have explained, is a delusional number when it comes to crypto. A trillion-dollar market cap assumes everyone who owns bitcoin bought it for $55,000 and could sell it for that. That is nowhere near the truth. Many bitcoiners bought bitcoin for a fraction of what it is today. And if everyone sold at once, the market would collapse. It’s all fantasy.

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Okay, let’s talk about bitcoin’s newest crazy god, who also has laser eyes on his Twitter profile.

MicroStrategy: More cowbell

Every single day, MicroStrategy chief Michael Saylor is on Twitter—or elsewhere—shilling bitcoin. This has literally been his new day job since he staked the future of his entire company and his reputation on “number go up.” His tweets are bizarre and often make no sense. Lately, he has been taking random quotes from famous people and attributing them to bitcoin.

In his latest move, Saylor has taken MicroStrategy deeper down the debt hole. Last week, the company sold $1.05 billion in convertible senior notes, which it plans to invest in more bitcoin. The notes mature in February 2027. (Decrypt, MicroStrategy PR)

This is on top of the firm’s $650 million bond offering in December, which MicroStrategy also used to buy bitcoin. Those notes mature in December 2025. The company owns 72,000 bitcoin per a February regulatory filing. And don’t forget, Saylor has his own personal stash of bitcoin, though we don’t know how much he still has—or if he was selling when MicroStrategy was buying.

If the price of bitcoin collapses, MicroStrategy could literally go bankrupt. But remember, Saylor owns 70% of the company’s voting stock, so he calls the shots. The other MicroStrategy board members can only sit back and watch in horror.

Big companies buying bitcoin and putting them into cold storage means more bitcoin getting pulled out of circulation so that the already small supply of circulating bitcoin grows smaller and the market becomes easier for whales to manipulate—even if those whales bought their hoards of BTC via alias accounts funded with tethers.

So what if MicroStrategy puts another $1 billion into bitcoin and Tesla buys $1.5 billion worth? Tether issues that much fake money in a week. Meanwhile, all the real cash in bitcoin goes out the door as miners sell their 900 newly-minted bitcoin per day for fiat. Bitcoin itself generates no revenue. It’s simply investor money going in one end and out the other.

Jorge Stolfi, a Brazilian computer scientist, estimates that the accumulative amount that bitcoin investors have lost so far is at least $15 billion. When you invest in bitcoin, you immediately lose money, just like all those who invested in Bernie Madoff’s fund, though they went on for years thinking they were making money.

NYAG / Bitfinex—status update

We should be hearing something soon on the New York attorney general’s investigation into Bitfinex/Tether, but probably nothing big, or earth moving—not yet at least.

Bitfinex’s law firm Steptoe filed a letter on Jan. 19, saying Bitfinex/Tether needed more time to send in their documents. Here is what they said exactly: “We will plan to next contact the Court in approximately 30 days to either provide a final status update or to schedule a conference with the Court to discuss any open items.”

The office of the attorney general still has to take a position on the material it receives, and Bitfinex boasted that it had spammed them with some 2.5 million documents. My guess is that Bitfinex, like failed Canadian crypto exchange QuadrigaCX, hasn’t kept accurate records of their financial dealings and they are flying by the seat of their pants. Quadriga operator Gerald Cotten kept no books, commingled funds, and viewed customer money as his personal slush fund.

Tether doomsday scenario

Some people—Nouriel Roubini in particular—have predicted that Tether will get taken down this year, though it will take a much larger effort than the NY AG alone. Still, what will happen if Tether’s operators are arrested and its bank accounts seized? If Tether collapses, we may see something like the following unfold:

  • Panic ensues on offshore exchanges, like Binance and Huobi, as traders begin dumping USDT and buying up BTC at any price.
  • The price of BTC on banked vs. unbanked exchanges begins to diverge. BTC goes up on unbanked exchanges and drops on banked exchanges, like Coinbase, as people start selling their BTC for cash en masse.
  • Banked exchanges face liquidity crises as they can’t keep up with withdrawals. We start to see system outages and paused trading—similar to what happened with Robinhood on Jan. 28.
  • The price of BTC collapses to the point where bitcoin miners cannot pay their monstrous power bills.
  • At some point, the bitcoin hash rate will drop, and bitcoin will go into a death spiral. When miners can’t pay their electric bills, they unplug from the network. This leaves bitcoin vulnerable to attacks, and the virtual currency becomes worthless.

Mind you, bitcoin will never die off completely. Unlike other Ponzi schemes, which disappear when they collapse, bitcoin will spring back to life from time to time. This is the fourth—and by far the biggest—bitcoin bubble since 2009.

Bitcoin’s sick energy consumption

After Tesla announced it bought 1.5 billion worth of BTC, bitcoin’s grotesque energy consumption has come under fire. Based on some estimates, the network consumes as much energy as the entire country of Argentina with 45 million people. Christmas lights are literally a more productive use of electricity to bring joy to people’s lives than bitcoin. (This is a joke. In 2018, bitcoiners claimed that Christmas lights consumed more energy than bitcoin.)

Bitcoiners like to argue this is all green energy, but that is simply not true. Two-thirds of bitcoin mining is based in China, a country that relies heavily on coal-fired electricity. Some miners in the Sichuan province get power from hydro, but only during the wet season. The rest of the time, they turn to fossil fuels. (My blog)

And for those still claiming bitcoin uses clean energy, Trolly had a few more points to add: 

  • The Three Gorges Dam—a gargantuan structure straddling the Yangtze River in China’s Hubei province—has long been criticized for its environmental impact and displacement of two million people. The dam generated a record 112 terawatt hours of electricity in 2020. According to Digiconomist, bitcoin consumes 79 TWh of electricity per year—more than half that.
  • You need one million Bitmain’s Antminer 19s Pros to reach the current bitcoin hashrate of 110M TH/s. That means there are at least one million nodes on the bitcoin network—more if miners are using Bitmain’s outdated S17 model. These machines are good for two years max before they get tossed into landfills and replaced with more efficient ASIC rigs.
  • Bitcoin processes 300,000 transactions per day. The all-in cost of a single bitcoin transaction is $20 for infrastructure and $40 for electricity. Miners currently break even when the BTC price is $20,000. (That’s based on energy and other costs.)

Coinbase behind Tesla’s BTC purchase

Coinbase facilitated Tesla’s recent $1.5 billion purchase of bitcoin, according to The Block. An unidentified source told the outlet that the San Francisco-based crypto exchange made the purchase on behalf of Tesla over the course of several days in early February. The price of BTC in the first week of Feb. was around $38,000.

Similar to how it helped MicroStrategy make its big BTC purchase, Coinbase broke up Tesla’s order into small pieces and routed those to over-the-counter trading desks to minimize the impact on the overall bitcoin market.**

Coinbase wrote up a case study on how it bought bitcoin for MicroStrategy.

Motley Fool’s ship of fools

Another ship of fools has headed off to sea.

The Motley Fool is a private financial and investing advice company based in Alexandria, Virginia. It’s been around since 1993, so you would think they actually do their due diligence. Apparently not. Also, regular folks rely on them for sage investment advice, which is why I was shocked to learn Motley Fool was putting $5 million into bitcoin. (Fool announcement)

Motley Fool justified the investment with these three reasons:

  1. We believe it will store value more effectively than gold over the long term.
  2. We believe it may become a medium for transactions, as/if pricing stabilizes in the decade ahead.
  3. We believe it can act as a productive hedge against inflation.

All three reasons are blitheringly stupid. Medium for transactions? If the price stabilizes in the future? Name one time in the past decade where the price of bitcoin has stabilized. As I explained earlier, the more people who hodl bitcoin, the less stable it becomes. It will never be a stable asset. And you can’t call bitcoin a “store of value” if you get only 20% of what you paid for it.

At least one sensible Motley Fool contributor explained why investing in bitcoin is a horrible idea.

GameStop hearing #1

I spent two hours on Thursday watching the first half of a five-hour GameStop House Financial Services Committee hearing. Most of the questions were not that interesting. This is the first of three hearings. I’m not sure I can watch anymore, unless someone from the SEC, such as Gary Gensler, joins in on the questioning.

The nut is that Robinhood CEO Vlad Tenev apologized to his users for stopping customer trading during the peak of the madness, but says he wasn’t colluding with hedge funds. “We don’t answer to hedge funds,” he said. “We serve the millions of small investors who use our platform every day to invest.” (NPR)

He also would not admit there was a liquidity problem when he limited trades in January.

David Portnoy doesn’t like Vlad’s hair. He thinks it makes him look untrustworthy.

And Keith Gill (Roaring Kitty), who made $48 million from a $53,000 investment in GameStop, came off as a likable, honest guy. Although, he may need those profits to defend himself against at least one proposed class-action. (Complaint)

Other newsy bits

Cynthia Lummis (R-WY) added laser eyes to her Twitter profile pic, confounding the political press and turning bitcoiners into a bunch of cooing babies (Slate)

A few years ago, the SEC shut down the entirely fraudulent ICO market. A sudden shutdown of the DeFi money market (DMM) may be the start of the next regulatory wave. (David Gerard)

The U.S. Treasury Department accused crypto payments platform BitPay of facilitating over 2,100 transactions with individuals in sanctioned nations. BitPay will pay $500,000 to settle the charges. (Coindesk, enforcement notice)

JP Morgan calls Tether an unbacked wildcat bank. “A sudden loss of confidence in USDT would likely generate a severe liquidity shock to Bitcoin markets, which could lose access to by far the largest pools of demand and liquidity,” analysts said. (Bloomberg)

FTX, one of Tether’s biggest customers, claims on Twitter that its volume and customer numbers are real. All you need is an email to set up an account—no KYC for tier 0, 1 accounts with up to $9,000 USD daily withdrawal,* which means anyone can set up any number of alias accounts. Trading volume is a meaningless number due to robot trading and probably wash trading.

Stephen Diehl on Bitcoin mining: “The Crypto Chernobyl.” (blog post)

BitMEX’s Arthur Hayes—who was indicted in October and is still at large—has resurfaced to argue the Robinhood shutdown was orchestrated by financial elites. This is a sign that retail investors should buy crypto, he said. (Cointelegraph) (Tweet)

*Updated to note FTX has no KYC on both tier 0, 1 accounts. In an earlier version of this newsletter, I said you did not need KYC to withdraw up to $1,000. But it’s actually up to $9,000 per day for high-volume accounts.

**Updated March 2: An earlier version of this story incorrectly stated that Coinbase routed the Tesla order to OTC desks, so as not to “crash” the price of BTC. This is incorrect. A large order would lift the market. Story has been altered to reflect that.

Feature image: Ship of fools depicted in a 1549 German woodcut

News: Bitfinex pays off Tether loan, Tether mints $1.8B in a week, Nigerian central bank cuts off BTC services, Elon Musk tweets send DOGE soaring

It’s Feb. 7, a year since the pandemic entered the US, and bored people with lots of stimulus money are gambling it all on crypto casinos and stocks. And to get things extra frothy, Tether spit out more than $1.8 billion in tethers last week—enough to push its market cap over $28 billion.

Amazing how things have evolved. It was big news in December 2017 when Tether reached its first $1 billion in tethers. Now the BVI-registered company is issuing that kind of money every few days. Why? Because they can. So far, nobody has stopped them. Also, because they have to. If they were to stop now, the price of bitcoin would collapse, exposing Tether for what it is—a massive fraud, the likes of which nobody has seen since Madoff. 

The price of bitcoin is now over $40,000, up from $32,800 a week ago. So if you bought bitcoin last week, you made money without ever having to get up off the living room couch. Just remember that you have to actually cash out via a banked exchange like Coinbase to realize those gains.

Bitfinex says it’s paid off Tether ‘loan’

Bitfinex announced on Friday that it’s paid off the remaining $550 million balance of its loan to sister company Tether in one fell swoop—in fiat currency and with interest.

Where did the money come from? Bitfinex won’t tell us. (The announcement was only three sentences long.) They just want us to believe—based on their word alone—that the entire matter is behind them. So I guess the New York attorney general can drop its probe?

That loan was at the center of the NY AG’s investigation into Bitfinex. After losing access to $850 million via its payment processor Crypto Capital, Bitfinex gave itself access to $900 million of Tether’s reserves—without telling its customers. And that’s after years of Tether saying that tethers were backed 1:1 with real dollars.

Nobody knows for sure how much of Tether’s money Bitfinex helped itself to. Bitfinex indicated—here and here—that it had previously paid off $200 million, leaving us to assume that the total loan amount was $750 million. But Bitfinex isn’t being upfront about how much it borrowed. And thus far, we have no audits, loan documents, or other evidence to prove the repayment was anything more than a story-book fantasy.

The fact of the matter is that Bitfinex was insolvent in 2018. Rather than crash and burn, it helped itself to Tether’s customer’s money to cover up for its massive losses. Are we to believe now that those losses magically disappeared? Just as we are to believe that tethers are now fully backed?

Let’s face it, Bitfinex probably started going down the tubes as early as August 2016 after it was hacked to the tune of $72 million worth of BTC and then lost its banking. The company’s operators have been playing a game of cat and mouse ever since. (See my Tether timeline for more details on past shenanigans.)

Mainstream media gets wise to Tether

Tether is getting more coverage in mainstream media. In his WSJ story, “What’s behind the bitcoin bubble,” columnist Andy Kessler covers all the Tether basics, including the NY AG probe and even the “Bit Short” article by Crypto Anonymous. (That story really is getting around, isn’t it?)

Word is getting out. Reporters are asking questions about Tether, and they are starting to document the funny business. Probably as a way to get up to speed on the topic before the shit really hits the fan—a day we all know is coming, wherein Tether gets exposed for what it really is.

In contrast, crypto media is trying desperately to fight the “Tether FUD.” Earlier, we had a reporter from The Block going on a podcast to try and convince us those billions of tethers are all backed with real cash. And I’m seeing nonsensical stories like this one in Bitcoin Magazine on “debunking the Bit Short.” Here’s one in another crypto rag about how the loan repayment will put an end to Tether FUD.

Bitcoiners and many crypto outlets—that are directly funded by the crypto industry—believe that Tether needs to be protected at all costs. How do you defend a company that won’t tell you what tethers are backed by? That refuses to submit to an audit? That is being investigated for fraud by one of the most powerful attorneys in the nation? You can’t, but they do.

I should mention that Jeremy Allaire has also come forward as a Tether apologist. Allaire is the CEO of Circle, which is part of the Centre Consortium, a collaboration with Coinbase that manages the USDC stablecoin.

USDC is growing rapidly. There are now $6.5 billion worth of USDC in circulation. The regulated stablecoin gets monthly attestations—but no full audit. Grant Thornton’s attestations say reserves are in cash and “other approved investments.” We don’t know what those investments are or who approved them. And it’s December attestation is over two weeks late, compared to earlier months. I’m sure it’s nothing to worry about though.

Nigerian banks cut off crypto services

The Central Bank of Nigeria (CBN) ordered banks on Friday to close the accounts of anyone involved in crypto services and to stop facilitating payments for crypto exchanges.

Bitcoin’s popularity in Nigeria was driven largely by a Russian Ponzi scheme called MMM. This connection, along with a few fraud causes, made African governments and regulators leery of crypto. The CBN warned banks in January 2017 that bitcoin and other cryptos were used primarily for money laundering and funding of terrorist activities. And then in February 2018, CBN warned Nigerian citizens they would not be able to get legal help if the crypto markets collapsed.

The CBN’s recent move impacts fiat on- and off-ramps, but peer-to-peer platforms like OTC desks remain unaffected. As a result, Binance temporarily suspended deposits in Nigeria naira. (Binance letter, Coindesk)

Musk tweets about DOGE, number go up

Dogecoin—a coin that was designed as a joke—made the WSJ after billionaire Tesla chief Elon Musk kept tweeting about it, causing the price to go parabolic.

Musk is doing this for the lulz. Watching people scramble to buy an asset after he tweets about it is his idea of amusement. Imagine, if you will, a rich guy throwing dollar bills onto the street and watching poor, wretched fools dive for it. This is Musk’s sense of humor.

The SEC has warned him that he can’t tweet things about Tesla for the lulz, so he is now applying the same douchebaggery to something he isn’t interested in simply because he can.

Kiss frontman Gene Simmons (the guy with the tongue) also announced he was stocking up on DOGE because he thinks it will increase in value. Why not? If Musk keeps tweeting about it, certainly number will go up.

Other newsworthy stuff

Trolly wrote a blog post about how the “Bitcoin economy” is just an illegal casino run by the mob. Leverage is the lifeblood of crypto, he says. And regulated exchanges like Coinbase are feeding the monster.

David Gerard wrote a blog post spelling out how Tether works for those who are still getting up to speed.

Yearn DeFi was exploited in the usual manner—smart contracts and not-so-smart people. A hacker made off with $2.8 million after draining $11 million from one of Yearn’s deposit pools. For the uninitiated, Yearn.Finance is a “yield aggregator” where users deposit funds in pools, which are then deployed to other DeFi protocols to generate yields for those depositors. DeFi—or decentralized finance—is based on smart contracts—bits of “unstoppable” code that run on a blockchain. (Cointelegraph)

German prosecutors have confiscated more than $60 million worth of bitcoin from a fraudster. But they can’t access the funds because Mr. Fraudster won’t give them the keys. How do you confiscate bitcoin if you have no access to it? (Reuters)

Miller Value Funds, run by veteran hedge fund manager Bill Miller, may invest up to $337 million in GBTC through its flagship fund, the Miller Opportunity Trust. GBTC’s premium to NAV is currently 6.5% — not the great arb opportunity it once was, so I’m wondering how much they will actually invest. (Decrypt)

Antonije Stojilkovic, a Serbian man, along with his coconspirators allegedly defrauded crypto investors out of more than $70 million. He has been extradited to the US. (DoJ press release)

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News: Tether surpasses $26B, Elon Musk pumps BTC, Gregory Pepin’s magic trick

It’s been three years since the last bitcoin bubble. And as I write this newsletter, I can’t help but feel this is getting so tiring. Where are the regulators? Why did they not step in long ago to put an end to so much nonsense in the crypto space? Things just seem to keep getting crazier.

Tether has now surpassed 26 billion tethers—after minting 1.3 billion last week alone. How does an outfit get away with creating $1.3 billion worth of a stablecoin without being subjected to an audit? Without a cease and desist? It’s been more than two years since the NY attorney general started investigating them.

Bitcoin slipped below $30,000 on Wednesday, but then climbed to $37,800 on Friday after Elon Musk added #bitcoin to his Twitter bio, apparently just for the lulz. The move sparked $387 million worth of short liquidations on Binance, Bitfinex, BitMEX, ByBit, Deribit, FTX, HuobiDM and OKEx.

Today Bitcoin is back down to $32,800.

In general, it’s been a week of madness in the markets. Reddit group WallStreetBets has been pushing up lousy stocks like GME and AMC to squeeze the shorts and wreak havoc on certain hedge funds. And to take the joke even further, they even pushed up the price of dogecoin 800% in a 24-hour period. Unsurprisingly, the DOGE pump was fueled mainly by tethers.

Still sore about that Bit Short story?

Are tethers backed? Nobody will give you a straight answer and certainly not Stuart Hoegner, Tether’s general counsel, who spends all day retweeting tweets and trying to convince folks that tethers are worth real money.

He is apparently still upset about the anonymous “Bit Short” article, which I mentioned in my previous newsletter. He keeps saying it’s all FUD, and now claims it’s not only hurting Tether, but all of bitcoin. Of course, the reason the story is gaining popularity is because it is largely true.

“But beyond its false claims about @Tether_to, this post really amounts to an attack on the entire cryptocurrency ecosystem. Bitcoin has a market cap of above US$600B, and the growing number of major institutions investing in bitcoin is a tribute,” he said in a Twitter thread.

Hoegner keeps complaining. (Also, we already know market cap is nonsense when it comes to bitcoin and the reason institutions have been jumping in is mainly because they see an attractive arb opportunity via GBTC.) But the one thing Tether won’t do is come clean and audit its reserves, which would put the whole matter to bed once and for all. Do those reserves consist of cash that Tether got from real clients? Or is Tether simply buying bitcoin with tethers and selling them for USD on OTC desks and banked exchanges?

Instead of giving out real answers, Stuart and Paolo and their friends at Deltec keep trying to obfuscate, distort, and push the blame on “disbelievers” and “salty nocoiners.”

Gregory Pepin’s disappearing act

Tether is a perpetual PR disaster machine. After delivering a disastrous interview with Laura Shin, where he tries to convince listeners Tether is legitimate, but comes off sounding like a used car salesperson, Gregory Pepin, the deputy chief executive officer at Deltec (where Tether does its off-shore banking), suddenly disappeared from Deltec’s website. But after Twitter noticed and started making jokes, he suddenly reappeared again.

Clearly, Deltec was monitoring Twitter and thought, well, maybe removing Pepin from the website wasn’t such a good idea after all? So they put him back. But his brief disappearance brought up questions: Were Pepin’s colleagues upset with him? Did he even consult with his colleagues before he went on the podcast? Surely they would have worked out a plan for what he would say and all come to an agreement on it. Did he forget to follow the plan? 

For the last time, Tether is NOT regulated

Tether keeps telling everyone that it’s regulated. Well, it’s not. No government agency is overseeing Tether and making sure they behave properly, which is why Tether and its sister company Bitfinex have been for years doing whatever they want. They make up the rules of the game as they go along, and put forth whatever nonsense narrative they feel like, simply because they can.

JP Kroning wrote a piece in Coindesk, where he points out that Tether is not regulated. Tether has made numerous claims that it is regulated because it is registered with FinCEN. But “registered” and “regulated” are two different things. “Tether isn’t regulated by FinCEN,” Kroning writes. A registration is not a seal of regulatory approval, and it shouldn’t be advertised as such. “Yet, this is what Deltec and Tether executives seem to be doing on Twitter and in podcasts.”

Ripple responds to SEC; the XRP pump

As I wrote in a recent post, Ripple responded to SEC charges that XRP is a security. They are using the same lame defense that Kik used to try and convince the SEC that kin wasn’t a security. It’s a strategy that is likely to fail miserably, and Ripple will most likely end up settling. It’s just a matter of when.

In the meantime, a group on Telegram called Buy and Hold XRP pumped the price of XRP to its highest number since December. The group’s membership hit Telegram’s 200,000 limit within hours, forcing everyone to head over to a new channel with a similar title. The granddaddy pump is scheduled to start on Feb. 1 at 8:30 EST. (Update: The organized pump turned out to be a miserable failure.)

Is XRP a security? All cryptocurrencies are investment contracts because they pass the Howey test. You can’t buy anything with XRP, BTC, ETH, or any of them. There is virtually no merchant adoption for crypto. For most people, a cryptocurrency is an investment of money in a common enterprise with an expectation of profit to be derived from the efforts of others. But the SEC has accepted the claim of bitcoin fanatics and cultists that Bitcoin is not a security, therefore, putting BTC outside of its jurisdiction.  

Coinbase going public via direct listing

Coinbase says it plans to go public via a direct listing. The U.S. crypto exchange confidentially filed its registration with the SEC in December. Now we know for sure they are not going the traditional IPO route.

In an IPO, a block of new shares are created and sold to institutional investors at a set price. The advantage of an IPO is it gives companies a way to both go public and bring in fresh capital at the same time. If a company doesn’t need fast cash, it can go with a direct listing, in which only existing shares are sold.

Direct listings have become popular of late because it gives companies a way to go public without the bank’s help. Palantir, Asana, Slack, and Spotify all went public without a traditional IPO. (Coinbase blog, Techcrunch)

The big question: What will Coinbase stock be worth once Tether is shut down and the price of BTC collapses?

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News: Tether extends doc deadline, resumes printing; GBTC’s premium melts away; Ken Kurson pardoned

We are three-quarters of the way through the first month of the new year. We have a new president in the Whitehouse, and people are getting vaccinated—a glimmer of hope at the end of a long dark tunnel. I’m doing some volunteer work for VaccinateCA, making calls to pharmacies. (I saw @patio11 tweeting about the project and wanted to contribute.)

Maybe toward the end of 2021, we’ll see more in-person crypto conferences, but for now, it looks like Coindesk’s big money-maker Consensus will be virtual again—only $50 to register compared to $2,500 for the real thing in past years. Currently, bitcoin is trading at around $32,000 after climbing to an all-time high of nearly $42,000 earlier this month, and Tether is closing in on $25 billion worth of tethers.

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Tether needs 30 more days, restarts presses

Jan. 15, the big document deadline day for Bitfinex/Tether in the NY AG fraud investigation, came and went. On Tuesday, after a three-day weekend, Tether’s law firm requested a 30-day extension to give them more time to turn over documents. The request was on behalf of all parties, so NYAG was apparently okay with this.

We won’t get another status update until mid-February. Until then, Tether has agreed to maintain the status quo, meaning the injunction is still in effect, and Bitfinex cannot dip into Tether’s reserves. (Court filing)

For now, it’s back to business as usual. After what appeared to be a short reprieve, Tether is once again printing tethers with abandon. (On Jan. 19, Tether printed another 400 million USDT.) They literally can’t stop, won’t stop, because they are too deep into the game.

In lieu of an audit, which would put this whole matter of “Are tethers backed?” to rest, Tether continues to recruit reporters, bank execs, and other gullible parties to profess to the world that tethers are fully backed. Meet the next actor in this ongoing charade: Gregory Pepin, Deltec Bank’s deputy CEO. Deltec is an offshore bank in the Bahamas where Tether has been doing its banking since 2018

“Every tether is backed by a reserve and their reserve is more than what is in circulation,” Pepin told Laura Shin on the Unchained Podcast. “We can see it firsthand, so I can confirm that,” he said, while repeatedly dismissing the anonymous “Bit Short” article,” mentioned in my last newsletter, as FUD.

Tethers are fully backed, but backed with what? Before they were called tethers, realcoins were supported by “one-to-one fully auditable stores of dollars,” according to a July 2014 article in the Independent Investor. “The bearer of these realcoins will have the first right to redeem them for subsequent U.S. currency.”

A reasonable assumption at this juncture is that tethers are backed by loans to third parties, bitcoins, equity in an offshore bank, a pile of shit coins, and increasingly fewer real dollars.

So far, we’ve heard from Stuart Hoegner, Paulo Ardoino, and a reporter from The Block, all talking up Tether lately, while the triad—Phil Potter, J.L. van der Velde, and Giancarlo Devasini—have slid off into the hills. (Granted, Potter claims he stepped down a while back.)

Tether invests in Fleet

Tether has invested $1 million of its customer’s money into an ICO. Game publisher Exordium, the company behind Infinite Fleet—a name perhaps borrowed from a popular saline enema product—has launched a public security token offering. It is unclear if Tether invested USDT or real dollars, but public participants can put in euro, BTC, or USDT, according to a company press release. (Decrypt, Infinite Fleet)

Infinite Fleet is Samson Mow’s blockchain game. Coincidentally, Mow is the chief strategy officer at Blockstream, a company responsible for a huge chunk of Bitcoin’s source code. Bitfinex is also a Blockstream investor. These types of incestuous relationships help explain why so many Bitcoin-related company execs are so fiercely defensive of Tether.

Is Tether partnering with startup exchanges?

There is reason to suspect Tether is partnering with startup exchanges by giving them USDT. Over the past year, all kinds of smaller exchanges have been announcing sizable tether giveaways. Alex Dreyfus, CEO and founder of Chiliz, for instance, said he was preparing for a 100,000 USDT giveaway. He also admitted he is a client of Tether and Deltec Bank.

Do a search for “USDT” and “giveaway” on Twitter and plenty will come up. Kucoin is one example. (Binance, an established Tether customer, is also giving away tethers.)

GBTC’s premium melts away

Here is something that hasn’t gotten enough attention. Grayscale Investments has played a role in fueling the bitcoin bubble. By convincing institutional investors they could buy into GBTC at net asset value and sell on secondary markets at a 20% to 30% premium after a six-month lock-up, it has created a self-reinforcing market dynamic.

Accredited investors looking to take advantage of an arbitrage opportunity, bought into GBTC, pushing up GBTC assets under management, which was then used to promote the idea that institutional investors, dominated by hedge funds, were scooping up bitcoin products. All this, in turn, lured more retail suckers into the market. “Look, all the big companies are rushing in! This must be a safe bet!”

But now that premium has dried up as fewer retailers are showing an interest in bitcoin, given the price has dropped by $10,000 in recent weeks. GBTC was recently trading at just 2.8% over NAV, leaving accredited investors stuck with GBTC in an illiquid market. (Bloomberg, Trolly’s thread)

Meanwhile, it looks like Barry Silbert has left the chatroom. He stepped down as CEO two weeks ago.

Just like that, Kurson off the hook

Surprise, surprise. Former Ripple board member Ken Kurson was one of the 74 people Donald Trump pardoned at the last minute on Jan. 19. Kurson is also the co-founder of crypto rag Modern Consensus, where I worked for an intolerable six weeks. It’s just unbelievable this guy, who was criminally charged with cyberstalking, got a pardon. (Full list of pardons, NBC)

While many of Trump’s pardons went to political pals—including Steve Bannon, another pro-bitcoin guy—Kurson’s was an obvious favor to Jared Kushner, whose father, Charles, also received a pardon. Kurson’s pardon stands out, in part, because of the risk it poses to some of the women he stalked and harassed. (The Daily Beast, paywalled) 

“Suffice it to say, what he was actually arrested for was part of an ongoing pattern of abuse, revenge, & sociopathy,” Deborah Copaken, a contributing writer at the Atlantic, said on Twitter. She worked for Kurson in the past, wrote about the experience, and helped the FBI with their investigation. “All jokes aside, I am worried about my own safety. @FBI – How do you protect those who helped you but who are now totally exposed because of a presidential pardon?”

Other newsworthy bits

“How can $24 billion worth of tethers move a $650 billion bitcoin market cap?” The is an insufferably dumb question, and I explain why in a recent blog post. (My Blog)

David Gerard wrote about the history of wildcat banks and early “stablecoins” with excerpts from an 1839 Michigan Bank Commissioner report. (Gerard’s blog)

Craig Wright is at it again. He is now claiming the Bitcoin white paper and Bitcoin.com are his. He is trying to force Bitcoin.org to take down the white paper, which they now refuse to do. (Coindesk)

Balaji Srinivasan outdid himself on Twitter when he compared bitcoin, one of the world’s biggest energy hogs, to a battery, setting off the “bitcoin is a battery” meme.

Stephen Diehl, a programmer, compares crypto to a “giant smoldering Chernobyl sitting at the heart of Silicon Valley which a lot of investors would prefer you remain quiet about.” His thread went viral.

Gary Gensler is officially named for SEC chair. (NYT) We can expect greater crypto oversight from him. (Bloomberg)

Meanwhile, Allison Herren Lee was sworn in as SEC acting chair until Gensler takes over. (SEC, Decrypt)

MicroStrategy bought another 314 bitcoins for $10 million cash. Saylor’s company now holds 70,784 bitcoins acquired at an aggregate $1.135 billion. (SEC Filing, Coindesk)

Circle has surpassed $5 billion worth of its USDC stablecoin. They produce regular monthly attestations. But as Frances Coppola points out, if Circle/Centre were a bank, they would have to produce actual audited accounts.

Updated on Jan 24 with more info on Kurson’s pardon and a quote from Deborah Copaken. Also added the bit about Craig Wright.

News: Tether’s offshore Deltec Bank, the Bit Short, NYAG’s document deadline, Tether truthers compare skeptics to QAnon

Finally, another newsletter! I am trying to find a way to write a crypto newsletter that doesn’t take all day to write. This is a (failed) attempt at that. Going forward, this sporadic newsletter will assume you know a thing or two about the crypto space. (If not, read the articles I link to!)

First some housekeeping—I’ve been working to update my blog and move it over from WordPress.com to WordPress.org. My main challenge is finding a WordPress theme that I like, preferably one that is free. If you have any recommendations, please let me know.

Also, the crap butterfly keyboard on my Macbook Pro is failing me, so I’ve ordered a Mac Air with the M1 chip, which will arrive in a few weeks. I’m hoping it makes my life easier.

If you want to support my work, a reminder that I have a Patreon account. Think of it as buying me a cup of coffee, a bottle of wine, or a case of wine once a month, depending on what level you subscribe to.  

Now, on to the news, starting with Tether.

Tether conversations reveal things

I wrote two blog posts recently—these are both transcripts with annotations. If you are interested in Tether and Bitfinex, I recommend you read both, as they contain a lot of good information.  

The first is an interview with Tether frontmen Stuart Hoegner and Paolo Ardoino hosted by bitcoin maxi Peter McCormack. The point of the interview was clearly to attack the “Tether FUD.”

Remember, it’s very important that Tether keep up the illusion that real money is behind tethers and all is well in Tetherland. If the charade crumbles, so does Tether’s dollar-peg and along with it, the bitcoin market.

To that end, Hoegner is claiming that the now $24 billion worth of tethers in circulation are fully backed. What a switch. He told us in April 2019—22 billion tethers ago—they were 74% backed. The question is what are they backed with? He won’t tell us. (Deltec is their off-shore bank in the Bahamas, by the way.) 

Peter: You mentioned Deltec. Are you shareholders in the bank? 
Stuart: We don’t talk about the investments that we have on the Tether side.
Peter: Okay, so are tethers fully backed?
Stuart: Look. The short answer is yes. Every tether is 100% backed by our reserves. And those reserves include traditional currency and cash equivalents, and may include other assets and receivables from loans made by tether to third parties. 

The second transcript I wrote up hasn’t gotten as many views but it is also interesting. It’s a debate between The Block’s Larry Cermak and blogger Bennett Tomlin. They argue whether Tether is acting in good faith. Cermak thinks they are. He believes tethers are fully backed—and wants you to believe that, too.

One question we have to ask is why Cermak, who was a staunch Tether skeptic in the past, has suddenly pulled a 180 and joined the campaign to prop up Tether? Assuming good faith, it appears he has fallen for the same con one Bloomberg reporter did two years ago.

Questions around Tether’s Deltec Bank

Another curiosity that sprung up from Paolo and Stu’s interview: Who is Deltec’s banking partner? If Tether keeps its reserves at Deltec and its largest customers have accounts there too, one would think Deltec needs a U.S. bank partner to store USD. In other words, a nostro account in a foreign bank. 

This should not be a secret. When Bitfinex was banking with Noble Bank in Puerto Rico, Noble openly stated on its website that it doesn’t actually hold the money. Instead, it used BNY Mellon as its custodian.

Presumably, Deltec has a custodian, too. This might explain why the Bahamian Central bank is not reporting inflows that match what Tether claims to have in its reserves. (The central bank publishes a quarterly statistical digest that looks at the total assets that all the country’s banks are holding.)

Of course, another explanation as to why the country’s central bank isn’t showing a large inflow of funds could be that Tether doesn’t have the reserves it says it does—or else, maybe, a good portion are in BTC?

In a year-in-review video, Deltec’s CIO Hugo Rogers dropped a bomb. He said, with the straightest face you can imagine, that the bank has a “large position” in bitcoin.

“We bought bitcoin for our clients at about $9,300 so that worked very well through 2020 and we expect it to continue working well in 2021 as the printing presses continue to run hot.” (He is referring to the U.S. printing press, but we know Tether has been running hot, too.)

Hoegner denied that any of those funds were Tether’s, according to The Block.

The Bit Short

An anonymous blogger published a Medium post on Tether titled “The Bit Short: Inside Crypto’s Doomsday Machine.” It’s full of great quotes and insights, like this one, describing how Tether’s core moneymaking engine may possibly work:

  1. Bob, a crypto investor, puts $100 of real US dollars into Coinbase.
  2. Bob then uses those dollars to buy $100 worth of Bitcoin on Coinbase.
  3. Bob transfers his $100 in Bitcoin to an unbanked exchange, like Bybit.
  4. Bob begins trading crypto on Bybit, using leverage, and receiving promotional giveaways — all of which are Tether-denominated.
  5. Tether Ltd. buys Bob’s Bitcoins from him on the exchange, almost certainly through a deniable proxy trading account. Bob gets paid in Tethers.
  6. Tether Ltd. takes Bob’s Bitcoins and moves them onto a banked exchange like Coinbase.
  7. Finally, Tether Ltd. sells Bob’s Bitcoins on Coinbase for dollars, and exits the crypto markets.

And this great quote here:

“Forget the activity on the offshore exchanges for a moment, and just think of a simple mental picture. Imagine you could stand at a metaphorical booth, where Coinbase’s exchange connects with the US financial system. If you could do that, you’d see two lines of people at the booth. One line would be crypto investors, putting dollars in—and the other line would be crooks, taking dollars out.”

If you can visualize the image above with Coinbase, you can start to understand why FinCEN is so anxious to push through its proposed “unhosted” wallets rule.

Tether’s document deadline has passed

Jan. 15 was the deadline for Bitfinex/Tether to submit a trove of documents to the NYAG, which has been investigating them for Martin Act violations. A lot of folks were hoping to see a court filing drop on Friday with the NYAG taking a position on the documents that it has received. The injunction, which limits Bitfinex from dipping into Tether’s reserves, also ended Friday, according to the NYAG’s letter from Dec. 8.

(Update: This is a bit confusing. I am not completely sure if the injunction ended on Jan. 15, according to the NYAG’s December letter, or it is implicitly extended until the next court order, per the original order.)

The NYAG hasn’t filed any new court documents yet, but we are waiting anxiously. Tether says they’ve so far sent 2.5 million docs to the NYAG—I believe that’s called a document dump.

In the meantime, Tether has mysteriously stopped printing tethers. The last big print was 400 million tethers on Jan. 12, and prior to that, 400 million on Jan. 9, according to @whale_alert.

Understanding GBTC

There has been some confusion on Twitter as to how Grayscale Bitcoin Trust (GBTC) works. Grayscale doesn’t buy bitcoin directly. Grayscale customers send Grayscale their bitcoin—or cash to buy bitcoin with—and Grayscale issues shares in return. But why do the shares consistently trade at a premium to net asset value?

This November 2020 article by investor Harris Kupperman explains it well. “Think of GBTC as Pac-Man. The coins go in, but do not go out,” he said, going on to describe how GBTC functions as a “reflexive Ponzi scheme.”

Coinlab cuts a deal with Mt Gox creditors

Coinlab, a former U.S. company that has a $16 billion claim against Mt. Gox, has proposed a deal with Mt. Gox creditors over their claims. If creditors choose to go forward with the deal, they can agree to get back 90% of their BTC ahead of the settlement, according to Bloomberg.

Kim Nilsson of WizSec says Coinlab was never acting in good faith. “CoinLab was insisting on continuing to hold up the process for everyone while they litigate to try to steal everyone’s money, and had to be essentially bribed so as not to obstruct this arrangement.” (WizSec blog)

Other notable news

FinCEN has extended the deadline for comments on its proposed crypto wallet rule. Starting from Jan. 15, you now have 15 days to comment on reporting requirements, and 45 days to comment on proposed rules for reporting counterparty information and record-keeping requirements. (Coindesk, FinCEN notice)

Good-bye and good riddance. Brian Brooks has stepped down as acting commissioner of the OCC. (Coindesk.) The former Coinbase exec recently posted an editorial in the Financial Times shilling DeFi. (FT, paywalled)

The European Central Bank calls for regulating Bitcoin’s “funny business.” (Reuters)

Gary Gensler is reportedly President-elect Joe Biden’s choice to lead the SEC. Gensler is a crypto savvy guy, who taught a course on blockchain at MIT Sloan. Crypto folks can expect greater oversight from him. Hopefully, he will bring the hammer down an all those 2017 ICOs. (Bloomberg)

Tether apologists are now comparing (archive) Tether skeptics to unhinged QAnon conspiracy theorists—an example of what lengths they will go to discredit reasonable questions about Tether’s reserves. Remember, the burden is on Tether to prove they have the assets they say they do.

USDC, a U.S. regulated stablecoin issued by Circle, now has a circulating supply worth $5 billion—far outpacing that of any other U.S. regulated stablecoin.

Frances Coppola debates Nic Carter about bitcoin. (What Bitcoin Did podcast)

Bitcoin mining was partly to blame for the latest blackout in Iran. (Washington Post)

Ripple’s ex-CTO loses access to $200 million in bitcoin. “This whole idea of being your own bank—let me put it this way, do you make your own shoes?” said Stefan Thomas. “The reason we have banks is that we don’t want to deal with all those things that banks do.” (New York Times)

Bitcoin may have helped finance the pro-Trump Capital riots (Decrypt)

Twitter has banned the account of former Overstock CEO Patrick Byrne after he posted conspiracy theories relating to the Presidential election. Byrne is a longtime bitcoiner who led Overstock’s decision to originally accept bitcoin and invest in the space. (Decrypt)

Larry Cermak and Bennett Tomlin debate Tether’s solvency—transcript with notes

Richard Yan of The Blockchain Debate podcast held a debate between The Block’s Larry Cermak and Bennett Tomlin, a data scientist and blogger with an interest in fraud. Patrick McKenzie, a Tokyo-based entrepreneur, who wrote one of the best articles describing Tether to date, joined as a co-host. 

The motion on the debate was, “Is Tether acting in good faith?” Tomlin argued that no, they are not. While Cermak argued for the motion, giving Tether a generous benefit of the doubt.

Cermak is a bit of a puzzle to nocoiners these days. He has recently taken to defending Tether, stating that he believes the BVI-registered stablecoin issuer, which has so far issued $24 billion in tethers, is fully backed. In the past, he took a hard stance against Tether and its sister company, crypto exchange Bitfinex, causing them quite a bit of trouble. In October 2018, for instance, he disclosed in a tweet that Bitfinex was banking with HSBC under a shell. Soon after, the feds froze that bank account. The shell, as it turned out, was registered to Arizona businessman Reginald Fowler, who was indicted the following year on bank fraud charges.

Cermak has also admitted to owning crypto and making money in DeFi markets. He recently bragged on Twitter about gifting his fiancee $1,000 in crypto to gamble in the futures markets. Tomlin, who is working on a book on Tether, told me he does not currently own any meaningful amount of crypto. (At one point, he owned about $500 worth of bitcoin and ether.) “I want to stay as unbiased as possible,” he said.

Tomlin does a good job presenting facts in the debate. He clearly has read through all of the related court documents, and knows what’s in them. Whereas, Cermak tends to rely on “somebody told me this” type of information. His sources appear to be Tether frontman Paolo Ardoino and large Tether customers, such as OTC desks, exchanges, and high-frequency trading firms, who stand to make big profits in the crypto space.

What follows is the transcript with my annotations. I’ve removed filler words (such as uh, basically, you know, right, so, etc.). Brackets indicate words I’ve inserted for clarity. I’ve added links where appropriate and edited out most of the intro. Overall, there’s lots of good info in here, and I recommend reading the full transcript. 

Richard: Bennett, please go ahead and tell us how Tether has been acting in bad faith all this time since they started in 2014.

Bennett: The easiest way to go about this is to look at a specific example that will show many of the patterns that have persisted over this period. Bitfinex gave over $1 billion to payment processor Crypto Capital Corp without a contract or an agreement. This payment processor was not a registered money servicing business or a licensed money transmitter. This payment processor lied to the banks about what the accounts would be used for. And when the principal for this payment processor was arrested, he had in his possession, counterfeit U.S. currency and fake bond certificates

(The “principal” Tomlin is referring to is Reginald Fowler, who allegedly served as Crypto Capital’s money mule, setting up bank accounts under shell companies and moving money for Bitfinex. It is worth mentioning here that Tether and Bitfinex have the same operators: CSO Phil Potter, CEO Jan Ludovicus van der Velde, and CFO Giancarlo Devasini, who are barely heard from these days. Nocoiners refer to them as the triad.)

When this payment processor stopped responding to Giancarlo and Bitfinex’s requests to withdraw funds and the DigFinex executives believed that these funds were potentially lost, Bitfinex publicly insisted that withdrawals were working fine and there were no problems.

(DigFinex is the parent company of Bitfinex and Tether. Here is an org chart for reference. The “lost” funds included $850 million, some of it tied up in a network of 60 bank accounts set up by Fowler and some of it seized by the Polish Ministry of Justice from Crypto Capital’s Polish subsidiary, Crypto Sp. z. oo.)

However, privately, in order to combat this effective insolvency of Bitfinex, the executives of Bitfinex and Tether orchestrated a swap of multiple hundreds of millions of dollars from Tether’s bank accounts to Bitfinex in exchange for a ledger notation saying that tether now possessed the inaccessible funds at Crypto Capital, effectively making Tether insolvent.

This fact was not disclosed and Tether’s homepage and terms and conditions at this point still claimed every tether was fully backed by the equivalent currency, despite this effective insolvency. These are not the actions of good actors in the cryptocurrency space.

(The NY attorney general has been investigating Tether and Bitfinex since late 2018 for violating the Martin Act. Most of the details of what Tomlin is referring to can be found in a court filing.)

Richard: Thanks Bennett. That was very thorough. And I would say you’re probably one of our first guests that have actually prepared a statement and read from it as if this was a hearing or something. But anyway, thank you, Bennett. I definitely don’t think you are in the minority there when you accuse Tether of being in bad faith. So I’d love to hear what Larry has to say next. Larry, please go ahead with your opening statement.

Larry: First of all, Bennett’s statement was great. There’s a lot of merit to it. That being said, Tether has seen tremendous growth this year. It’s important in several different products. It’s incredibly important for the current market structure. Basically all the futures are collateralized by Tether. Now the majority of volume is coming from tether pairs, and we’ve seen legitimate growth from Tether this year. Some people argued that growth is pumped by Tether itself, where you can see similar growth in USDC and competing stablecoins. 

(USDC is a US regulated stablecoin that has also seen a lot of growth, but that growth is dwarfed by Tether, which since March 2020, when BTC plunged to below $5,000, has issued 20 billion tethers.)

There is, at least in my experience, overwhelming evidence that there is money going into Tether and there’s money being redeemed by several different parties. These parties are usually OTC desks, market-makers, and exchanges. The reason why there isn’t much public evidence of this is because these parties tend to be more on a private end and they don’t have much of a reason to actually tell people that they’re redeeming for hundreds of millions of dollars.

I do think that Tether used to act questionably and Bennett highlighted that really well. I do think that they’ve changed significantly in the past year and a half. I’ve been watching Tether for the past four years now. And the behavior has changed a lot. 

They are much more transparent publicly. They are much more transparent in their goals, how they operate. And I do think that right now, my belief is that they are fully backed. And my belief is that they are not acting in bad faith. Quite the opposite. I think they are super important to the crypto space. And I agreed that it’s important to consider the possibility that Tether might at some point stop existing. But I don’t think it’s fair to say that they’ve been acting in bad faith, especially in the last couple of years.

(Tether has not been transparent at all. In a recent podcast, Tether frontmen Poalo Ardoino and Stuart Hoegner refused to say what assets were backing tethers. However, one thing they were clear on—it wasn’t all cash.)

Patrick: If I can jump in here. Assuming, arguendo, that Tether is fully backed, Tether has said a few definitions over the years as to what constitutes backing. Under which definition do we believe that they are fully backed? What is the collateral? Where is it?

Larry: That’s a good question. I think that they are fully backed when it comes to dollars on bank accounts. Tether has the mandate to invest in super low-risk yielding opportunities. So as far as I know, the vast majority is in US dollars on their bank accounts and they don’t just have one, it’s possible. Some of it is in some bonds or really low-yield investment vehicles. I don’t believe that any of that backing is in cryptocurrencies or some kind of other more risky vehicle.

(In his recent podcast, Hoegner counted Tether’s remaining $550 million loan to Bitfinex as an asset backing Tether. In an April 2019 affidavit, Hoegner said the 2.1 billion tethers in circulation at the time were only 74% backed. Tether/Bitfinex have never said anywhere publicly that they’ve invested in bonds. Also, Tether’s terms of service says tethers are backed by “traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities.”)

Richard: And when we say bank accounts, are those bank accounts at Deltec Bank in the Bahamas or are those bank accounts at Deltec Bank somewhere else? Are there banks that the world doesn’t know [about]?

Larry: Absolutely. As far as I know. The last time I talked to Paolo was maybe a month ago when we were working on a stablecoin report. I asked him this question as well. He did say that the majority of funds are at Deltec and there are also some other banks that they’re working with, but only for smaller amounts. I assume that’s mostly just to make the redemptions and the transfers easier for customers. But I do think that the majority of the funds is at Deltec in The Bahamas.

Bennett: If I can ask a question, because I’ve been curious about that too, just as an outside observer, as to where the funds might be held.

The Central Bank of the Bahamas publishes a quarterly statistical digest that looks at the total assets that all the banks in the Bahamas are holding. And if you look at it, with the most recent one being released in November, you do not see any increase in assets held at Bahamian banks over the last year. Either there must be comparable outflows from somewhere else to match any inflows from tether, or there’s some reason Deltec Bank would not be counted among those statistics. Do you have any insight into why that would be?

Larry: I don’t. I really don’t know. I’ve looked into those documents as well. I’m not sure if it even encompasses all the money that is in the Bahamian banking system. I’m not sure why that is honestly.

Basically the reason why I believe that Tether is fully backed is not just because I talked to Paolo and they feed me this marketing stuff. It’s because I talked to a lot of different actors in the crypto space, those being massive OTC desks, large traders, exchanges directly, and basically anyone who deals with Tether directly, and they have redeemed tens of millions of dollars. I mean, I’ve seen proof of that.

I trust these people, and I’ve talked to so many of them at this point that it’s beyond reasonable doubt that Tether is operating as it should when it comes to redeeming money. The frequent argument that I hear from people on the other side is, why isn’t the supply decreasing at all? Basically, why is it only going up?

The simple answer is that the demand is just so much higher, and they don’t do these redemptions every week or something. They have a system, where if more money is coming in then is coming out, they obviously don’t reduce the supply. And this happens in fairly long periods of time. So that’s why it’s not happening. 

And if what you guys are conferring is that if Tether was not back fully or only had a really small amount of the backing, they would not be able to serve these redemptions. And basically without any issues, these things are happening quickly. And to the point where a lot of these large traders or institutional customers have started their own bank accounts in Deltec, just so they can make the process more efficient. 

(Paolo and Stu confirmed in their podcast that several of their customers also bank at Deltec. Yet, we have no idea what type of arrangement Tether has with its large customers, whether Tether is in fact loaning USDT to them and counting those loans as backing, or what the deal is.)

And so that’s the basis for my argument that Tether is backed. And then also just talking to Paolo and having conversations with people that are close to the business. At this point, I would be shocked to find out that it was less than 98% or 99% backed.

Bennett: I have a couple of things I want to add to that. The initial document released in the New York attorney general investigation said, at that point, the largest redemption was $24.2 million. So Do you think that Tether’s documents that they were handing over before the ex-parte order were incomplete, that the average size of the redemption has gone up significantly in the intervening two years? What would explain that dynamic? 

Larry: Oh, absolutely. I think it has gone up way significantly in the last two years, to the point where now a hundred-plus million dollar redemptions are completely normal. 

That’s because the space has just grown quite a lot. Like I said, the dynamic with Tether has changed significantly. Bitcoin used to be the main reserve currency when it comes to crypto, both for futures and derivatives. Now it’s tether and the same is happening for the pairs. It used to be all bitcoin, now it is tether. 

So Tether is much more important now. The supply is much higher and these parties are using it unquestionably because if they want to get access to futures, and these features are extremely liquid, they do have to have access to tethers. So these redemptions are definitely increasing in size. There’s no doubt about that. 

Also, one thing I would like to point out is that you have to understand that Tether obviously doesn’t want any of their information to be public. And that is not only because they are covering something shady, which could be the case, but it’s also because they just don’t want their own business information to be out there for everyone like you and me. So that’s my basic response to that. I do think that the redemptions are now significantly larger. That still means that they’re not acting in bad faith.

Bennett: There’s one other point I wanted to make there before we move on. You said that you were confident tethers were fully backed because they’ve been able to service these large redemptions. But you also said that there are more deposits actively coming then going out, which would mean to service these redemptions, until there’s a whole group of them, they could in theory, service them with a small amount in reserve and the incoming deposits, correct?

Larry: Yes. It’s hard to estimate how much they would need to have to justify this condition. So I agree with you. Again, I guess the main question here is: What do you think they’re doing with the money? Do you think they’re just taking it for themselves or what do you think they’re doing with it?

Bennett: We know from the New York attorney general investigation, that Tether executives do receive large, aperiodic payments from comingled client and corporate funds out of the Tether account. That was discussed when they were arguing for the initial injunction against them, with the limits on related party transactions. So I do think there is the possibility that money has been exfiltrated by Tether executives.

Their lawyers also argued that their mandate is not just to invest in easy yield or things like that, but that Tether has the ability per Tether themselves to keep zero in reserves and invest anywhere they see fit, including—and the lawyer made very clear that they had done this—in bitcoin and crypto assets. So it is conceivable to me that a meaningful portion of their backing is currently invested in extraordinarily volatile assets.

Larry: I think that’s definitely not true. And again, I’ve had conversations with Tether executives and talked to different people. And as far as I can tell, that’s not true. They’re not investing in bitcoin and volatile assets. They are investing in low-yielding opportunities. 

(It is interesting Cermak would say this, considering he literally wrote an article for The Block in March 2019 with the headline “Tether admits in court to investing some of its reserves in bitcoin.”)

And to your point that some of the money used to go out to some of the executives. I do agree that’s a terrible look. I think it can mostly be explained by the fact that they just had so much trouble banking themselves that they used their personal bank accounts, which is a terrible practice, I agree. I don’t necessarily think that they’re acting in bad faith, but they acted in a careless way. I don’t think at this point that they’re just taking money out of it for their own personal gain. And that’s mainly because Tether now has more than $20 billion [worth of tethers] in supply.

Even if you say that they’re yielding about maybe 0.05% or around 0.01%, that’s a lot of money and the business is really treating them well in that regard. They’ve grown significantly this year and they’re generating a lot of money from it. And that’s while Bitfinex itself, as an exchange, has struggled this year. 

Now it’s picking up again. Early this year and late last year, the volumes really dropped significantly. And that again is another argument against people that think that Bitfinex is just faking value. They’re just creating a lot of Tether, and then the volumes are going up. 

That’s definitely not the case. And the clear evidence against that is because in 2017 and 2016, Bitfinex was one of the most important exchanges when it comes to spot. Now it’s not even in the top five and the volume has dropped significantly compared to other exchanges. So I don’t agree with that fully.

Patrick: It is extremely curious that their lawyers wouldn’t bring up that we only invest in low volatility as zero-custodial-risk assets when asked that in the course of investigation as to whether they were dissipating client funds and instead chose to tell the court that they had the right to invest it in absolutely anything they wanted, including cryptocurrencies. And we’re doing that. These seem difficult to square for me.

Larry: I was the one that read the document first. And I was the one that led the coverage on that first. So I know what the document said. It wasn’t as clear. It was a little bit more ambiguous. 

They’ve said they’ve previously invested on small amounts of cryptocurrencies. Again, I don’t believe that to be a significant amount. And if it was, I still believe that it was a very small amount of the total. And again, it’s hard to explain some of these things because that’s just by talking to people and understanding how Tether works in the background. 

But you keep coming back to the point that they basically can do anything, and that the lawyers don’t want to disclose what they don’t want to tell people. And that to me makes a lot of sense, right? Tether can do almost anything. It’s in their best interest not to disclose the information because they feel like the US people and the United States overall, they don’t have any jurisdiction. Tether claims to not function there. So I would say that kind of explains that.

Patrick: The jurisdictional point is an interesting one for me, because I’m not super familiar with banking regulations in the Bahamas, but if hypothetically Tether is holding large amounts of dollars at Deltec and not in the Bahamas, then the natural thing for me to assume is that they’re holding it in some sort of correspondent banking relationship elsewhere. And so it would matter a bit whether those jurisdictions would care whether the US believes that Tether is subject to a US court order.

So do we actually know what those jurisdictions are? Are they ones like, without loss of generality, Russia, which don’t care about us court orders? Or are they ones like Japan or the United Kingdom, which would happily enforce one?

Larry: I don’t think we know the details. Again, what do you think would have to happen for the money to be frozen by the US authorities?

Patrick:  A polite request to? 

(Banks don’t like dealing with crypto money, so if an onshore bank knew that it was holding Tether money, they would likely freeze the accounts. This is exactly what happened with CIBC and QuadrigaCX in Canada. And it’s why Wells Fargo cut Bitfinex off in early 2017. Bitfinex tried to sue Wells Fargo for it, but later dropped the suit.)

Larry:  Why do you think that would happen? There will have to be significant evidence of some sort of fraud or the money not being used in the right way. And we haven’t seen that yet.

(The NYAG is literally investigating Tether and Bitfinex for fraud at this moment. They have already uncovered evidence, in the form of Bitfinex hiding from its customers the fact that it lost access to $850 million in 2018, leaving the exchange insolvent.)

Bennett: I remember a case where an analyst published some evidence that Bitfinex was using global trade solutions at HSBC. And shortly after that, their accounts got shut down and they had to switch to new banking.

Larry: Oh, absolutely. And I used to be in the same boat as you are. What I realized later is that they’re doing this because they are having so much trouble finding a bank. And that’s why when they find a banking relationship that works for them, they tend to stick to it. And Deltec seems to be the one that has stuck. 

I one hundred percent agree with you. It is really weird when you see they open a new bank account, and then all of a sudden, after everyone finds out, it gets shut down. And that’s because no bank really wants to associate themselves with Tether because they’re risking way more than they would be gaining out of it. That’s just a natural response. 

(Banks have to comply with strict KYC/AML rules. If they touch dirty money, they face huge fines, and crypto money is often dirty, so naturally, they don’t want to do business with Tether, for that reason.)

And also because Tether—and again, I don’t think this is necessarily a bad faith, it could come across as that—but when they start these bank accounts, it’s because they basically are forced to. I want to make sure that everyone who listens understands my position isn’t to defend Tether. They’ve made several major mistakes before, but I do think that they’re super important to the space. And I do think that they’re acting well now. But they were in a difficult position because no one would give them bank accounts. So at that point, you really have no other choice almost.

Patrick: That’s the answer to my question on what the United States government would likely take issue with. If one assumes, arguendo, that tether has not been entirely candid with what it said to prior banking relationships, and then gotten frozen out of their accounts. That record of being less than entirely candid might not just go away because they got a new bank that was willing to say, politely, have a broader risk tolerance, not that a lawyer couldn’t speculate, but that would be a thing that I would not want in my history if I wanted a stable US dollar banking in the future.

Larry: I think that the response to that from Tether would be that they have not really been involved with a lot of the US customers directly. And the US court system doesn’t really have much of a jurisdiction over what they’re doing. I want to be clear again, I do think that something like this is possible. And I’ve warned people about it. Tether at this point is massively important to the crypto space. And if something like a black Swan event were to happen, it’s important to be ready and to be prepared to do something about it, and make sure that you don’t get completely screwed over if something like this happens. I don’t think it’s likely at this point.

(Cermak is on one hand defending Tether, and on the other, he is telling traders “to be ready” in the event something catastrophic happens.)

Richard: Can we take the debate in a different direction? Let’s talk about the fact that institutions do business with Tether. What is the nature of the business relationship between these businesses and Tether? Why do they not do business with USDC on a similar scale, for example. And when they obtain their USDTs, given the fact that Tether had this history of not being fully backed to put it politely, what kind of discount, if any, do the hedge funds or OTC desks get when they get the tethers?

Larry: They get no discount whatsoever. And that was the one point I was going to bring up as well before. If you guys believe that they’re not fully backed and if you believe that they might be acting in bad faith, why do you think there is no discount? And why do you think there is no premium? The discount only happened twice, if I recall correctly. And it was always about 10% maximum, then went back quickly. 

So why do you think that there is no premium, there is no discount. Why do you think it’s trading at par? It’s actually less volatile than USDC, for example, or at least comparable.

Bennett: Generally, if you look at the USDT/USD markets, it trades pretty even at 1:1. And there hasn’t been a major premium since, say, the end of 2018, like comparing tether to spot exchanges. And just speaking more broadly, the OTC quotes I’ve been able to see for tether do generally have it priced right around a dollar. 

I don’t think there’s any major discount in the market for tether like that. And even accepting that tether is not fully backed, I don’t necessarily think there would be a discount, so long as you believe that it’s redeemable or that, at that moment, you’ve got more need for it than you would for the comparable dollar. And so I still think even a potentially fractional reserve tether could still trade one-to-one without that being evidence of it.

Larry: I don’t agree with that myself. I agree with Bennett saying that if it’s only like 85% backed, 90% backed, they would still trade at 1:1. It’s only trading at 1:1 because there’s a future expectation that it will be back 1:1 at some point in the future. Not just because you can redeem it.

These large traders, again, they’re not idiots. They have to hedge their risks. And if they do think that at some point in the future, there might be a background on tether and they won’t be able to redeem all their money, they’re not going to even deal with it. So I don’t agree that. 

Richard: And what about the earlier part of my question? Why don’t these OTC desks do business with USDC, which also has experienced dramatic growth?

Larry: To your earlier point, and then maybe then Bennett can jump in. The biggest reason is because Tether has been the first and it has by far the biggest network effects. 

I brought this up earlier already, but the majority of futures is now collateralized by tether. And that wasn’t the case early this year before BitMEX really started to be affected. And now effectively it’s not even important anymore. BitMEX was all collateralized by bitcoin. And it was by far the largest futures exchange, the most important one by far. 

(Four BitMEX operators were indicted in October for Bank Secrecy Act violations. One was arrested, three remain at large.)

It’s not anymore. Now you have Binance, you have Huobi, you have OKex, you have Deribit, most of them are collateralized by USDT. So that dynamic itself, that shift, has already happened. And those network effects are why these OTC desks and these large institutional players have to get exposure to Tether because the products that they’re available on only function in tether. There are no futures that are collateralized by USDC.

Really the only alternative you have is bitcoin, but then you’re not trading the most liquid futures. The same thing can be said about crypto exchanges. The role of Binance has also grown so much this year, and that’s actually another thing I’m a little bit concerned about. Tether and Binance are by far the two most important companies right now in the space. And if something happens to either of them, we are definitely in trouble. 

I want to make sure that people understand that. And those risks need to be understood and prepared for, if they do happen at some point, even if it’s a low chance of happening. To answer your question, it’s because the market structure just demands tethers. And it’s mostly because of the network effects.

Patrick: Are we seeing some fragmentation of the network where half of the network exists, or some percentage of the network exists in, let’s say the United States and tightly aligned countries and some percentage of the network exists everywhere else. Because it would seem to me, if you want futures exposure, you can get futures exposure at the Chicago Mercantile Exchange at the price of having to be credible to the CME and deal exclusively in regulated dollars. And what I hear you saying is that you would want futures exposure at an exchange that is more flexible with respect to how one funds that futures exposure. Does this portend well for those networks continuing?

Larry: The biggest reason why these funds and these clients are interested in trading on these venues is because they are more liquid. And that’s because, like you said, they’re a little bit more lenient when it comes to which clients they take. It’s hard for someone in China to trade on CME. It’s not hard if they want to trade on Binance or Huobi. 

And naturally, the products with the most liquidity, they end up attracting the most liquidity, and it compounds the debt. CME is not a perfect product. It’s cash settled. But for example, there are pretty high limits of how much you need to get exposure to. And a lot of these exchanges, like Binance or Huobi, they also have a ton of retail clients. And needless to say, some of these funds do want to trade against those people because they’re less sophisticated and it’s easier to market make and all that. CME right now is not a product that is really an alternative to something like Binance or Houbi because you don’t have the same possibilities.

Bennett: I agree almost completely with Larry’s last two answers. Tether’s got the largest market cap and the most adoption because it was the earliest and it is the most used [stablecoin]. It’s been integrated at the most exchanges, it’s used as collateral for the most things. And I do think there is an appeal for a lot of people that Tether is less willing to serve at the beck and call of US regulators. So you see adoption for tether out of China and out of Russia, but even for online gambling and stuff in the Chinese mainland. And the kind of people who would be interested in tether there would not be probably interested in USDC because they would expect there to be a larger risk of funds being frozen or inaccessible, in the sense that Circle would freeze the tokens or block the redemption more so than Tether would.

Larry: I absolutely agree with that. And USDT is viewed by some people, like Bennett said, as less friendly to US regulators and the US overall jurisdiction. The influence of the United States is viewed as much smaller than USDC or Paxos or Gemini dollar. 

Also, one thing I want to point out and I’m sure Bennett will agree as well. The first massive growth of tether initially, end of 2017. We have to remember the reason was that Chinese exchange has got cut off from the fiat systems. And a lot of that money ended up flowing into tether. First couple of billion, or the majority of the money early on, has come from the Chinese exchanges. What that means is that because of these early network effects, there are massive OTC markets in China that use USDT and China was super important early on in crypto, and it still is and those network effects are at this point super hard to destroy. 

And so I do think that when it comes to trading, unless there is some regulatory intervention, Tether will remain the stable candidate it’s used by far the most.

(China told all of its crypto exchanges to shut down in 2017. After that, the only way for traders to on-ramp from the yuan into the crypto world has been via OTC exchanges, which enable peer-to-peer trading by connecting buyers and sellers.)

Richard: Let’s take an audience question. So this is from Nevine Mishra [spelling ?], and this is a question for everyone here. What would be the ratio of bad transactions in Tether? So the bad here basically refers to money laundering, and Tether is basically on-ramp outside of the USD payment system. Just not sure if tether has necessarily instituted the mechanisms to do the proper KYC/AML and so forth. Even though recently they did put out a tweet affirming that they do so. So can you guys speak to basically the possibility and the extent to which these transactions are of the money-laundering nature facilitated by tether?

Larry: I tend to start and then maybe Bennett can answer after me. I do think because of the dynamics that we talked about, it’s by far the most used by trading, it’s also viewed as the most lenient when it comes to just allowing stuff to happen. 

It does end up being used for nefarious activities and activities that are illegal. But it is my belief that Tether’s KYC/AML system internally is as advanced as USDC, as advanced as Paxos. I do think that the compliance is on always the same level, if not the same model.

Their compliance team is great. You can find all the people associated with Tether and the ones that they work on compliance. Also, it’s important to realize that they have frozen a lot of money this year, and a lot of transactions. By far more than USDC, far more than Paxos, and far more than any regulated stablecoin.

(I am not aware of any evidence that points to Tether’s superior KYC/AML system. As noted in the Ardoino and Hoegner podcast, Tether says it does check the identities of its customers, but what about the thousands of other users that tether trickles down to? My theory is that Tether’s large customers are akin to Liberty Reserve exchangers, acquiring tethers in bulk and distributing them in smaller quantities to individuals who require anonymity in their payments.)

Richard: Can you elaborate on that point? The freezing.

Larry: Because it’s more likely to be associated with these activities. And when tether finds out about it, especially this year, they have been really ruthless. When they think something weird is going on, they block it. Some people do believe that they’re more lenient, but actually they do end up blocking a lot. If there is any suspicion that it’s involved in some money laundering activity, they freeze it immediately. 

That has happened a lot this year, and it’s not really happening with USDC and Paxos. The best thing about stablecoins on Ethereum is that all of this data is public. You guys can, after this podcast, go and find the number of blocked addresses on USDC and Paxos, and you’ll see it’s much, much lower than Tether. So the argument that they are less active, it’s like weird that way. But yeah.

Bennet: Larry, you mentioned something that’s one of my biggest frustrations with Tether, and that is that they are at their essence, a finance company that is supposed to be keeping track of all these records of tethers issued, assets in their bank accounts, and all of that. And on their transparency page, on their website, for years, they’ve listed for Omni, their quarantined USDT, the stuff that was frozen, either as part of the initial hard fork after the hack or later after the Omni devs added the freezing ability to Omni. And that number, the number of quarantined USDT they have in their transparency page does not match with what happens if you add up what you can find in the Omni blockchain. And that’s been true for years. So talking about ostensibly, a company where this type of record is the most important thing they keep, and it’s been publicly wrong for years. And it took me like 45 minutes of scanning the blockchain to figure that out and Tether hasn’t done that.

Larry: Again, I do think that Tether has been extremely negligent early on, and to some extent still is, in small ways. So I do agree with that. It is behavior that doesn’t come across. 

The contra agreement to that is that Tether simply doesn’t care about you and me. That’s the thing that Tether skeptics don’t realize. They just don’t care about what’s viewed publicly. They care about one thing, and that’s if they can find counterparties to actually trust them enough, to send them real money and then work with them to redeem their money as well. 

One thing that we didn’t touch on yet, and it’s really important for this to be known, is that Tether functions in a B2B way. It only works with large clients, like exchanges, like OTC desks, like traders, and it only redeems [tethers] with them. 

Whenever there is an argument on Twitter [where someone says] I tried to redeem tether with them directly, it is just not possible. And I agree that early on, [Tether] stated that it was possible—and that’s a major mistake—but they don’t function that way. They don’t care about Tether skeptics at this point. They only care if the tether peg actually remains the same, and they only care if they can find more clients to put in more money and earn more yield. That’s their point of view. And they don’t care about me and Bennett. Why would they?

Bennett: There’s a couple of things here I want to look at. One is yes, they’re B2B. And they really always have been, but that leads to the question of why they publish their stated minimum, which is only $100,000 to redeemed, and why they made such a big deal of reopening their verification platform, supposedly for clients to redeem tethers.

(In November 2018, Tether announced that customers could once again redeem tethers directly via Tether, but all accounts needed to have a minimum issue and redemption of $100,000. At one point, customers could redeem tethers via Bitfinex, but that is no longer possible.)

Also, Tether, themselves, are the ones who still proclaim on their website that they are the most transparent, that they will provide this look inside. And so I don’t think it’s unreasonable to hold them to their own statements.

Larry: I totally agree. And I do think that it makes almost no sense why they would do that. I think initially, it was for people to trust them. Because early on, you have to remember, all this was new and you had a couple of tens of millions in it. It was hard to trust it. And they had to gain the trust somehow. I do think they made some of these statements up because they just wanted people to trust it more, so the peg would actually hold.

One thing that’s important for fiat-backed stablecoins. It’s really the only thing that’s important is trust in that stablecoin itself, because when the trust breaks, it’s very hard to get it back. I think they just were super careless, super negligent, made several of these mistakes before, where they claimed that something was true and that they couldn’t follow up on it. Another example we didn’t bring up yet is they used to claim that they are a hundred percent audited and there was never any audit. There was barely any proper attestation. And I do think that was in some way acting in bad faith—pretending to do something just to gain early trust so it would work at a larger scale. 

Bennett: The curious thing to me is that when they were banking in the Taiwanese banks, they had an accounting firm who did give them a monthly attestation that is in large form similar to what Grant Thornton gives to Circle. And then they stopped that. And a couple years later we got the Friedman report. And then a little bit after that, we got the Freeh report and then the Deltec letter and then nothing. So at one point they were able to get monthly attestations saying that the balance in their accounts was greater than the number of tethers issued. And then they stopped.

Larry: Yeah, that’s a really good question. And when I talked to Paolo and if someone at Bitfinex is listening to this, I one hundred percent agree. Attestations should be the bare minimum of what they publish, especially because it’s fairly easy to do and it’s reasonable, cheap. Everyone else does it. 

I think the reason why they don’t do it goes back to the point that they just don’t have to. It just functions well enough without that the attestations and people at this point trust it enough that they just feel like it’s not even worth their time, right? 

Tether is still a relatively lean team, similar to Bitfinex. And they just probably feel, who cares? Unless the peg starts breaking, we’re not going to release any attestations. And there’s precedent to this before. I’m sure you recall, Bennett, but whenever there was some sort of a break to the peg, historically, pretty much like clockwork, like a week or two afterwards, they started doing some sort of a relationship that confirmed some of these reserves, and they work with Bloomberg as well. So my view on this is that they only do the bare minimum because they just don’t feel like they have to. They feel like at this point, they’re trusted enough that they just don’t have to go to these lengths and spend the money. But if someone, again, if someone at Bitfinex is listening right now, I think this would be the bare minimum. They make enough money right now to justify it and it’s really a no brainer.

Patrick: Do you feel that their reticence with regards to attestations might be related to their reticence with regards to disclosing banking relationships? If I recall back in the day on the UI for requesting a wire from them, they put in red text that they didn’t want you to disclose the wiring information to or from them because it would put the entire cryptocurrency economy at risk. I think I read that in a tweet of yours, if I’m not mistaken. Are we allowed to take them at their word? Is that the reason why they don’t want to disclose this?

Larry: I don’t agree with this approach as well. Their argument is that they have these banking relationships that at least back then used to work in a way that had to be in almost a shady way. And they believed that was the case. 

I don’t think that’s the case anymore, by the way. I do think that all the banking partners that they have now are aware of the relationship. And I do think that at this point, they’re functioning in a much more legit way that they were before. Back then that’s why I was a Tether skeptic as well because they had literally, no one was associated with each other. No one really was able to answer these questions that I had. That has changed. So I’ve changed my mind on a lot of these things because of their approach and because of the information I’ve been provided by other third parties. But I was in the same boat as well.

Richard: We’re seeing a lot more institutional interest in Bitcoin, but the counter narrative to Bitcoin right now is just that it’s heavily manipulated with tether possibly being the biggest manipulator. What do you think is the level of due diligence these institutional investors have performed on this particular matter?

Larry: The first thing I would like to address is that this is like one of the laziest arguments that people make on Twitter, that Tether is manipulating the markets, that they’re creating tethers to pump the price of Bitcoin. There have been several papers debunking the system. And it’s apparent from data that they’re not doing this.

I track data on a daily basis. I track pretty much all the indicators that are there and every indicator this year has been going up. Everything like spot inflows, [just talking to?] exchanges that support fiat. There’s no evidence whatsoever that Tether is creating USDT to pump the price of Bitcoin. 

You can do some fairly simple data analysis by how the market reacts based on when the tethers are created. Really, the simplest explanation to why some people are confused is because when new money comes into Tether, they have to create USDT and that money ends up going into some sort of a cryptocurrency because otherwise they wouldn’t even put it in tether. 

They conflate the relationship of training tethers to market going up. It’s just a natural reaction when you put more money in the system, the price will go up. I would like to just make sure that people actually study this relationship more closely because that’s one of the latest arguments. And I think that Bennett agrees on this point.  

Bennett: I largely do. Generally when people are talking about tether manipulating the market, they’re referring to the paper from University of Texas that was published in 2018, “Is Bitcoin Untethered?” And that paper has some methodological issues, specifically, if I remember right with periodicity, meaning that to get the results they get, it’s very dependent on which periods you look at and how you analyze the flows with respect to that.

I don’t necessarily think that’s we’re seeing. The common conspiracy theory is: unbacked tethers are printed, and they’re used to buy bitcoin. The bitcoin is then inflated, sold. Money goes back into each Tether’s bank account [while they’re backed?]. The market I think is too liquid for that to really effectively work.

Tether can’t move the market enough to get back enough to make that effective. However, there is still again, we get back to the question of backing and what’s really behind the tethers. Because if there’s a general belief in the marketplace that there are 23 billion real dollars behind this tether purchase, seeing this bitcoin and whatever, if that is not fully backed, if that amount of dollars did not actually enter the ecosystem, I think that could fairly be called manipulation.

Now as to the size of that effect. I don’t necessarily think it’s a large effect. I don’t think tether is responsible for any of the bull runs in bitcoin or anything like that. But I do think that tether could have still slightly inflated the price if they were not fully backed.

(I asked Tomlin later what he meant in saying that tethers aren’t responsible for bitcoin bull runs. “It’s just a highly leveraged frenzy,” he said. “Bubbles are always caused by some amount of organic interest. Bitcoin is exacerbated by being a relatively, or historically at least, thin market that now is loaded with leverage.”

I disagree. I think large tether issuances have a huge impact on the market. Unlike in 2017, I believe the bitcoin price, which recently went as high as $41,000, is mainly pushed up by tethers in this bubble. Price plays a huge part in fueling the frenzy. Read my story, “Are pixie fairies behind Bitcoin’s latest bubble?”)

Larry: To some extent, I agree with that. One thing I would like to add is a fun consequence of the paper being published from manipulation is that, I don’t know if you guys will notice, but now Tether basically like they don’t disclose whenever they create new tethers exactly. They basically give it like a week in advance or something. So they prevent people from actually conflating these two things that’s happening at once.

Richard: You mean they authorize first, right? So they basically mint and then they say they authorize it, but it hasn’t been deployed. And then they distribute them to various places.

Bennett: I feel like you could still do much the same analysis. Instead of tracking the issuing address, you could just check movements from the treasury. 

Larry: You probably could, but it’s just like a funny consequence. 

Richard: Going back to that paper Is “Bitcoin Really Untethered” by John Griffin and Amin Shams that Bennett was referring to, what did you say specifically was the issue with their methodology? And also about other papers that have been debunking this? 

I actually have the papers here, but I am not sure where the debunking part is. One of them is called “The Impact of Tether Grants on Bitcoin,” by Wang Chun Wei. And then the other one is, “What keeps Stablecoins Stable,” by Richard Lyons and Ganesh Viswanath-Natraj.

The first paper, “The Impact of Tether Grants on Bitcoin,” conducts an independent study as to whether Tether prints prior to bitcoin pumps. If there’s any kind of statistical relationship and basically says, there’s none. But it doesn’t directly debunk “Is Bitcoin Really Untethered.” So when Bennett says there’s some kind of methodology problem, I’m not familiar as to what exactly the issue is there.

Bennett: It’s been a while since I looked at that paper in specific. But if I remember, and they even mentioned this in one of the appendixes for the paper. If you change the way the period is measured or something like that, you see the impact from the tether flows decreases significantly. 

The other thing we do need to talk about is what Larry said is you expect when tethers enter the market, when legitimate money enters the market, that generally the prices of things are going to go up because there’s more money coming in. And so I’ve looked at a bunch of data around tether and I can push it and tweak it and get statistically significant results that are potentially interesting. But in order to get them, you have to pick magic numbers. So you’re picking a certain period, a certain cutoff, a certain something in order to make sure that your data looks the way it does. And the paper has some of those kinds of things in it.

Richard: As you’re saying the statistical finding isn’t sufficiently robust. If you pick a particular window in construction of your variable, you get a favorable result. And if you just move that a little bit, you no longer have a favorable result. Is that what you were saying?

Bennett: Yeah. If I remember even with the change in the periodicity, it was still directionally correct, but the impact became much smaller. And just looking at it, as a skeptic and as someone who tries to observe this market, it was not convincing enough to me and I was predisposed to be convinced by it.

Richard: The other interesting thing that’s been happening lately is that some of the Tether executives seem to have become a little bit more open in terms of appearing on podcasts and having conversations with the public. First of all, do you agree with that assessment that they’re being a little bit more open these days and second of all, if so, why do you think they’re doing that?

Larry: It’s one hundred percent by design and that’s one thing, like I mentioned before, that led me to trust into Tether more than I did before. They are public for one simple reason. And that’s to make sure that people stop spreading conspiracies. It’s for marketing purposes. When  you have a person that can go directly against some of these claims early on, it’s much more effective than letting someone like Bitfinex’ed just go with these theories that sometimes don’t have any merit. Sometimes they do. Sometimes they don’t. 

But they’re doing it because they want people to think of Tether as more legitimate than it has the rep for right now. Paolo keeps claiming that Tether is as regulated as other stablecoins. It’s a marketing move and it’s a good move as well.

(To be clear, the Tether/Bitfinex triad haven’t been seen at all in a long while. Paolo Ardoino, Tether’s CTO, took on the role of Tether frontman starting around November 2019. He constantly tweets reassurances that Tether is fully backed, regulated and is following KYC/AML protocols.)

Bennett: I am not necessarily convinced that they are more public. If you go back in time to earlier Bitfinex and Tether history, like I’ve saved the entire post history of Raphael Nicolle, the founder of Bitfinex on Bitcoin Talk. I’ve got the same for Giancarlo Devasini, and “myself” [a pseudonym for] one of the early consultants for Bitfinex, and Phil Potter would frequently show up, not on podcasts and stuff like this, but if you’re looking back to 2016, 2017 on the Whalepool teamspeaks and in other places like that, where they were still trying to reach out to crypto traders and stuff like that. 

And I agree with Larry, it definitely is a marketing move, but it’s also interesting to me that not all the executives have been more public, like Paolo. He’s probably the most public face of both. And  Stuart, Hoegner, the general counsel for both Bitfinex and Tether, is probably the one you hear from next often. You will almost never hear from [J.L. van der Velde], the CEO of both Bitfinex and Tether, who originally came over from Perpetual Action Group Asia, or you’ll occasionally hear from Giancarlo now, but you hear from him a lot less even than you used to. I don’t necessarily buy that they’re more public or more open about this stuff now than they were historically. 

Richard: The weird thing is, if you are going to spend the time to go on all these podcasts and try to assuage the public about your legitimacy, why not just spend the money and do the report? Obviously, we have just been through this point and it sounds like both of you actually agree that some attestation should be in order.

Larry: Like I mentioned briefly before, Bitfinex hasn’t been doing so well in the past two years and they attribute that to marketing as well. Because they haven’t done much of marketing before and volumes went down significantly. Liquidity went down. So I don’t think it’s just about Tether, it’s about Bitfinex as well. And it’s about overall just having a face that you can connect to Bitfinex and Tether that is more public facing. 

Richard: Let’s take another audience question. This is from someone called EastMother: Does a stablecoin issuer, such as Tether, have fiduciary duties towards the people to whom issuances are made and, or the secondary market token holders, any opinion on us.

Bennett: This was a matter of debate of law in the New York attorney general case when Bitfinex was trying to appeal it. They basically claimed even in the initial transcript that they had no responsibility to secondary market participants, meaning tether holders who were not directly contracted with Tether Holdings Ltd. 

I think it’s reasonable to say that Tether, if they don’t have a legal responsibility, at the very least as a moral responsibility, that if they are issuing this asset that they say will maintain this value, that the asset does that, whether or not there’s a legal obligation fiduciary obligation towards any secondary market holders. I’m not qualified to answer.

Larry: I totally agree with Bennett there. I don’t think that legally they do. I do think that ethically that they do, but also one thing to realize that we haven’t touched on it much yet, but the collapse of Tether, if it were to happen at some point, and if we are assuming that they’re acting fraudulently, it would be terrible for their business and Bitfinex and Tether as well. They’re pretty profitable. 

So that argument to me never made too much sense. Yeah, you can probably make more money more quickly if you just rug pull and take all the money now, but you’re sitting on a business that’s generating millions dollars in revenue. You have Coinbase going public this year and likely trading at more than $40 billion and all these exchanges are going to be worth gold soon. So you would have to be shooting yourself in the leg, if you were doing this. Like why not just run the business for 10 years and probably end up making even more money? It seems ridiculous to me that some people think that this would be a legitimate strategy.

Richard: Back to the fiduciary duty part. So there have been recent regulations put forth by the US government. And one of them is the [proposed] STABLE Act, which basically says, if you are a stablecoin operator, you need to be regulated like a bank. And the second one is more of a rumor in that stablecoins might be classified as security and as such an SEC would have jurisdiction over them. Neither of them actually is law, but if they were to become law, what would be the implication on tether and then second order effect on the crypto market?

Larry: The first thing, I believe that stablecoins will never be considered securities. I don’t think that will ever happen, but I am not a lawyer, so I can’t say that for sure, but I think that’s extremely unlikely. The STABLE Act, I think, is a little bit more realistic, and it would definitely affect in a lot of ways, because if you do have to have a banking charter, if you do have to have to essentially be a bank to operate stablecoins in US dollars, that would put Tether in a really difficult spot. And it would be interesting to see if they would continue operating.

Richard: That would conflict with an earlier point in that the Tether folks basically think that the US doesn’t have jurisdiction over them. If so, then the STABLE Act or whatever the SEC wants to do, as long as they claim Americans aren’t touching this stuff, then it’s fine.

Larry: That’s a really good question. Maybe Bennett has some views here. I’m not an expert on this, and I’m not sure if they would continue operating if they were directly against one of these laws. I think they might, but not so sure, honestly.

Bennett: This is a tricky question. So I don’t think currency backed stablecoins, like a one-to-one backed, or pegged coin will be considered a security anytime soon. Now, there were more complicated algorithmic models like Basis before they were shut down. I thought there was the potential for parts of that model to end up being considered a security, but that necessarily an acute worry with something like Tether.

Richard: Why is that though? With stablecoins, there’s no expectation to profit from the effort of others. So that particular component of Howey Test wouldn’t work.

Bennett: When I mentioned before was a multi token system involving Basis bonds and a couple of other pieces all working together in order to allegedly maintain a pegged value, which ended up accruing a larger number of Basis coins, the stablecoins, to the holders of the Basis bond.

Larry: Basically what Bennett is trying to say that it’s a multitoken system where one of these tokens is very similar to security.

Bennett: It’s a functioning part of the stablecoin system. And I could even see the argument being made that Maker is a security, but I can’t necessarily see the argument Dai [is a security.]

Larry: Right. I absolutely agree.

Bennett: As for the STABLE Act, this is always where I get conflicted with tether because they try to act as though they’re not regulated by US regulators, but in early 2016, Bitfinex was willing to sign a settlement with the CFTC and collaborate with regulators in those respects. 

My guess is a more restrictive, stablecoin law, like the STABLE Act would be somewhat similar to a regulatory shutdown of Tether with the difference being, they would probably be able to spin it down more gracefully, so there’d be a lot less collateral harm to the market and to holders. 

But I would agree with Larry and say that with a regulation like that, it is unlikely to me that Tether would continue to offer a dollar-backed stable coin. They initially tried to diversify with the Euro tether, which was never popular. They kept trying again and they’ve got the Tether Gold and the Chinese yen tether and all that. My guess is that is part of the reason they have those other coins.

Patrick: One of the other risks for any regulatory regime is that there’s a sort of regulatory contagion where regardless of whether a Bitfinex or Tether—which are alter egos of each other—regardless of whether they are subject to US law or jurisdiction, some people who would like to be involved in the cryptocurrency ecosystem are subject to US law, or jurisdiction, and they might not be able to interact with US counterparties, which interact with tether because of the risk of, basically the tether cooties, attaching to those counterparties. 

And potentially I know people in the cryptocurrency ecosystem don’t think this is likely because it’s so technically easy to mix funds via distributed finance, et cetera, et cetera, but potentially that sort of contagion risk could cause… If your regulated stablecoin is fungible for a non-regulated stablecoin via any mechanism you can reasonably foresee, then you have to solve that problem for the government, basically.

Bennett: This proves Tether’s claim that they’re not subject to US regulation that they’re separate from all that doesn’t hold up. They are a dollar-backed stablecoin. And fundamentally, if you’re working in dollars, the long arm of the United States government will extend to you. And I mean, that’s part of the fundamental risk of Tether is that at some point that long regulatory arm of the United States government, whether it be the CFTC, the Department of Justice or a state government, like the New York attorney general, will find something that justifies them seizing a large amount of tether’s funds and leaves them deeply insolvent.

Larry: I do agree that’s a significant risk that’s worth considering. I think that Bennett’s totally right. I do think that if the US government and the US system wanted, they can take out Tether, probably fairly easily. But one thing that I don’t necessarily agree with, maybe Bennet has more information on this, but I don’t believe that they claim they’re less affected by US regulation and the United States itself. I think that’s what people assume, but I’m not sure that actually claims this. 

Bennett: This is where you get into their public statements in press releases, blog posts and things Phil Potter says in a Whalepool teamspeak because you’ll see the Bitfinex executives try to make arguments like that, that they’re not subject to certain US regulations because of where they’re domiciled. And you saw Giancarlo making these back on Bitcointalk a couple of years into Bitfinex’s existence and stuff like that. So there are public statements by DigFinex executives making those kinds of claims. But the press releases, the blog posts, marketing materials on the website will generally be carefully worded to give them the impression that they’re compliant with all relevant US regulations.

Larry: And are you aware of any of these statements being made more recently versus early on in Tether’s functioning?

Patrick: The litigation with the NYAG at oral argument, they were asked point blank, who is your regulator? And they said, we are not regulated.

Larry: This is a really nuanced topic. We’ve been working on a stablecoin report for almost two months. And we talked to several different stablecoin providers, like USDC, Paxos, all of those. But when we asked them about this, what does it mean to be regulated as a stablecoin? And everyone has different answers. It’s like when you use the word regulated, it’s just so ambiguous. 

You have to think of several different ways of how you regulate it. One is, do you have AML and compliance teams? There are several other aspects. Where are you keeping your funds? Is someone monitoring that? Do you have the compliance manual? 

It’s just so many different things like that. And so Tether publicly claims that they are as regulated as a USDC. I think that’s questionable. They are registered with FinCEN, which means that they have to report when some activities out of the ordinary happen. 

But it’s probably not as stringent as when you are registered with the New York Department of Financial Services, like Paxos or Gemini Dollar. It is difficult to say what regulated means in this sense, because there are no clear rules. And because these things function globally and every jurisdiction has different rules and different regulations.

Richard: As far as the NYAG lawsuit goes, and I’ve asked this question in a previous podcast as well, but I’m curious to hear your thoughts. What do you think is the timeline for some kind of outcome and some kind of resolution. And what do you think would be the knock on impact on the Tether ecosystem?

Bennett: So the next due date for a document production is January 15th, which is coming up right around the corner. What will be included in that? If documents will be provided. [Here is the NYAG’s letter to the NY supreme court.]

Richard: Which documents are the prosecutors looking for?

Bennett: Financial records for Tether going back to 2017 showing KYC, AML history of redemptions and history of issuances. But I do not have that in front of me.

Larry: My question for you, Bennett, is do you think that the NYAG  has the right to ask for these documents while. Bitfinex has pretty publicly said that no customers can have access to Tether.

Bennet I am a New York resident. The Block was very recently able to register an account on Bitfinex and trade with the name “I am NY resident.”

Richard: I’m not familiar with what you were saying about The Block registering as a New York resident. Can you guys elaborate on this?

Larry: It was an article that we published a year and a half ago, or almost two years ago, where some user registered with a name that said, “I’m a New York resident.” And as part of registration, when you go through the registration process, there’s a box that says that you have to tick that says, I’m not a resident of New York, or I’m not a resident of the United States. 

And that user ticked that box, even though the name said, I’m a NY resident. And it was supposedly to test if the compliance would pick up on it. But the reason why I’m bringing it up is because sure, your customers definitely had exposures to Tether, but it is probably reasonable to say that Bitfinex is not interested in those customers, unless they are based outside of the US with their own subsidiary.

Bennet: That’s irrelevant for New York jurisdiction, Bitfinex being interested in them. Doesn’t matter to the New York attorney general. 

Larry: I agree.

Bennett: And going back, this is particularly striking because if you read the 2016 CFTC settlement that Bitfinex signed, they agreed to ensure that they would stop violating sections 4A and 4D of that act. And part of that was making sure they were at no point offering non-physically delivered futures to US citizens. 

And I think it’s pretty safe to say that they continued to do that for a while after early 2016. And I think if you look at what the New York attorney general has found, meaning that there are several professional firms that Tether has hired in New York, that there are tether traders in New York that you’ve got Giancarlo emailing the head of Galaxy Digital and telling him that he should meet up with Phil Potter because they’re both in New York. I think it becomes under the Martin Act, it would appear that New York has the jurisdiction to ask for these documents. I think the better question is, what happens if Bitfinex chooses to ignore the New York attorney general, and not produce the documents? I do not know how far their ability to enforce goes.

Patrick: It’s worth mentioning that this possibly be a legal tactical move to ask for the document production. That question was put to them at oral argument and by the judge, if I recall, and they were given the opportunity to not deny that they were solely looking for Martin Act violations. So it’s possible that they’re using a statutory authority that they have to compel the production of documents, which would allow them to uncover evidence of other things that they could throw at Tether later.

Bennet: Which I think is actually an interesting thing for us to come back to because the New York attorney general launched their investigation into Tether before the really conflicted transaction — where they transferred the [$700 million] out of tether into Bitfinex in order to deal with the insolvency. So there was something before that that triggered a New York attorney general investigation, and Bitfinex and Tether were both producing documents and cooperating with the New York attorney general up until the time of this transaction. 

And that’s when then the Tisha James and [Assistant Attorney General] Brian Whitehurst had to go for the ex parte order. And then Bitfinex has been endlessly appealing and they are now out of appeals. You’re right, the Margin Act violation is not the only thing they’re potentially interested in, but they thought it gave them the best argument for document production.

Larry: I agree with that as well. I will say, some of these New York trading firms have subsidiaries in jurisdictions that allow them to get exposure to these instruments, even if they are officially based in New York. And similar can be said about what The Block published on the NY resident. Yeah, it is true compliance wise. I think it’s probably improved since then. That being said, someone basically had to take someone, who was  not the resident of New York. So technically you are still breaching the registration form.

Patrick: I know I’ve been intervening too much on one side of this debate. Bennett, what would you be satisfied with? Is there a way that tether could demonstrate their operating above board?

Bennett: If they were to start getting regular attestations by a qualified auditing firm, that would go a long way towards assuaging many of my fears. I still think that the history of tether has left them with enough detritus that they’ll never truly be compliant. And that eventually one of those albatrosses around their neck will pull them under water. But if I started seeing a true good faith effort like that to be publicly transparent and show that they are living up to their own promises, that would make me feel a lot better about them.

Richard: There’s an article from Decrypt last year about how a lot of us USDT on-ramp is done by Chinese nationals looking to move their wealth overseas because of the tight capital control there. Can you speak to the extent that this is true and whether you see this trend continuing?

Larry: From my experience and from the data that I’ve seen, I don’t think it’s as much of a problem as Decrypt made it out to be. Tether does have a lot of clientele in China and a lot of the money that was sitting on Chinese exchanges that then got cut off the fiat system. Some of it is now sitting in Tether. So there’s a very large Chinese ecosystem when it comes to tether. 

I don’t think it’s being used that much for fleeing capital controls. It definitely is to some extent, I don’t think it’s one of the biggest use cases of tether. Because there’s already a lot of money that was previously in these Chinese exchanges now with tether. But it’s important to say, the OTC markets for tether is the primary on-ramp for crypto in China right now. Basically running exchanges in China is illegal. You can argue whether that’s being enforced or not, but a lot of these exchanges like Huobi, Binance, and OKex, they have OTC P2P desks that allow people to convert their fiat to tether a Bitcoin directly. It is definitely being used. I don’t think it’s used at a massive scale. 

Richard: If I can summarize our debate so far, it seems that what Larry is saying is that tether has had these unprofessional practices, to put a charitably, in the past, where they also had constraints with banking access and so forth. But ultimately they crossed the line in various different ways in the past. But now the situation is slightly different. 

Number one is they’re a B2B business. They have enough institutional flow as it is. So they don’t really care so much for the retail opinion. Therefore, they don’t have to worry about attestation reports and so forth. And secondly, they have made up their mind, or at least taking comfort in the fact that they are outside the relevant jurisdiction that is pursuing legal action with them. That’s why they basically continue to operate the way they do. But ultimately, Larry’s arguing that they’re no longer acting in bad faith because they’re just doing enough to satisfy their existing clientele. Is that a fair summary of your position, Larry?

Larry: Yes. That’s a very good summary. Did a great job.

Richard: I think a big question on my mind is whether Tether is playing these games to pump the market with unpacked collateral. I know we’ve run around on this, but so far, I don’t think I’m thoroughly convinced that they’re not doing this. So if Larry, you could summarize in one or two sentences to convince somebody that this is not the case, what arguments would you use?

Larry: When new money comes into the system, you can expect the price to go up and evidence here is that when new tether is created and deployed, the price of Bitcoin goes up and even this relationship can be true while not manipulating the market. That’s really the only argument that I have.

Richard: The biggest hole I see in that argument is that there’s no proof that there’s money coming to the market. If there’s proof, which is probably what the attestation report can provide, then I think that whole logic will flow. But right now the problem is just that there’s no proof that money is coming in, right?

Bennett: That’s largely my problem is that we don’t have any public attestation, audit, or anything like that to suggest that the $23 billion in US dollars are actually there. And other oddities, like the fact that you don’t see those show up in the Bahamian central bank report and other things like that. Again, Tether making a better effort to be more public on that stuff would assuage lots of those fears.

Richard: I think the most favorable view with regard to this under collateralization problem is something like, even though there’s a lot of issuance of tether, right after a bearish movement in Bitcoin price and after the tether issuance, the Bitcoin price comes up. Even though that’s all true, that doesn’t mean there’s foul play. It could very well be that there’s authentic demand that is rushing into the market to take advantage of a temporary price dislocation. But the issue is that somehow still not sufficient to change people’s skepticism. 

Larry: It’s almost impossible to change their mind, honestly. [Their thinking is that] it’s beyond reasonable doubt that tether is manipulating the price. And if you believe this, your bias is too much to be objective. 

Richard: Let’s move on to the concluding remarks stage. Starting with Bennett, synthesize your thoughts and tell us how you feel after having this debate regarding your initial.

Bennett: I still believe tether has at many points in their history been a bad faith actor. You see this as early as 2015, when they’re lying about their ownership. You see this continuing through with the frivolous lawsuit against Wells Fargo. You see it continue with the interactions with Crypto Capital. You see it compounded by some of their opacity surrounding the tether hack and the forced hard fork of the Omni network. And just this continued pattern of behavior combined with just the public incompetence of failing to track their own assets on their public transparency page makes me believe that Tether does not at this point deserve the benefit of the doubt. And there is not sufficient evidence that they are making a good faith effort to be a good member of the crypto community and to be publicly transparent about both their functioning and their backing.

(Bennett has provided additional notes on his blog, as a follow up to this debate.)

Richard: Okay, great. Larry, go ahead with your closing remarks. 

Larry: I agree with Bennett that Tether has acted in, what someone, can call bad faith. I think I would call it bad faith early on, as well. I think they were forced to act in this way to basically survive and to find the product market fit early on, and then to grow that business early on.

I think some of it was necessary for the business to function. I don’t agree with a lot of these practices and I do think that they’ve made several mistakes. They’ve behaved in a negligent way. They behave unprofessionally. That being said, recently it has changed drastically. I don’t think they’re acting in bad faith anymore. I think they’re a really important actor in the crypto space. And I think that with all that I’ve said, and it might sound like I’m defending tether, but I still think that there is a chance that there is a regulatory intervention at some point, which would put the markets into chaos for some time.

And I do think it’s a possibility that even people like me that don’t think Tether is acting in bad faith should consider because the US government can do something about Tether and can if they really want to and let it set. And this one, it’s a reasonable possibility. I still think it’s fairly low chance that something happens, but whoever’s listening to this, it’s important to, consider this closely. And if it does happen, make sure that you’re prepared for that possibility. 

That being said again, I think this was a good debate and I agree with a lot of Bennet’s points, but I do not think that Tether is acting in bad faith now. And I don’t think it has been in the past year and a half. 

Richard: Okay, great. Thanks for joining the debate today, Bennett and Larry, and thanks for co-hosting Patrick.  

# # #

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Judge gives Reggie Fowler 45 days to find new defense counsel

A New York district judge agreed to allow Reginald Fowler’s defense team to withdraw from their client’s case due to nonpayment. He then gave Fowler 45 days to seek a new attorney. 

(Update on Feb. 9: The judge has given Fowler three more weeks. Fowler now has until Feb. 25 to retain new counsel, according to the latest court filing.)

Judge Andrew L. Carter

Fowler is the former NFL minority owner linked to hundreds of millions of dollars in missing Tether and Bitfinex funds. Tether is the company that has so far issued $20 billion worth of stablecoins, and Bitfinex is a crypto exchange. Both companies are operated by the same individuals.

In a telephone status conference today, Judge Andrew L. Carter agreed to allow Fowler’s defense counsel—Hogan Lovells and Rosenblum Schwartz & Fry—to step down. They claim their client owes them more than $600,000.

However, while the government agreed to letting the lawyers withdraw, it was opposed to an adjournment of the April 28 trial, arguing that the situation was of Fowler’s own making. After all, his lawyers had been warning him since February they were planning to quit. The trial has already been postponed twice.

“We believe the almost four months until trial is sufficient time for a new counsel to prepare for trial,” U.S. Assistant Attorney Jessica Greenwood told the judge.

Judge Carter disagreed. That assumes Fowler’s new attorneys have already been retained and are on the case today, he said, stressing that it may take time for Fowler to find a new lawyer—especially given that his current lawyers are seeking to withdraw because he hasn’t paid them.

“That usually doesn’t make the defendant a very attractive client to a subsequent law firm,” Carter said.

The judge then explained to Fowler—who was on the call, joined by his defense team—that if he was unable to afford a new attorney, the court would provide him one free of charge. However, he would need to fill out a financial affidavit for the court to make that determination.

Although Fowler would not admit to whether he could afford an attorney, he did say he wished to try and hire one who would be more willing to work with him given his “current condition.” 

“The government has seized all my assets,” he said, starting to sound a bit angry. “The government has asked me to put the properties that I have that are free and clear up for bail. The government has handcuffed me. They have shut me down. They have locked down my family,” he said—though it’s not clear what he meant in saying his family was “locked down.”

“I can’t even get a bank account. My business has been shut down since COVID, so we don’t have any income. We do have assets. We can’t get to the assets because the government has tied them all up, so what I want to do, respectfully, is to try to find a firm that will work with me, understanding that we have assets that are tied up by the government, i.e., the properties that have me set for bail, or whatever you call it.”

Fowler, now living in Chandler, Arizona, is free on $5 million bail. Five properties were put up for lien in order to secure his bond.

He called it “ludicrous” that the government forced him to put up “nearly $2 million worth of nearly free-and-clear properties” for bond. (A quick look on Zillow puts the properties’ value at around $1.4 million.)

Fowler said if he could not find an attorney to work with him, he would ask the court for assistance.

The judge stressed that Fowler has a right to be represented by an attorney, and gave him until Feb. 2, 2021, to find one on his own. A new trial date will be set after that time, the judge said.

Hogan Lovells also represents Fowler in a class-action complaint against Tether and Bitfinex, in which Fowler is named. They are seeking to withdraw from that case as well.

Related stories:
Reggie Fowler owes lawyers $600,000
Reggie Fowler, man linked to missing Bitfinex funds, hoodwinks his own defense team
Confirmed: Reggie Fowler can’t pay his lawyers

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News: Bitcoin’s new crazy god, Tether’s runaway train, Binance sees $1B profits, STABLE Act threatens stablecoins

Crypto has come of age. What does that mean?

Among other things, it means MicroStrategy CEO Michael Saylor has replaced Patrick Bryne as the new crazy god of institutional bitcoiners. And another crypto exit scam has been invented: dying in India. (See Jorge Stolfi’s full reddit post. He is a computer scientist in Brazil.)

All Ponzi schemes eventually implode, even if it takes 25 years like Bernie Madoff’s did. When that happens, you have two choices: turn yourself in or disappear. Gerald Cotten chose to disappear. Of course, many people believe he is really and truly dead. I’m just not one of them.

With that, here is the news that I find interesting from Bitcoinlandia, an imaginary place where people keep insisting bitcoin is not a Ponzi.

MicroStrategy buys more BTC

MicroStrategy continues to funnel its excess cash into bitcoin. The analytics firm bought another $50 million worth of bitcoin, Saylor disclosed in a tweet.

MicroStrategy bought its most recent pile of bitcoins at an average price of $19,427—at the top of the market—and now owns a total of 40,824 bitcoins.

Here’s the thing: Saylor holds 73% of the voting stock of MicroStrategy, so he does not need buy-in from stockholders to make decisions. He is ruler and king, and if he wants his firm to buy more bitcoin, so be it.

Saylor also has a large private stash of bitcoins. I would be very curious to know how much BTC he owned before and after MicroStrategy’s recent purchase.  

If those bitcoin hold their value, all will be fine, Jorge Stolfi said on Reddit. But, if BTC “drops back to $8,000, the other stockholders will be upset, and may have grounds to sue Michael for mismanagement or whatever—even if there are no other shenanigans. If he did sell his coins while the company bought them, it will be worse.”

Guggenheim Partners

Another institutional investor has jumped on the bitcoin bandwagon. In a recent SEC filing, Guggenheim Partners, a leading Wall Street investment firm, revealed that it is looking to invest 10% of its $5.3 billion Macro Opportunities Fund into Grayscale’s Bitcoin Trust.

To be clear, Guggenheim is not buying bitcoin directly. It plans to invest nearly $500 million in GBTC shares. Grayscale itself now owns more than 500,000 bitcoin.

And Guggenheim isn’t taking on any risk. The firm makes money whether the price of BTC goes up or down. The retailers who are invested in the fund are the ones who carry all the risk.

Bitcoin is highly volatile and has no role in retail investor portfolios. As Economist Nouriel Roubini explained in a lengthy Twitter rant:

“Investing in BTC is equivalent to [taking] your portfolio to a rigged illegal casino & [gambling]; at least in legit Las Vegas casinos odds aren’t stacked against you as those gambling markets aren’t manipulated the way BTC is. Instead BTC is manipulated heavily by Tether & whales.”

Tether’s runaway train

On to my favorite topic: Tether—a firm that mints a dollar-pegged stablecoin that’s hugely popular on unbanked exchanges.

On Nov. 28, Tether surpassed 19 billion tethers in circulation. And like a runaway train with no way of stopping, it is fast on its way to issuing 20 billion tether—worth the notional equivalent in US dollars.

So, what is going on with the New York Attorney General’s investigation into Tether and Bitfinex?

The last bit of real news we had was in September when Judge Joel M. Cohen once again ordered Bitfinex and Tether to turn over financials. However, he did not set a deadline. He left that decision to a special referee, according to Coindesk. And we haven’t heard anything on the matter since.

Stepping back, recall that Bitfinex/Tether have been resisting handing over documents since November 2018 when the NYAG—in pursuant to the Martin Act, which gives it broad powers to investigate fraud—first served subpoenas for information stretching back to January 2015.

In April 2019, when the NYAG was concerned that iFinex (parent company of Bitfinex/Tether) was insolvent and Bitfinex was dipping into Tether’s cash reserves, it sought an ex parte order compelling the companies to produce documents and staying further actions pending the ongoing investigation.

iFinex responded with a motion to dismiss. In August 2019, the Supreme Court denied the motion and the respondents sought to appeal, arguing that the NYAG did not have the power to demand documents since Bitfinex and Tether didn’t have sufficient contacts in New York.

In July 9, 2020, a New York state appeals court sided with the NYAG. (Court filing)

As I’m writing up this newsletter, Coindesk’s Nikhilesh De has just pulled up a new court filing in the case from Dec. 4 that is a bit bewildering. At first glance, it appears to be the same filing from July, repeated twice.

Drew Hinks, a lawyer not involved in the case, said the filing is a remittitur—a jurisdictional document that formally ends the life of an appeal by notifying the world that the decision is final.

I’ll update this post as I learn more—specifically why a remittitur is important after the appellate judgment has already been issued and become final. Does this help the investigation going forward?

(Update: I am pretty sure that the remittitur was just a procedural thing that signals that the appellate court is done and has kicked the ball back to the original court—i.e., Justice Cohen.)

Bitcoin sets new all-time high

On Nov. 30, the price of bitcoin reached $19,900 on Coinbase, according to the Block, surpassing its previous all time high (ATH) set on Dec. 17, 2017, by about $10.

After bitcoin reached its new high, it promptly lost 13% of its value.

When you see bitcoin getting pumped like this, what you are seeing is traders cashing out before the bubble bursts. Bitcoin is not a company. It does not create any actual revenue. Cash coming into the system goes to paying the miners, who sell their 900 newly minted BTC per day and earlier investors lucky enough to sell at the right time.

I’m sure the current pump has nothing to do with the NYAG getting closer to exposing Tether/Bitfinex’s inner workings, the recent indictment of BitMEX operators, and Binance’s latest efforts to aggressively block U.S. citizens from using its exchange.

Binance pulls in big profits

The largest tether exchange expects to earn between $800 million and $1 billion in profits for 2020, its captain Changpeng Zhao (“CZ”) told Bloomberg. The Malta-registered exchange also expected $1 billion in profits 2018.

Speaking of Binance, the crypto exchange is suing Forbes and two journalists for a recent report claiming that the exchange had a plan to dodge regulations. (Here is the complaint.) It’s unlikely CZ will get anywhere with this lawsuit because the suit will get torn apart in discovery.

Similar to when Bitfinex threatened to sue prolific critic Bitfinex’ed in December 2017, this is likely more of warning to other journalist: don’t dig too deep, or we’ll come after you.

STABLE Act

The big news of the week is that three congressional democrats are trying to pass a bill that will require stablecoin issuers to comply with the same regulations and rules as banks.

If passed, the Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act, would require stablecoin issuers to apply for bank charters, get approval from the Federal Reserve and hold FDIC insurance. (The bill, press release.)

Stablecoin issues are like wild cat banks. Back in the 1800s banks would issue their own currency, and nobody knew what was backing the currency. And because these banks were often in remote, hard to get to locations, people often had trouble redeeming their notes for silver or gold or whatever it was that was supposed to be backing them.

Other news

Facebook’s Libra Association has announced a change of name. It is now the Diem Association. (Press release)

Tether skeptic Cas Piancy debates Sino Global Capital CEO Matthew Graham. (Podcast)

PayPal is shilling bitcoin on Facebook and Twitter.

Reggie Fowler owes his defense team $600,000. Lawyers were conned by a con. (My blog)

Joe Biden intends to nominate Adewale Adeyemo as Deputy Treasury Secretary, not Gary Gensler as previously thought. (New York Times)

Bill Hinman, who first spoke of “sufficient decentralization,” served his last day as SEC’s Division of Corporation Finance director on Friday. (SEC statement on departure)

Spotify is looking to add support for crypto payments. The streaming service wants to hire an associate director to lead activity on the libra project and other crypto efforts. (Coindesk)

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Reggie Fowler owes lawyers $600,000

Reggie Fowler, the former NFL minority owner linked to missing Tether and Bitfinex funds, owes his defense team more than $600,000, according to a new court filing on Tuesday. 

Fowler’s lawyers want to drop out of the case due to nonpayment, but they need to get permission from the court first. 

Last we left off, U.S. District Judge Andrew Carter ordered attorneys at law firm Hogan Lovells—also representing defense lawyer Scott Rosenblum at Rosenblum Schwartz & Fry—to file three versions of a sealed letter dated Nov. 18.

The public version—redacting what should not be revealed to the government or the public—discloses more details on the lawyers’ frustrations with a client who perpetually strings them along. 

Hogan Lovells attorneys James McGovern and Michael Hefter initially asked for a $25,000 retainer in late 2018 when they first met with their client. Fowler only ever paid the retainer, and two years later, he now owes them $600,000.

His defense team believed all the stories he told them that he was swimming in money, so they weren’t too concerned—at first.

“From the very inception of this matter, we have been led to believe that Mr. Fowler is a high net worth individual with substantial assets, which would allow him to pay his legal bills with little hardship,” the lawyers said in their letter to the judge.

Hogan Lovells started working with Fowler on October 18, 2018. They had their first meeting with him on Nov. 8, 2018, around the time Fowler was initially contacted by the FBI.

“When we agreed to represent Mr. Fowler, it was our understanding that he had been targeted by cryptocurrency businessmen seeking to take advantage of Mr. Fowler’s personal balance sheet as a means of transacting cryptocurrency transactions without drawing the attention of bank compliance officers or regulators,” they said.

Fowler was later arrested in Chandler, Arizona, on April 30, 2019. (DoJ press release and indictment.)

After his release in May on $5 million bail, Fowler hired Scott Rosenblum to join the defense team. Rosenblum asked for a $275,000 retainer and an additional $85,000 per week retainer, if the case went to trial. Rosenblum received a partial retainer of $100,000, which Hogan Lovells notes that Fowler paid “while he had several unpaid, overdue invoices for legal services issued by Hogan Lovells.” 

Additionally, Fowler paid another lawyer (unnamed) in Portugal in full for her services. He also paid international law firm Reed Smith LLP for services rendered in 2018.

“The fact that other attorneys had received payments from Mr. Fowler for their services led us reasonably to believe that Mr. Fowler’s representations to us that he would pay our bills was truthful,” the lawyers said.

In the second half of 2019, the lawyers were diligent about contacting Fowler for money. Each time they reached out, he told them payment was imminent and that “transactions or business deals that would fund the payment of our fees were in process”—but he never paid him. 

In February, following a plea bargain that went awry and a superseding indictment, the defense team realized the case would likely go to trial, requiring a substantial amount of work, and still no check from their client.

Fowler has ample funds, they said, including “$10 million in real estate that is unencumbered and could have been liquidated or monetized at any point during the past two years.” His refusal to pay, the lawyers added, has “led to a breakdown in the attorney-client relationship.”

The government has till Dec. 8 to respond and replies are due Dec. 11.

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Confirmed: Reggie Fowler can’t pay his lawyers

Reginald Fowler’s lawyers confirmed that money is indeed at the center of a conflict between them and their client — and the main reason why they want to withdraw from the case. 

The news was revealed Friday in a telephone status call attended by Assistant US Attorneys Jessica Greenwood, Sheb Swett and Sam Rothschild; Fowler’s defense team, James McGovern, Michael Hefter, and Sam Rackear of Hogan Lovells, and Scott Rosenblum of Rosenblum Schwartz & Fry; and Fowler himself.

Fowler, a former NFL investor — who resides in Chandler, Arizona, and is free on bail — is accused of setting up a shadow banking service that has been linked to Crypto Capital, a Panamanian firm at the center of the New York Attorney General’s investigation into crypto firms Bitfinex and Tether.

As I wrote earlier, Fowler’s defense counsel have been careful about disclosing details on why they want to ditch their client, who they have been working with since Fowler was indicted in April 2019.

District Judge Andrew Carter began the call: “Defense, can you give me a little further elucidation regarding the grounds for your seeking to be relieved without getting into any privileged or confidential materials?”

Fowler’s attorney McGovern said the matter involved privileged and confidential information but added: “I think it is fair to say that it is of the nature that the government assumes in their filing, of a fee-based nature.” 

Judge Carter cut straight to the heart of the matter: “So it is fair to say, without getting into the details, this is about lawyers not getting paid?”

“Yes,” McGovern answered, but added it was “a little bit more than that.” He then suggested that his team file an ex-parte submission setting out the nature and specifics of the request to withdraw. “That way, we’ll provide the court with a substantial amount of information that will provide color for the entire discussion,” he said. 

Fowler is represented by two legal firms. Carter asked if the nature of the conflict was the same for both firms. “Yes,” responded Rosenblum, Fowler’s attorney at the second law firm.

Federal prosecutors have argued that Fowler’s defense can’t simply withdraw from the case without giving some type of explanation.

US Assistant Attorney Greenwood reiterated that argument, telling the judge that “there are significant portions of a fee arrangement that are not potentially privileged.” She suggested Fowler’s attorneys provide details in an ex-parte and then allow the government to access the non-privileged portions “so we can appropriately respond to the motion to withdraw.”  

Judge Carter agreed to allow Fowler’s defense team to file a submission under seal. “Once I receive those materials,” he said, “I will make a determination as to whether or not the document will remain under seal or whether or not there are portions that can, in fact, and should, in fact, be redacted and other portions that should be made public.”

The defense counsel said they would submit the document on Nov. 18.

So where is Fowler’s money?

Fowler has been having money problems for a while—problems that extend back to when the US Department of Justice froze his bank accounts in late 2018, leading to the collapse of the Alliance of American Football, a new football league that he cofounded and was a major investor in.

From there, things seem to have gotten worse.

Recall that in January 2020, Fowler rejected a plea deal that would have required him to forfeit $371 million. It was the forfeiture requirements that blew up the deal. Prosecutors hit back with a superseding indictment that added a new count: wire fraud.

On October 15, Law360, reported that Fowler’s legal team might be open to exploring for a second time potential options to resolve the charges, even though the new wire fraud charge complicated things.

And then, on October 23, Fowler’s defense team went to the court seeking to modify conditions of his bond so that he could pay for his defense. (Here is the original May 2019 bond conditions; here is their request for a change.)

Specifically, they wanted to change the bond conditions to enable Fowler to take credit out on properties he had acquired prior to February 2018 “when the alleged conspiracy began” without approval from pretrial services. And to remove the five properties posted as security for the $5 million bond.

Those properties, based on a rough estimate of looking at them on Zillow, are probably only worth around $1.5 million total.

Whatever happened after that — it clearly wasn’t enough to satisfy his attorneys.

Updated Nov. 14 to add the bit about Fowler’s accounts getting frozen in 2018 and the AAF.

Reginald Fowler’s lawyers want to quit. Did he neglect to pay them?

Reginald Fowler, the Arizona, businessman allegedly linked to hundreds of million of dollars in missing Crypto Capital funds, is about to lose his defense team. Did he neglect to pay them?

And knowing who their client was, did his lawyers ask for a large enough retainer in the event that something unexpected like, say, a superseding indictment might extend their work?

Crypto Capital is the payment processor that Tether and Bitfinex—and several other cryptocurrency firms—used to shuttle money around the globe as a workaround to the traditional banking system. Fowler allegedly helped out by opening up a network of bank accounts for them.

We can only guess the real reason Fowler’s lawyers are keen to drop their client at the moment, but court docs may offer clues. Here is the backstory:

Earlier this week, Fowler’s attorneys—James McGovern and Michael Hefter of Hogan Lovells US LLP—asked a New York judge for permission to withdraw from the case. (Here is their motion to withdraw filed on Nov. 9.)

(Fowler is also represented by Scott Rosenblum of Rosenblum Schwartz & Fry PC, though Rosenblum’s name is not on the motion.)

The lawyers claim they initially told Fowler their reasons for wanting to quit on February 26—coincidentally, just five days after the government added a fifth charge against Fowler in its superseding indictment and a month after Fowler forfeited on a reasonable sounding plea bargain.

In the months follower, the legal team informed Fowler both “orally and in writing on multiple occasions” of their grounds for wanting to withdraw. Now, after much back and forth, they have had enough: they are asking the court for permission to drop him.

McGovern and Hefter don’t offer a specific reason for wanting to quit in their motion, citing attorney-client privileged. But they argue the case has had “limited pertinent discovery,” Fowler has had ample time to find new counsel, and essentially, the case should go on just fine without them.

Federal prosecutors are not convinced. In a letter addressed to Andrew Carter, the Southern District of New York judge overseeing the case, they argue the defense counsel has’t presented enough facts for the court to decide on the motion. (Here is their response filed on Nov. 12.)

Specifically, they dispute the “limited pertinent discovery” claim, saying the government has so far produced over 370,000 pages of discovery, much of which they have already discussed in detail with the defense counsel.

Further, they argue that if this is about a “fee dispute,” the court needs to weigh other factors, such as “nonprivileged facts” about the fee arrangement, including whether a “more careful or prudent approach to the retainer agreement might have avoided the current problem”—i.e., McGovern and Hefter should have insisted on more money up front.

Finally, they claim that if Fowler’s lawyers’ leaving further delays the trial, the court should not allow it. After two postponements, the trial is currently scheduled for April 12, 2021. (It was originally slated to begin on April 28, 2020, and then got moved to January 11, 2021, before the current trial date.)

“Now, approximately five months before the current trial date, defense counsel seeks to withdraw from this matter based on facts they claim were discussed with the defendant as early as February 26, 2020—nearly nine months ago and before both prior adjournments in this case,” federal prosecutors said. “The current motions should be denied if allowing counsel to withdraw at this late stage would further delay trial.”

Read Part II: “Confirmed: Reggie Fowler can’t pay his lawyers

And Part III: Reggie Fowler, man linked to missing Bitfinex funds, hoodwinks his own defense team

(This story was updated on Nov. 13 to note that Fowler is also represented by Scott Rosenblum.)

News: Bitmarket CEO turns up dead, Bitfinex to NYAG: ‘Yeah but no but,’ more weirdness from Tron

human-figure-outline-imprinted-on-grass-picture-id177395889It’s no fun when the money’s all gone. Two weeks after Polish crypto exchange Bitmarket shut down due to “lack of liquidity,” the lifeless body of its CEO, Tobiasz Niemir, turned up in the woods. It’s not clear if he fell in with shady characters or he put that bullet in his head all by himself.  

Here is an interview with Niemer done shortly before his death.

You remember BTC-e, the crypto exchange that was shut down in mid-2017? The U.S. is now suing the exchange and its operator Alexander Vinnik to recover penalties of $100 million imposed by FinCEN for allegedly violating the Bank Secrecy Act. Vinnik, a Russian national, is facing extradition requests from both the U.S. and Russia. (Here are the court docs.) 

Binance has been shilling its centralized BNB token. The crypto exchange regularly burns (destroys) large numbers of the token to increase the value of whatever is left. The BNB burn is “meaningless nonsense to fool suckers,” writes David Gerard. “Anyone taking Binance posts about BNB seriously as any sort of trading signal is dumb enough to trade literally any shitcoin they see, and probably deserves to.”

The hearing for Reggie Fowler, the AAF investor tied to Bitfinex’s missing $850 million, has been moved to December. (Here are the court docs.) Also, recall that he was released on $5 million bail secured by several pieces of cheap real estate and two financially responsible people. Who were his wealthy friends? A source tells me it was his ex-wife Lori Fowler and Molly Stark, the director of Spiral Volleyball, a company he owned. It pays to stay on good terms with your exes.

(Update Dec. 22: Lori Fowler and Molly Stark signed the court documents for his release.)

Bitfinex and Tether filed court docs arguing once again that they are not doing any business in New York and tether is not a security. (Here is Bitfinex counsel Stuart Hoegner’s affidavit and an accompanying memorandum of law submitted by the company’s outside counsel). It all boils down to “yeah, but, no, but yeah.” We’ll hear from the judge on Monday, July 29 as to what he thinks. 

Big whoops: Swedish crypto exchange Quickbit says it has leaked the data of 300,000 customers. According to the exchange, a third-party contractor left the data unprotected while upgrading on the exchange’s servers. 

Elsewere in cryptoland 

After bidding an astounding $4.5 million in a charity auction for the privilege to have lunch with billionaire Warren Buffet, Tron CEO Justin Sun cancelled last minute, claiming a bad case of kidney stones. But come to find out Sun’s been on the lam from China since November 2018. He is living in San Francisco now, which was where the lunch was supposed to have taken place. 

Sun was, however, feeling well enough to attend the Tron after-party on July 25, even though nothing actually happened before the party, since lunch was cancelled.

According to Chia founder Bram Cohen, Sun also forgot to make a scheduled payment as part of Tron’s mid-2018 acquisition of file sharing service BitTorrent. Someone needs to explain to Bram that kidney stones can take a lot out of a person.

In other news, the IRS is sending out scary letters to bitcoin holders, reminding them that they need to report any gains in crypto trading and pay their taxes. “Taxpayers should take these letters very seriously, IRS Commissioner Chuck Rettig said. 

How did the IRS get all this info? Previously, a court ordered Coinbase to hand over the personal identifying information of customers who had transactions of $20,000 or more on the exchange between 2013 to 2015.

An MIT fellow thinks the structure of Facebook’s Libra was lifted verbatim from a paper that he and two other scholars published last year. What say you, Facebook? Are you stealing people’s ideas? It’s not like you’ve done anything like that in the past.

On the subject of Libra, one of the big selling points of the project was that it had 27 partners backing the project. But the CEO of Visa reminds us, no companies have officially joined yet. They’ve only signed non-binding letters of intent. 

Telegram is under the gun. The popular messaging service has sold $1.7 billion worth of its Gram tokens to investors. Now it needs to build a Gram wallet into Messenger by October or give all the money back — and we’re sure it doesn’t want to do that.  

Finally, Sergey Ivancheglo (aka “Come from Beyond”), the founder of IOTA and one of the project’s core developers, quit the IOTA Foundation. The two remaining directors are non-developers, but we’re sure they’ll handle everything just fine on their own. Nice bunch of people, really. 

 

News: NYAG calls Bitfinex out, Bitfunder founder off to jail, Roubini pissed at Bitmex

A few people asked me where I’ve been lately. I’ve been working! I recently started a full time job. I’m the editor of a website about ATM machines. I recently wrote Spanish authorities: bitcoin ATMs expose hole in AML laws” and Bitcoin ATMs: Why Vancouver doesn’t want them.” (By the way, if you are curious how criminals use bitcoin ATMs to clean money, this moneylaunder.com article does a nice job of explaining the process.) 

I also write a newsletter on money. You should sign up for it

On to the news — 

Much ado about exchanges

Crypto exchange Bitfinex is doing a lot more business in New York than it’s led us all to believe. The NYAG’s recent court filings — a Memorandum of Law and an affirmation from assistant Attorney General Brian Whitehurst, along with 28 pieces of evidence — reveal a full picture of the company’s dealings in the state.  

Why does it matter? Because his means NYAG has jurisdiction to push ahead with its investigation into Bitfinex and Tether’s ongoing shenanigans. Decrypt’s Ben Munster also points out that Bitfinex “loaned tethers to a New York trading firm.” There’s an open question as to whether the funds were ever paid back.  

Also, Bennet Tomlin had a good thread on the NYAG’s filing.

By the way, there are now nearly $3.9 billion tether sloshing around in the markets, pushing up the price of bitcoin, which briefly crested $13,000 on July 10. 

I nearly missed this bit of news from a few weeks ago: Ireland-based cryptocurrency exchange Bitsane went poof!, leaving its 246,000 users high and dry. Users began having issues withdrawing crypto from the exchange in May. And on June 17, the exchange’s website along with its twitter and facebook accounts vanished.  

Bitmarket, the second largest Polish crypto exchange, has shut down citing a loss of liquidity. Approximately 1,300 bitcoin are stuck on the exchange, and users are rightfully pissed off. They have formed a Facebook group and are planning a class-action lawsuit. The exchange was acting goofy before the shutdown. Reddit user u/OdoBanks says users were asked to change passwords and provide additional KYC for withdrawals.

Founder of bitcoin stock exchange Bitfunder will be spending 14 months behind bars for lying to the SEC about a hack that cost clients 6,000 BTC. Instead of telling his customers the truth in 2013, operator Jon Montroll misappropriated funds to hide the losses.  

Cryptocurrency exchange hacks don’t happen too often — only once every few weeks. Japan’s Bitpoint is the latest to make headlines. The exchange’s hot wallets were hacked to the tune of $32 million worth of crypto, most of which were customer funds. On Monday, the exchange found another $2.3 million missing on exchanges “that use the trading system provided by Bitpoint Japan,” according to Japan Today

(Update, July 15, 11:30 a.m. EST — previously, I indicated Bitpoint located $2.3 of the missing funds, but actually the exchange found more money missing.)

Speaking of Japan, the country’s top regulator says 110 crypto exchanges are waiting for licenses right now. Under Japanese law, crypto exchanges need to register with the Financial Services Agency to operate in the country. As of now, there are only 19 licensed exchanges in Japan. The FSA has been slow to license after the Coincheck hack

Binance burned 808,888 of its native BNB tokens — about $24 million worth. This is the eighth burn of BNB coins, which are totally not a security. The price of the remaining BNB goes up every time there is a burn. Keep in mind, until any crypto is converted to fiat, its value is completely theoretical. 

Screen Shot 2019-07-14 at 11.26.10 PMBitMEX, the Hong Kong-based bitcoin derivatives exchange, has finally released the tapes (round 1 and 2) from its “Tangle In Taipei,” a July 3 debate between Bitmex CEO Arthur Hayes and NYU professor Nouriel Roubini. The two have been going at it online.

A man is suing Gemini — the NY exchange operated by the Winklevoss twins — after $240,000 was stolen from his money market account and wired to Gemini, where it was used to to purchase crypto on the exchange.  

Due to heightened oversight on online crypto exchanges, users are increasingly asked to fork over their IDs and addresses. The shift is giving peer-to-peer exchanges, which typically don’t impose such KYC checks, a boost, according to Bloomberg

Other interesting stuff

Founders of the Tezos crypto platform object to sharing emails between them regarding the Tezos “fundraiser” because they are married. Steven Palley has the full story

New York City’s Monroe College was hit with a ransomware attack that shutdown the college’s computer systems. The attackers want the college to fork over $2 million worth of bitcoin to free up the computers.  

President Trump blasted bitcoin on Twitter. He is no fan of Facebook’s Libra either. There’s only room in this country for one currency, and that’s the almighty dollar.

The Federal Trade Commission has fined Facebook a gobsmacking $5 billion for privacy violations. It’s the biggest fine in FTC’s history. Surprise, surprise, Facebook’s stock went up on the news. 

An angry mob burned down the home of a man behind bitcoin ponzi scheme in South Africa after he admitted all the money was gone. 

Finally, police in China cracked down on a cartel of illicit bitcoin miners who stole nearly $3 million worth of electricity. A local power company tipped off authorities after they noticed a peculiar surge in power use.  

News: LEO getting pumped, Cryptopia scrambles to save its data, Poloniex says it’s stopped ignoring customers

This newsletter is reader supported. If you appreciate my work enough to buy me a beer or cup of coffee once a month, that’s all it costs to become a patron. I’m trying to pick up freelance gigs when I can, but one of the joys of writing for my own blog is I can write whatever I want, when I want. On to the news…

Bitfinex and LEO

Screen Shot 2019-05-29 at 5.43.17 PMUNIS SED LEO, the full name of Bitfinex’s shiny new utility token, is in its second week of trading. The price started at around $1, but it’s already climbed to a high of $1.52, according to CoinGecko. I’m sure the price increase is totally organic—not.

There are 1 billion LEO in circulation—660 million issued on Ethereum and 340 million issued on the EOS blockchain. 

Crypto Rank warns that 99.95% of LEO coins are owned by the top 100 holders. Also, Bitfinex still has not disclosed information about the investors. “We consider that the token can be manipulative,” Crypto Rank tweeted.

Given its $850 million shortfall, Bitfinex needs to pull in more money. It recently entered the initial exchange offering (IEO) business. IEOs are similar to initial coin offerings (ICOs), except that instead of handing you money directly to the token project, you give it to the exchange, which acts as a middleman and handles all of the due diligence.

Tethers

As the price of bitcoin goes up—at this moment, it is around $8,730—the number of tethers in circulation is going up, too. There are now more than $3 billion worth of tethers sloshing around in the crypto markets, pushing up the price of bitcoin.

Whale Alert says $25 million worth of tethers were taken out of the supply and put into the Tether Treasury. Kara Haas tells me, don’t worry, $150 million Ethereum-based tethers were just issued, and they more than make up for the difference.

Omni tethers, Ethereum tethers, Tron tethers. Tethers appear to be constantly coming and going, bouncing from one chain to another. It gets confusing. But maybe that is the point—to keep us confused. And to add to the jumble, tethers are now executing on EOS.

In the next couple of weeks, Tether is also planning to issue tethers on Blockstream’s federated sidechain Liquid. And later this year, the Lightning Network.

I updated my recent tether story to note that if you want to redeem your tethers via Tether, there is a minimum redemption of $100,000 worth—small detail. Also, I still haven’t found anyone who has actually redeemed their tethers.

Cryptopia’s data—held to ransom?

Cryptopia filed for liquidation on May 14. Liquidator Grant Thornton New Zealand is now scrambling to save the exchange’s data, held on servers hosted by PhoenixNAP in Arizona. The tech services wants $1.9 million to hand over the data.

Grant Thornton is worried Phoenix will erase the SQL database containing critical details of who owned what on the exchange. It filed for Chapter 15 and provisional relief in the Bankruptcy Court of the Southern District of New York. (Here is the motion.)

According to the motion, Cryptopia paid Phoenix for services through April. But when it offered to pay for May, Phoenix ended the service contract and “sought to extract” $1.9 million from the exchange. Grant Thornton says only $137,000 was due for the month of May. Phoenix also denied the liquidators access to the data.

On May 24, the court granted motion. (Here is the order.) Phoenix has to preserve the data for now, but Cryptopia has to pay $274,408 for May and June as security in the temporary restraining order. 

Meanwhile, Cryptopia liquidators’ first report is out. The New Zealand exchange owes 69 unsecured creditors $1.37 million (these are just the ones who have put in claims thus far) and secured creditors over $912,000, with an expected deficit of $1.63 million.

Turns out January 14, the day Cryptopia suffered its fatal hack was the exact same day Quadriga announced the death of its CEO Gerald Cotten, who, uh, had been dead since December 9. The two defunct exchanges had a few other things in common, which I outline in my first story for Decrypt.

Poloniex 

Living in Cambridge, I found it strange that nobody in the local blockchain community knew anyone who worked at Poloniex, based in Somerville, the next town over. I was told Polo staff kept a low profile for security reasons. But I also wonder if they were trying to avoid pissed off customers, whose inquiries they ignored for months.

When Circle acquired Polo in February 2018, it inherited 140,000 support tickets. Now, more than a year later, Circle says it’s all caught up. Polo’s customer support has been “completely transformed” and 95% of inquiries are now handled within 12 hours.

Coinbase

Yet another executive has left Coinbase, president and COO Asiff Hirji. This is the third C-level executive to leave the San Francisco crypto exchange this year.

Recently, Coinbase said it was offering a crypto debit card in the UK—a Visa with a direct link to your Coinbase wallet that lets you spend crypto anywhere Visa is accepted. Financial Time’s Izabella Kaminska thinks that could open a back door for dirty money.

Coinbase plans to add margin trading. Leveraged trading lets you supersize your trading power, because you are borrowing from the exchange, but it also supersizes your risk.

It is easy to understand why Coinbase would want to get a piece of the margin trading business. BitMEX has been reeling in the profits with its bitcoin derivative products. The company’s co-founder is now a billionaire who has so much money, he is giving it away.

Binance is also talking about putting margin trading on the menu.  

Elsewhere in cryptoland 

Kik, the messaging app that raised $100 million selling its kin token in 2017, thinks decades old securities laws need revamping. It wants to create a new Howey test.

The Canadian startup launched DefendCrypto.org, a crowdfunding effort to fight the SEC. It’s contributed $5 million in crypto, including its own kin token, toward the effort.

Ted Livingston, Kik’s CEO says there was no promise kin would go up in value, like a stock. But that is not what at all what he implied during a presale pitch.

Craig Wright, the self-proclaimed inventor of bitcoin, created a hoopla when he filed registrations for the bitcoin code and Satoshi white paper. Disagreements over the significance of the registration have spilled out into his Wikipedia page. Drive-by editors even tried to change Wright’s name to “Craig Steven Fart face.”

Taotao, a new crypto exchange is launching in Japan. It is fully licensed by the Financial Services Agency, the country’s financial watchdog, and it is 40% owned by Yahoo Japan.

As long as the price of bitcoin keeps going up, that is all that matters to bitcoiners. David Gerard delves into the origin of the phrase “Number go up.”

Geoff Goldberg, well-known for his battles against the relentless XRP armies, has been mass reported for calling out the bots that run rampant on twitter. No good deed goes unpunished, apparently. Twitter has effectively silenced him for seven days.

Finally, the Associated Press has a new entry on crypto—sorry, cryptocurrency.

# # #

Related stories:
Social media startup Kik is kicking back—at the SEC
Turns out, you can make money on horse manure, and tethers are worth just that
“QuadrigaCX traders lost money on Cryptopia on the same day in January”—my first story for Decrypt

 

 

News: Kraken sets out to raise millions, Circle is cutting staff, Bitfinex scores another tiny victory in court

Crypto exchanges are struggling. Revenue growth is not what it was during the bubble of 2017, and regulators are cracking down. You can’t just list any old coin anymore without considering, “Is the SEC going to deem this a security?” And the cost of hiring lawyers, responding to subpoenas, and staying compliant is cutting into profits. So what are exchanges doing? They are laying off staff and/or trying to raise more money, while they hold out hope for the big institutional money that will come any day now.

Kraken and Bnk to the Future

Screen Shot 2019-05-24 at 12.12.57 AM

Recently, customers of Kraken got an interesting email offering a “rare, but limited opportunity.” Some folks thought the email was spam, but it was real.

Turns out, the San Francisco-based trading platform is partnering with Bnk to the Future as a way to raise funds by selling preferred shares of its stock. You can own a piece of Kraken for as little as $1,000. (In the US, you need to be an accredited investor, though.) 

The exchange hopes to rustle up $15.45 million. (Originally, it wanted to raise $10.2 million, but lifted the goal.) As of this writing, Kraken has raised $6.2 million from 942 investors. The crowdfund runs until June 20.

In December, Kraken tried to raise money at a $4 billion valuation, and it reportedly raised $100 million early this year, which it used to buy Crypto Facilities, a regulated London-based crypto derivatives exchange.  

In 2016, Bitfinex also used Bnk to the Future when it encouraged its customers to exchange their BFX tokens to shares in iFinex, the parent company of Bitfinex and Tether. BFX was the token that Bitfinex gave to its customers in compensation for funds they lost when the exchange was hacked. The exchange sold $57.39 million worth of iFinex shares in this manner, basically converting stolen funds to shares.

Bitfinex customers didn’t have much of an option. BFX tokens were dropping in value, and they wanted to get their money back.

Bitfinex/Tether and the NYAG law suit

Bitfinex joyously declared another small legal victory on May 22, when New York Supreme Court judge Joel M. Cohen granted a motion limiting the scope of the documents Bitfinex and Tether have to hand over to the New York Attorney General’s office.

The day prior, the companies had filed a motion to dismiss the case outright with three new court docs: proposed order to show cause, a memorandum in support of the motion to dismiss, and an affidavit by their general counsel Stuart Hoegner.

Lawyers for the companies argued the Bitfinex platform does not allow New Yorkers to trade (putting it outside of the NYAG’s jurisdiction), the Martin Act doesn’t apply to them (because tether is not a security or commodity, they said), and the document requests were too onerous. The NYAG has seven days to respond, and the judge scheduled a hearing for the motion to dismiss on June 29. 

According to Hoegner’s affidavit, which I read late one evening, you can’t actually redeem tethers 1:1 unless you bought them directly from Tether, which means if you got them on an exchange somewhere, too bad. You won’t be too surprised to learn then, that I can’t find a single person who claims to have either bought or redeemed tethers via Tether Ltd.

The Block got hold of a court transcript from the Bitfinex court hearing on May 16. “Tether actually did invest in instruments beyond cash and cash equivalents, including bitcoin,” a lawyer for Bitfinex told the court.

Wait, what? Bitcoin? Tether invested in bitcoin?

The entire purpose of tether is to be a stable asset that traders can use to escape market volatility. Yet, Tether is taking its reserves—money that it was supposed to keep an eye on, so that tethers always remained fully backed—and investing it in a highly volatile asset. What if bitcoin crashes? What then of the stablecoin? 

We learn something new about Tether everyday, it seems. According to CoinMarketCap, every 24 hours, the entire $3 billion supply of tethers changes hands 7.5 times, but not really, because most of that volume is fake.

The Block analyst Larry Cermak posted a graph of exchanges that trade tether, and some of the ones with the highest volume are obscure platforms nobody has heard of. “If I were to make an educated guess, at any given time, only a maximum of 15% of the total Tether volume is real,” he tweeted. In other words, it is all wash trading, i.e., trading bots simultaneously buying and selling tether to create the appearance of frenetic activity.

As far as I can tell, tether’s actual value is on par with horse manure—giving true meaning to the word “stablecoin”—just not as good for the roses. 

Circle and Poloniex

Circle, the Boston-based company that bought crypto trading platform Poloniex in February 2018, is laying off 30 people—10 percent of its workforce. The company blames the layoffs on an “increasingly restrictive regulatory climate.”

Last week, I mentioned that Poloniex geofenced nine altcoins, meaning people in the US will no longer be able to trade those coins on the exchange after May 29. Circle said  recent guidance from the SEC was a trigger for the move. I took another look and realized that one of the coins was Decred—a fork of bitcoin. Why Decred?

It’s possible the project’s premine and governance structure look a little to shareholdery, and Circle, which is backed by Goldman Sachs, is not in a position to risk listing any coins on Poloniex that might be construed as securities.

QuadrigaCX

I finally got around to writing up QuadrigaCX Trustee’s Preliminary Report. Ernst & Young basically says the money is all gone. Also, it adds that Quadriga’s financial affairs were a complete mess, and they’ll probably never sort everything out properly.

Remember the photo of 1,004 checks sitting on a stovetop? EY finally deposited those into a disbursement account on April 18. What a surprise for this trader to learn the money was freshly sucked out of his bank account two years later!

Also interesting, Black Banx (formerly WB21), the third-party payment processor allegedly holding $CA12 million in Quadriga funds is now issuing Visa cards without Visa’s consent. Antony Peyton, the finance journalist who had a thug show up on his doorstep last time he wrote about them, has been researching the company.

Cryptopia

New Zealand crypto exchange Cryptopia went belly up on May 14. Turns out, for the last nine months—since before the January hack that put it out of business—Adam Clark, the exchange’s former founder and programmer, has been building a new crypto exchange. According to his LinkedIn profile, he’s been working on Assetylene since September 2018. So, if you lost your money on Cryptopia, you can try again on Assetylene. I’m sure they’ve got their security issues sorted out by now.

Meanwhile, the funds that were stolen from Cryptopia are on the move. Whale Alert, who has been keeping on eye on the transfers, says funds from Cryptopia recently went to Huobi, where they were likely traded for other coins. Whale Alert also noted 500 ETH going to decentralized exchange EtherDelta.

Elsewhere in cryptoland

Facebook is getting ready to launch its GlobalCoin cryptocurrency payments system in 2020. They probably want to do something like PayPal combined with social media. David Gerard asks: “Why are on earth are they doing this as a cryptocurrency?” As he explains, nothing about putting this on a blockchain makes any sense whatsoever.

Bestmixer.io, one of the largest crypto mixers and tumblers, was shut down by Dutch authorities with the help of Europol and Luxembourg law enforcement. According to Europol’s press release, it was responsible for $200 million in money laundering.

Well, this is a shocker. The SEC has again delayed the VanEck bitcoin ETF proposal. Here is the order. The new deadline for the SEC to make a decision is August 19, and it can delay one more time for a final deadline of October 18, Jake Chervinsky tweeted. It’s been eight years, and the SEC has yet to approve any bitcoin ETFs in the US.  

Bitcoin is set to overtake the existing financial system—or maybe not. In a recent report, the European Central Bank says crypto poses no threat to financial stability in the euro zone. A “very low” number of merchants currently allow buying of goods and services with bitcoin, and there is no “tangible impact on the real economy.”

The IRS is planning to publish new tax guidance for crypto holders and traders. The last time it issued guidance was November 2014, back when it said crypto would be treated as property and you had to report earnings as capital gains.

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Turns out, you can make money on horse manure, and tethers are worth just that

Screen Shot 2019-05-23 at 9.22.35 AM

Did you know, there is an actual business for horse manure?  

“It’s wild,” one horse farmer told Stable Management. “You can take this stuff that nobody wants and turn it into something of value.”  

You can do something similar in the crypto word. Shitexpress was a service that delivered horse poop anywhere in the world for bitcoin. Now, instead of sending actually poop, you can send tethers, a stablecoin issued by a company of the same name, Tether Limited.  

Tethers are a major source of liquidity in crypto markets. In lieu of the US dollar, you can use them to enter and exit positions in times of volatility. As such, tethers are responsible for the health and wellness of dozens of crypto exchanges, including Binance, Huobi, Bittrex, OKEx, Poloniex and others, that don’t have direct banking.

Inner workings

When Tether first entered the world in 2015, tethers were promised as an I.O.U. For years, Tether assured us that every tether was worth $1—as in, one actual US dollar that Tether had on hand that you could redeem your tethers for.  

Tether and its sister company Bitfinex, one of the largest crypto trading platforms by volume, are now being sued by the New York Attorney General. As court documents reveal more of the companies’ inner workings, people are asking: What are tethers worth? Is one tether worth a dollar? Less than a dollar? What can I get for my tethers?

For a while, the thinking was, well, maybe one tether is worth 74 cents, because in his first affidavit, filed on April 30, Stuart Hoegner, Bitfinex and Tether’s general counsel, said tethers were only 74% backed. In other words, Tether was operating a fractional reserve, kind of like a bank, but sans regulatory oversight or deposit insurance.

Tether updated its terms of service on February 26, to let you know tethers weren’t fully backed, but if you weren’t paying close attention—i.e., checking the Tether website every single day—you may have missed it. Tether says it can amend, change, or update its terms of service “at any time and without prior notice to you.”

Now, it’s looking like one tether is worth whatever someone gives you for it. If someone gives you bitcoin for a pile of tethers, hurray for you, that is the value of your tethers. If the person who got your tethers can pass them off to someone else for bitcoin, or another crypto of value, then yay for them! It’s called the greater fool theory, and, so far, it seems to be working—Tether is still trading on par with the dollar.   

But if you take those tethers to Tether, the company that, so far, has shoveled $3 billion worth of them onto the markets, and say, “Hey, can I redeem these for dollars, like you have been promising me all these years?,” they will most certainly tell you, “Sorry, no.”

Are you verified?

You can only redeem tethers under certain conditions, such as you bought loads of them directly from Tether—and you are not a US citizen.

In Hoegner’s recent affirmation, filed on May 21, he says you have to be a “verified” Tether customer to redeem tethers. 

“Only verified Tether customers are entitled to redeem tether from Tether for fiat on a 1:1 basis. There is no right of redemption from Tether on a 1:1 basis for any holders of tether who obtained the tokens on a secondary market platform and who are not verified Tether customers; on the contrary, such holders of tether have no relationship with Tether and are expressly precluded from redeeming tether on a 1:1 basis for Tether.”

In that paragraph, Hoegner reminds us three times—just to make sure we understand his point—that whoever you are and however you ended up with your tethers, the company is under no obligation to give you cash back for those tethers.

Per Tether’s terms of service, only those who bought tethers directly from Tether Limited—aka “validated users”—can redeem tethers. Anyone who got tethers on the “secondary market,” meaning, an exchange, is not able to redeem those tethers.

As court docs reveal, from November 2017 to December 2018, you could only buy tethers for cash directly from Bitfinex. Per Tether’s website, as of November 27, 2018, you could once again buy tethers directly from Tether. However, you have to buy a minimum of $100,0000 worth. According to Tether’s definition, Bitfinex is a secondary market.

Also, if you want to redeem tethers on Tether, you have to redeem a minimum of $100,000 worth at a time, and you can’t redeem more than once a week.

Further, if you live in the US, you have zero chance of ever redeeming your tethers for cash. Hoegner says that as of November 23, 2017, Tether ceased servicing customers in the US, and at this time, “no longer provides issues or redemption to any US customers.”

To summarize, if you are a US citizen holding a bag of tethers, Tether will give you nothing for them. If you acquired tether on Bitfinex or some other exchange, Tether owes you nothing. And if you don’t like that, too bad, because Tether also says in its terms that when you buy tethers, you waive any rights to “trial by jury or proceeding of any kind whatsoever.”

Wait, this doesn’t look like a dollar!

If you are one of the lucky few who purchased $100,000 or more worth of tethers via Tether’s website—and you are not a US citizen—and would like to redeem 100,000 or more of them, you may or may not get actual dollars back any time soon.

In its terms of service, Tether says it “reserves the right to delay redemption or withdrawal” of tether in the event of illiquidity—meaning, if they don’t happen to have cash on hand today. The company also says that it reserves the right to pay you “in-kind redemption of securities and other assets” held in its reserves.

Screen Shot 2019-05-27 at 12.06.21 PMBasically, that equates to, you could get shares of iFinex (Bitfinex and Tether’s parent company) or LEO tokens (a new token Bitfinex recently created) or whatever is in the soup bowl that day. And you may end up with something that has as much real world value as horse manure—just not as good for the roses.

Update (May 27): This story has been updated to reflect that if you buy or redeem tethers from Tether, you have to buy or redeem a minimum of $100,000 worth.

 

 

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News: $250 million longs wiped out by bitcoin whale, Binance reopens withdrawals, Bitfinex set to trade LEO

Screen Shot 2019-05-18 at 5.17.10 PMThe price of bitcoin (BTC) is organically decided by traders—big ones, and only a few of them.

In the morning of May 17, the price of bitcoin did a nosedive, dropping from around $7,726 to $6,777 in about 20 minutes. The plunge was due to the actions of a single large trader (a “whale”) putting up 5,000 BTC (worth about $40 million) on crypto exchange Bitstamp.

The massive liquidation wiped out $250 million worth of long positions on BitMEX, a bitcoin derivatives exchange based in Hong Kong. (The BTC price it used bottomed at $6,469.15.) This, in turn, caused bitcoin’s price to plummet on other exchanges.

It’s hard not to view this as intentional price manipulation. 

BitMEX relies on two exchanges—Bitstamp and Coinbase Pro—equally weighted, for its Bitcoin-US dollar price index. Bitstamp and Coinbase both have low trading volumes, which makes them particularly vulnerable to price manipulations. It is like rolling a bowling ball down an alley and there are only two pins. You just have to aim for one.

Dovey Wan, partner at crypto asset investment fund Primitive Ventures, was the first to spot the dump on Bitstamp. She tweeted“As NO ONE will simply keep 5000 BTC on exchange, this is deliberately planned dump scheme, aka manipulation imo.” 

Despite the hit, the price of bitcoin magically recovered. As of this moment, it is trading at around $7,300. Bitstamp has launched an investigation into the large trade.

Delay, delay, delay

In the wake of such blatant price manipulation, it is tough to imagine that the SEC will ever approve a bitcoin exchange-traded fund (EFT).

On May 14, the US regulator again delayed a decision to approve the Bitwise ETF proposal. The deadline for the SEC’s ruling on the VanEck bitcoin ETF is May 21, but I’m betting that will get pushed out again, too.  

Bitfinex

The New York Supreme Court has ordered Bitfinex to stop accessing Tether’s reserves for 90 days, except for normal business activities. The judge modified the New York Attorney General’s original order to ensure it does not restrict Tether’s “ordinary business activities.” Bitfinex played up the event as a “Victory! Yay, we won!” sort of thing, but the NYAG’s investigation is ongoing, and the companies still have to hand over documents.  

Traders clearly don’t have much confidence in Bitfinex at the moment. Amidst the regulatory drama swirling around Bitfinex and Tether, they are moving a “scary” amount of bitcoin off the exchange. 

Meanwhile, Bitfinex is pinning its hopes on its new LEO token. Paolo Ardoino, the company’s CTO, tweeted that Bitfinex raised $1 billion worth of tethers—not actual dollars, mind you, but tethers—in a private sale of its new token LEO. Bitfinex has yet to disclose who actually bought the tokens, but I’m sure they are totally real people. 

Bitfinex announced that on Monday, May 20, it will begin trading LEO in pairs with BTC, USD, USDT, EOS, and ETH. It will be interesting to see if traders actually buy the token. US citizens are not allowed to trade LEO. 

Binance

After freezing deposits and withdrawals for a week following its hack, Binance opened up withdrawals again on May 15. Traders are now free to move their funds off the exchange. 

Binance is looking to create utility around its BNB token. The exchange burned all of its Ethereum-based BNB tokens and replaced them with BEP2 tokens—the native token of Binance Chain. The cold wallet address is here.

Cryptopia, Poloniex, Coinbase

New Zealand crypto exchange Cryptopia is undergoing a liquidation after it experienced two security breaches in January, where is lost 9.4% of all its assets. Its customers are understandably pissed and outraged.

After the breach, the exchange was closed from January until March 4, when it relaunched in a read-only format. Ten days later, traders woke up to a message on the exchange’s website that read, “Don’t Panic! We are currently in maintenance. Thank you for your patience, and we apologize for the inconvenience.” Cryptopia closed permanently on May 15. Grant Thornton NZ, the company handling the liquidation, expects the process will take months.

In the US, regulatory uncertainty continues to plague exchanges. Boston-based Poloniex, which Circle acquired last year, says it will disable US markets for nine tokens (ARDR, BCN, DCR, GAME, GAS, LSK, NXT, OMNI, and REP). “It is not possible to be certain whether US regulators will consider these assets to be securities,” the exchange says. 

Meanwhile, Coinbase is using the $300 million it raised in October to gobble up other companies. The San Francisco-based exchange is in talks to buy Hong Kong-based Xapo for $50 million. Xapo’s coveted product is a network of underground bitcoin cold storage vaults. The firm is rumored to have $5.5 billion worth of bitcoin tucked away in bunkers across five continents. 

Elsewhere in Cryptoland 

John McAfee has disappeared. “He was last seen leaving a prominent crypto person’s home via boat. He is separated from his wife at the moment. Sources are claiming that he is in federal custody,” says The Block founder Mike Dudas.

McAfee’s twitter account is now being operated by staff, who later denied he was in custody, posting pics of McAfee with his wife in their “new” backyard. 

Decrypt’s Ben Munster wrote a hysterical piece on Dudas, who has a habit of apologizing post tweet. “He tweets like Elmer Fudd shoots his shotgun; from the hip, and nearly always in the foot.” The story describes Dudas as a real person with human foibles.  

Bakkt says it’s moving forward with plans to launch a physically settled bitcoin futures product in July. The company does not have CFTC approval yet—instead, it plans to self-certify, after which time, the CFTC will have 10 days to yea or nay the offering.

Both CME and CBoe self-certified their bitcoin futures products as well. The difference is this: they offer cash equivalents to bitcoin upon a contract’s expiration. Bakkt wants to deliver actual bitcoin, which may give the CFTC pause.

The SEC has fined Alex Tapscott, co-author of the book “Blockchain Revolution,” and his investment firm NextBlock, $25,000 over securities violations. (Here is the order.) And the Ontario Securities Commission fined him $1 million.

In 2017, NextBlock raised $20 million to invest in blockchain and crypto companies. In raising the money, Tapscott falsely touted four blockchain bigwigs as advisors in slide decks. After being called out by then-Forbes writer Laura Shin, the company returned investors’ money. But the damage was done, and the SEC went after them anyway.

Tim Swanson pointed out that the the Stellar network went down for about two hours, and only those who run validator nodes noticed. Apparently, nobody actually cares about or uses the Stellar network.  

According to a report by blockchain analysis startup Chainalysis, 376 Individuals own one third of all ether (ETH). Based on a breakdown of the Ethereum initial coin offering, which I wrote for The Block earlier this year, this comes as no surprise.  

Robert-Jan den Haan, who has been researching Bitfinex and Tether since way back when, did a podcast interview with The Block on “What the heck is happening with Bitfinex.” If you are Bitfinex-obsessed like I am, it is worth listening to.   

Apparently, kicking back at regulators is super costly and something you may want to consider before you launch a token that doesn’t have an actual use case. SEC negotiations have cost Kik $5 million, as the media startup tries to defend its KIN token.

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New York Supreme Court: Bitfinex may not touch Tether’s reserves for 90 days

Screen Shot 2019-05-16 at 8.30.44 PMBitfinex will not be able to dip into Tether’s reserves for 90 days, except to maintain normal business activities, according to a New York judge. The crypto exchange must also “promptly” hand over documents to the New York Attorney General (NYAG).

On May 16, New York Supreme court judge Joel M. Cohen granted Bitfinex’s motion to modify a preliminary injunction obtained by the NYAG. The judge called the original ruling vague, over broad, and not preliminary, meaning it lacked a specified time limit. He also held that the Martin Act—New York’s powerful anti-fraud law—“does not provide a roving mandate to regulate commercial activity.”

Decision and order

NYAG’s original petition consisted of two parts: a directive to Bitfinex and Tether to “produce evidence,” and a preliminary injunction to ensure that the respondents maintain a status quo while the NYAG’s investigation is ongoing.

In his 18-page decision and order, the judge granted the directive—Bitfinex and Tether still have to surrender documents—and agreed to modify the preliminary injunction, so as not to restrict the companies’ “ordinary business activities” any more than necessary.

The modified injunction spells out the following:

Tether cannot loan, extend credit or transfer assets—outside of its ordinary course of business—that would result in Bitfinex having claims on its reserves.  

(In an earlier letter to the court, iFinex, the parent company of Bitfinex and Tether, claims that Tether’s business model depends on it “making investments and asset purchases with the proceeds it derives from selling tethers.” Presumably, since this is an ordinary part of the company’s business, Tether can continue to invest its reserves, though it is not clear how it is investing the funds.)

Tether and Bitfinex cannot distribute or dividend any funds from Tether’s reserves to executives, employees, or agents of Bitfinex—except for payroll and normal payments to contractors and vendors.  

The companies are barred from destroying or altering any documents and communications, including material called for by the NYAG’s 2018 investigative subpoenas.  

If the NYAG wants to extend the 90-day injunction, two weeks before the injunction expires, it must submit a letter to the court. Bitfinex will then have seven days to submit a response. Based on that, the judge will decide whether to hold a hearing.

Victory, for now…

In a post on its website, Bitfinex revels in its victory. The exchange claims the NYAG sought the April 24 order “in bad faith” and vows to “vigorously defend” against the agency’s actions. Bitfinex adds that it remains committed to protecting its customers, its business, and its community against the NYAG’s “meritless claims.”

Most tether holders (the NYAG calls them “investors”) entered into their contracts under the assumption that tethers were fully backed. Each tether was supposedly worth $1—until late February, when Tether changed its terms without actually telling anyone.

Around the same time, Tether made a questionable loan to Bitfinex for $900 million. (Both companies are run by the same individuals, and the same people signed the agreement on either side.) Bitfinex has already dissipated $750 million of those funds. The remaining $150 million appear to be safe—at least for now.

To note, the investigation into whether Bitfinex violated the Martin Act is still ongoing. As a result of today’s ruling, Bitfinex still has to hand over documents and communications about its “business operations, relationships, customers, tax filings, and more.” The NYAG has been requesting those documents since November.

A transcript of the hearing is available here, courtesy of The Block. 

Update (May 19): I updated this story to clarify that there were two parts to NYAG’s original order. Additionally, I noted that Tether can still invest its reserves.

Update (May 21): I added a link to the full transcript of the hearing.

# # #

Related stories:
Bitfinex to NYAG: You have no authority! We did nothing wrong!
NYAG: Bitfinex needs to submit docs and stop dipping into Tether’s reserves
The curious case of Tether: a complete timeline of events

 

Reginald Fowler, man tied to missing Bitfinex funds, out on $5M bail

Screen Shot 2019-05-02 at 1.33.58 PMReginald Fowler, the ex-NFL owner arrested in connection with operating a “shadow bank” that processed hundreds of millions of dollars of unregulated transactions on behalf of crypto exchanges, is out on $5 million bail.  

The U.S. Government previously argued that Fowler should be detained without bail. The government thought he was too much of a flight risk due to his overseas connections and access to bank accounts around the world. But for the time being, at least, Fowler is a free man, albeit, with restrictions.

Order and letter

The order setting conditions of release was filed with the District Court for the District of Arizona on May 9. A letter of motion, submitted by U.S. Attorney Geoffrey Berman and addressed to Judge Andrew Carter of the District Court of Southern New York, was entered on May 8.

Copies of the letter went to defense attorneys James McGovern and Michael Hefter, partners at Hogan Lovells in New York. Fowler’s arraignment is set for 4:30 p.m. on May 15 at the Southern District Court of New York. 

Fowler was arrested in Arizona on April 30. The bond is being posted in New York, because the District of Arizona does not include secured bonds in bail packages. 

According to conditions set forth in the bond, Fowler cannot travel outside of the Southern District of New York, the Eastern District of New York, and Arizona. He also had to surrender his travel documents and his passport. 

The properties and the wealthy friends

Fowler’s $5 million personal recognizance bond is secured by two unnamed “financially responsible” co-signers and the following properties: 

  • 3965 Bayamon Street, Las Vegas, Nevada
  • 8337 Brittany Harbor Drive, Las Vegas, Nevada
  • 4670 Slippery Rock Drive, Fort Worth, Texas
  • 4417 Chaparral Creek Drive, Fort Worth, Texas
  • 8821 Friendswood Drive, Fort Worth, Texas

A quick look on Zillow indicates the properties are cheap investment houses, worth perhaps $1.5 million in total, if that. This would mean that the additional $3.5 million is secured by Fowler’s wealthy friends, whoever they are.

The LLC on the five properties is Eligibility LLC, 4939 Ray Road, #4-349 Chandler, Arizona 85226. The mailing address points to a UPS store, so it is basically a P.O. Box.

Global Trading Solutions LLC, a company linked to Fowler’s shadow banking operation, had the same mailing address for a time, but the address was later changed.

Indictment

On April 11, Fowler and Ravid Yosef, an Israeli woman who lived in Los Angeles and is still at large, were indicted on charges of bank fraud. Fowler was also charged with operating an unlicensed money services business. 

Fowler’s company—or one of his companies—was Global Trading Solutions LLC, which provided services for Global Trade Solutions AG, the Switzerland-based parent company of Crypto Capital Corp.

Cryptocurrency exchanges used Crypto Capital as an intermediary to wire cash to their customers. The firm is allegedly withholding $851 million on behalf of Bitfinex, a crypto exchange that is currently being sued by the New York Attorney General.  

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Thanks to Nic Weaver for locating the court documents. He spends his beer money on PACER, so you don’t have to.

News: Money laundering in real time, Binance has you covered, maybe, and Bitfinex ready to IEO with LEO

A lot is going on in cryptoland right now—most of it involves investigations, a New York Attorney General (NYAG) lawsuit and missing funds, but I don’t want to sound negative.

The destiny of all crypto exchanges is to be hacked, apparently. Last year, thieves stole $950 million worth of cryptocurrency from exchanges. So, in many ways, it’s not surprising to hear that Binance, the largest crypto exchange by volume, got hacked a second time.

Binance, all funds SAFU

Thieves looted more than 7,000 BTC from Binance in a single transaction. The hackers, however, are not free yet! They still need to move that $41 million worth of BTC into fiat,  a feat that typically requires layering funds into smaller and smaller amounts (generally using a script of some sort), moving it through coin mixers, and then funneling it through various exchanges until they can exit into cash. 

Thanks to blockchain, we can watch this money laundering happen real time. The first transaction out of Binance consisted of of 44 outputs. The hackers have since consolidated the bitcoin into seven addresses of mostly amounts. Now we wait.

After the hack, Binance suspended all deposits and withdrawals for seven days. Traders on the platform can’t dump their bitcoin—or their tether. If bitcoin were to crash, they would be trapped. Fortunately, bitcoin is not crashing—it’s pumping. As I write, bitcoin is now at $6,800, having shot up $1,000 within a week.

According to one expert, the boost is partially due to “a rare alignment of celestial bodies forged in an ancient supernova”—thus, number go up. Makes total sense to me.

Binance says it has an insurance policy—its SAFU fund—to cover losses on the exchange. Nobody knows for certain what is in that fund, because there has never been an outside audit, but Binance’s CEO CZ says they have enough bitcoin to cover the losses. Phew!

In a recent blog post, CZ also said the exchange is revamping its security measures, including its 2FA, API and withdrawal validation processes. Also, withdrawals and deposits should resume “early next week.”

Bitfinex’s legal woes

If you need to get up to speed with the Bitfinex and Tether saga, I covered the NYAG lawsuit in my previous newsletter. Robert-Jan den Haan also wrote a complete timeline of Bitfinex’s history with its third-party payment processor Crypto Capital.

We have podcasts, too. I discuss the Bitfinex drama with Sasha Hodder on HodlCast, and Robert talks about it with Laura Shin on her Unconfirmed podcast.

In response to the NYAG’s court order, Bitfinex submitted a motion to vacate. The NYAG filed an opposition, and Bitfinex responded. At a hearing on May 6, New York Supreme Court judge Joel M. Cohen called the preliminary injunction “amorphous and endless.” The prelim will stand, but he is giving both parties a week to sort it out.

Bitcoin was selling at a 6% premium on Bitfinex—a sign that traders are willing to pay more to get rid of their tether and get their funds off the exchange. The price of bitcoin on the exchange was so off-kilter that CoinMarketCap, a website that aggregates bitcoin pricing from top exchanges, stopped pulling from Bitfinex.

The Bitfinex premium disappeared when Binance halted withdrawals on its platform, Larry Cermak doubts it has anything to do with Binance though. He thinks it’s because Bitfinex started processing cash withdrawals again.

Twitter user “Bitfinex’ed,” disagrees. When bitcoins and tethers are stuck on Binance,  that effectively reduces the supply and makes it that much easier to pump the market, he told me. He think prices will crash when Binance reopens withdrawals.

“I am lion, hear me roar”

Screen Shot 2019-05-10 at 9.39.37 PMBitfinex has a $851 million shortfall due to issues with Crypto Capital. How is it going to fix that? Here is an idea: Why not just print more money?

The exchange’s latest plan is a token sale, or exchange traded offering (ETO), on its own platform. It will be selling a new token LEO—as in lion.

Earlier this week, iFinex, the parent company of Bitfinex, released a white paper outlining the business proposition behind the token offering. Each LEO is worth 1 USDT, which is worth $1 USD. This is not the first time Bitfinex has issued a new token to pull itself out of a financial mess. (It created a BFX token after it was hacked in 2016.)

Bitfinex shareholder Dong Zhao told CoinDesk that iFinex has received hard and soft commitments of $1 billion for the token sale. Perfect. That should definitely eleviate all of Bitfinex’s money problems.

QuadrigaCX

Ernst & Young, the trustee for failed Canadian crypto exchange QuadrigaCX, released a preliminary report describing the company’s assets and liabilities. In a nut, Quadriga has US$21 million in assets, but owes creditors US$160 million.

Elsewhere

Recently, Negocie Coins, a crypto exchange that you probably have never heard of, rose to number three on CoinMarketCap’s top exchange’s list sorted by volume. How is this even possible? Clay Collins, founder of market data company Nomics, made a video, explaining how crypto exchanges use ticker stuffing and volume spamming to game the system.

FinCEN has released a new “interpretive  guidance” for money services businesses using cryptocurrency. If you are not sure if you are a money transmitter, David Gerard breaks it down for you. Sasha Hodder also covers the new guidance in Bitcoin Magazine. And there were several tweet storms—here, here, and here.

The FinCEN document has far reaching implications, such as, it appears Lightning Network (LN) operators qualify as money transmitters. Emin Gün Sirer says he is not surprised “given how similar LN is to hawala networks, and given the role hawala networks played in financing terrorism pre-9/11.”

The US banking committee is concerned about Facebook’s attempt at a cryptocurrency—Facebook coin—and how the social media giant is treating people’s’ financial information. It’s published an open letter with questions for Facebook.

Redditor u/BioBiro, who needed to acquire bitcoin for a totally legal purchase, complains about the rigamarole he had to go through. Among other things, “Now there’s two pictures of me and my driving license on their server for the rest of time, I guess.”

Consensus, CoinDesk’s big money maker conference, kicks off in New York next week. Last year it had 8,500 attendees, pulling in ~$17 million in ticket sales—and that’s before sponsorships. Arthur Hayes, CEO of bitcoin derivative exchange BitMEX, was one of several who rolled up to New York Hilton Midtown in a lambo.

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Bitfinex to NYAG: You have no authority! We did nothing wrong!

Screen Shot 2019-05-06 at 5.42.29 PMBitfinex has filed yet another rebuke to the New York Attorney General’s ex parte court order.

The April 24 order basically tells Bitfinex to submit documents and stop dipping into Tether’s reserves, which it has done, so far, to the tune of $750 million.

Bitfinex filed a motion to vacate or modify the order on May 3. On Friday, the Office of the Attorney General (OAG) opposed the motion. And on Sunday, Bitfinex filed a response to the opposition. The reply memorandum in further support of the motion to vacate or modify the order was filed by law firms Morgan, Lewis & Bockius LLP and Steptoe & Johnson LLP.

In the memo, Bitfinex argues that “nothing in the Attorney General’s opposition papers justifies the ex parte order having been issued in the first place.” It lists a bunch of reasons for this—essentially, a lot of “buts,” which equate to Bitfinex saying, “It wasn’t me, you can’t prove it, and anyway, nobody was harmed by the thing I totally didn’t do.”

Here is a summary—also, I am not a lawyer. 

But, tethers are not a securities!

The OAG claims Bitfinex violated the Martin Act, New York’s anti-fraud law, which grants the agency expansive powers to conduct investigations of securities fraud.

Bitfinex argues that the OAG did not even try to explain how tethers (the dollar-backed coins issued by Bitfinex’s affiliate Tether) qualify as securities or commodities in the first place. In its opposition, this is what the OAG did say, in a footnote:

“The Motion to Vacate wrongly suggests that an eventual Martin Act claim stands or falls on whether ‘tethers’ are securities or commodities. It does not. The Bitfinex trading platform transacts in both securities and commodities (like bitcoin), and is of course at the core of the fraudulent conduct set forth in OAG’s application.”

This looks like an attempt by Bitfinex to pull the OAG into the weeds, and the OAG is not going there. The fact that Bitfinex does trade in securities and commodities (the CFTC considers bitcoin a commodity, and the SEC considers most ICO tokens to be securities) is enough to bring Bitfinex under the OAG’s purview. ‘Nuff said. 

But, this is so disruptive!

The ex parte order is “hugely disruptive,” says Bitfinex, because it freezes $2.1 billion of Tether reserves—what’s currently left to back the 2.8 billion tethers in circulation—prohibiting any investment of any kind, for the indefinite future. 

In other words, Bitfinex feels like it can do whatever it wants with the cash that tether holders gave it for safe keeping. Tether works like an I.O.U., which means Bitfinex is supposed to hold onto that money for redemptions only.  

The big reason Bitfinex wants to bend the rules here is that it is desperate for cash to stay in operation. If it can’t get that cash from somewhere, the exchange is potentially in danger of running aground, or getting into even more trouble with regulators. At this point, Bitfinex is even trying to raise $1 billion in a token offering. 

But, we didn’t do anything wrong!

Bitfinex argues it has not committed fraud. It has taken hundreds of millions out of Tether’s reserves, but that is okay, because it updated Tether’s terms of service to make it clear that reserves could include loans to affiliates. What’s more, Bitfinex says it updated the terms before it drew a line of credit from Tether for $900 million.

(It has so far dissipated $750 million of that loan—which was signed by the same people on either side of the transaction—with access to another $150 million.)

In its memo, Bitfinex says:

“This disclosure gave anyone holding or considering buying tether the opportunity to take their money elsewhere if they chose, defeating any allegations of fraud.” 

In fact, Tether did update its terms of service on its website on February 26, 2019, but it did so silently. It was not until two weeks later, when someone inadvertently stumbled upon the change, that the news became public. In contrast, a bank would totally be expected to reveal such a move—at the very least, to its regulators.  

The OAG also claims that in mid-2018, Bitfinex failed to disclose the loss of $851 million related to Crypto Capital, an intermediary that the exchange was using to wire money to its customers. Bitfinex argues that, as a private company, it had “no duty to disclose its internal financial matters to customers.”

If Bitfinex were to go belly up all of a sudden, traders could potentially be out of their funds, but apparently, that is none of their business. Also, Bitfinex went beyond not disclosing the loss. It even lied about it, telling its customers that rumors of its insolvency were a “targeted campaign based on nothing but fiction.”  

The OAG’s opposition to Bitfinex’s move to vacate, literally has an entire section (see “Background”) that basically says, “We’ve caught these guys lying repeatedly, here are the lies,” which Bitfinex does not even address in its memo.

But, nobody has been harmed!

The OAG’s job is to protect the public, but Bitfinex says “there has been no harm to tether holders supposedly being defrauded, much less harm that is either ongoing or irreparable.” Particularly now, it says, after it made the details of its credit transaction—the one where it borrowed $900 million from Tether—fully public.  

“Holders of tether are doing so with eyes wide open,” Bitfinex says. “They may redeem at any time, and Tether has ample assets to honor those requests.”

Ample assets, that is, as long as everybody doesn’t ask for their money back all at once. Bitfinex’s general counsel Stuart Hoegner already stated in his affidavit, which accompanied the company’s move to vacate, that tethers are only 74% backed.  

Tether’s operation fits the definition of a fractional reserve system, which is what banks do, which is why banks have a lot of rules and also backing and deposit insurance.  

But, “the balance of equities favors Bitfinex and Tether!”

Bitfinex and Tether would be fine, if the OAG would just go away. The agency is doing more harm than good, Bitfinex argues. 

The exchange argues that a preliminary injunction would not protect anyone, but would instead cause “great disruption” to Bitfinex and Tether—”ultimately to the detriment of market participants on whose behalf the attorney general purports to be acting.”

It maintains that it needs access to Tether’s holdings because it needs the “liquidity for normal operations.” That is, Bitfinex admits it does not have enough cash on hand, without dipping into the reserves.

But, what’s good for Bitfinex is good for Tether. “For its part, Tether has a keen interest in ensuring that Bitfinex, as a dominant platform for Tether’s products and known affiliate, can operate as normal,” the company says. 

Besides, the OAG has no business “attempting to dictate how two private companies may deal with one another and deploy their funds,” says Bitfinex.

It maintains the OAG’s actions have actually done harm. In the weeks leading up the order, the crypto market was rallying after an extended downturn. In its court document, Bitfinex writes: 

“This rally was halted by this case, which resulted in an approximate loss of $10 billion across dozens of cryptocurrencies in one hour of the April 24, 2019 order becoming public.”

Not only that, but Bitfinex itself was harmed by the publicity brought on by the OAG’s lawsuit. The exchange says the balance of it cold wallets “have fallen sharply, an indication that customers have been drawing down their holdings.”

It is likely that Bitfinex is going to have to surrender the documents the OAG is asking for at some point—and that may be what it is trying to avoid. Its attempts to vacate the OAG’s order appears to be an effort to buy time, while it scrambles to figure out how to come up with the nearly $1 billion it needs to stay afloat—a token sale may be just the thing.

Update:

On May 6, New York Supreme Court judge Joel M. Cohen ruled that the OAG’s ex parte order should remain in effect, at least in part. However, he thinks the injunction is “amorphous and endless.” He gives the two parties a week to work out a compromise and submit new proposals for what the scope of the injunction should be.

On May 13, iFinex, the parent company of Bitfinex and Tether, submitted this letter and this proposed order to the court. Among other things, iFinex is asking for a 45-day limit on the injunction and to replace three paragraphs—one of which would allow Tether employees to get paid using Tether’s reserves.

For its part, the OAG submitted this letter and this proposed order. The OAG is not opposed to Tether’s employees being paid, but it wants Tether to to pay its employees using transaction fees—not reserves.

# # #

What happened next?
NY Supreme Court Judge: Bitfinex may not touch Tether’s reserves for 90 days

Related stories:
NYAG: Bitfinex needs to submit docs and stop dipping into Tether’s reserves
The curious case of Tether: a complete timeline of events

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