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.

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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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NYAG: Bitfinex needs to submit docs and stop dipping into Tether’s reserves

Screen Shot 2019-05-05 at 1.09.10 PMBitfinex was not happy with the New York Attorney General’s April 24 ex parte court order, which demanded that the crypto exchange stop dipping into Tether’s cash reserves and hand over documents that were requested in November 2018. It struck back with a strongly worded motion to vacate, or overturn the order.

On May 3, the Office of the Attorney General (OAG) submitted an opposition to that motion. The agency argues that Bitfinex violated the Martin Act, New York’s anti-fraud law, widely considered the most severe blue sky law in the country.

Legally, Tether and Bitfinex are separate entities, but they are managed by the same individuals. To note, the OAG’s order does not prohibit Bitfinex from operating. Nor does it prohibit Tether from issuing or redeeming tethers (USDT) for U.S. dollars.

The order simply prohibits Bitfinex from helping itself to anymore of Tether’s funds. This, of course, poses a problem for Bitfinex, because it desperately needs cash to stay afloat. (It’s latest effort to fill the gap is a token sale, but that is another matter.)

There are currently 2.8 billion USDT in circulation, and each of them is supposed to be backed 1:1 with the dollar, but as of now, they are only 74% backed.

The alleged fraud

The OAG began investigating Bitfinex late last year. If there is any question as to how Bitfinex allegedly committed fraud and misled its customers, the OAG spells that out clearly in its memorandum. I’m paraphrasing some this. 

Bitfinex failed to disclose to its clients that it had lost $851 million of “wrongfully commingled” client and corporate funds to Crypto Capital, an overseas entity, which it used as an intermediary to wire US dollars to traders on its platform.

Bitfinex knew in mid-to-late 2018 that Crypto Capital’s inability—or unwillingness—to return the funds meant it would have problems filling out client requests to withdraw cash off the exchange. Nevertheless, it told the public that rumors of insolvency were a “targeted campaign based on nothing but fiction.”  

In November 2018, Bitfinex tried to cover up the loss by moving (at least) $625 million from Tether’s legitimate bank account into Bitfinex’s account. In return, Bitfinex “credited” $625 million to Tether’s accounts with Crypto Capital. OAG says the credit was “illusory,” because the money at Crypto Capital was lost or inaccessible.

(In its motion to vacate, the OAG notes that Bitfinex contradicted itself by saying the “credit” Bitfinex gave to Tether was $675 million—a $50 million discrepancy.)

Bitfinex later shifted to a new strategy. It engaged in “an undisclosed and conflicted transaction” to let Bitfinex dip even further into Tether’s reserves. The exchange took out a $900 million loan from Tether, secured by shares of iFinex—the parent company of both Tether and Bitfinex. OAG says there is little reason to believe the iFinex shares have any real value, especially in the event iFinex itself defaults.

In March 2019, $900 million represented almost half Tether’s available reserves at the time, but Bitfinex and Tether did not disclose this to its customers. In fact, up until February 2019, Tether telling its customers that USDT was fully backed. Bitfinex told the OAG that it has already dissipated $750 million of Tether’s funds.

Bitfinex demonstrates “a pattern of undisclosed, conflicted, and deceptive conduct” that its customers would “find material, and indeed, essential to buying tethers and trading assets, like bitcoin, on the Bitfinex platform,” the OAG said.

In its motion to vacate, Bitfinex argues that the Martin Act stands or falls on whether tethers are securities or commodities. It does not, the OAG says. In fact:

“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 the OAG’s application.”

Related events

The OAG points to other events that underscore the need to maintain the status quo.

Since the original order, two individuals, Reginald Fowler and Ravid Yosef, were charged with bank fraud in connection with their operation of a “shadow bank.” Fowler was arrested on April 30, while Yosef is still at large.

The operation processed hundreds of millions of dollars of unregulated transactions on behalf of numerous cryptocurrency exchanges and associated entities—“several of which,” the OAG says, are at the center of its own investigation. 

This appears to indicate the OAG’s is looking into other exchanges, which makes sense, given it sent out a questionnaire to more than a dozen cryptocurrency exchanges in April 2018, requesting they disclose key information about their operations.

While the OAG does not specifically state that the “shadow bank” is Crypto Capital, it points to the Memorandum in Support of Detention of Fowler, which said that companies associated with Fowler “failed to return $851 million to a client of the Defendant’s shadow bank.” 

The OAG’s investigation is still ongoing.

# # # 

 

News: More Bitfinex drama, Crypto Capital, a dodgy football businessman and a relationship coach

There is so much going on now with Bitfinex. My eyes are burning and my head hurts from reading piles of court docs. Here is a rundown of all the latest—and then some.

The New York Attorney General (NYAG) is suing Bitfinex and Tether, saying tethers (USDT) are not fully backed—after $850 million funneled through third-party payment processor Crypto Capital has gone missing.  

Screen Shot 2019-05-04 at 2.10.08 PMIt’s still not clear where all that money went. Bitfinex says the funds were “seized and safeguarded” by government authorities in Portugal, Poland and the U.S. The NYAG says the money was lost. It wants Bitfinex to stop dipping into Tether’s reserves and to handover a mountain of documents.

In response to the NYAG’s ex parte order, Tether general counsel Stuart Hoegner filed an affidavit accompanied by a motion to vacate from outside counsel Zoe Phillips of Morgan Lewis. Hoegner admits $2.8 billion worth of tethers are only 74% backed, but claims “Tether is not at risk.” Morgan says New York has no jurisdiction over Tether or Bitfinex. Meanwhile, the NYAG has filed an opposition. It wants Bitfinex to stop messing around.

Football businessman Reggie Fowler and “co-conspirator” Ravid Yosef were charged with running a “shadow banking” service for crypto exchanges. This all loops back to Crypto Capital, which Bitfinex and Tether were using to solve their banking woes.    

In an odd twist, the cryptocurrency saga is crossing over into the sports world. Fowler was the original main investor in the Alliance of American Football (AAF), an attempt to create a new football league. The league filed for bankruptcy last month—after Fowler was unable to deliver, because the DoJ had frozen his bank accounts last fall.  

The US government thinks Fowler is a flight risk and wants him held without bail. The FBI has also found a “Master US Workbook,” detailing the operations of a massive “cryptocurrency scheme.” They found it with email subpoenas, which sounds like it was being kept on a Google Drive?

Yosef is still at large. She appears to have split her time between Tel Aviv and Los Angeles. This is her LinkedIn profile. She works as a relationship coach and looks to be the sister of Crypto Capital’s Oz Yosef (aka “Ozzie Joseph”), who was likely the “Oz” chatting with “Merlin” documented in NYAG’s suit against Bitfinex.  

All eyes are on Tether right now. Bloomberg reveals the Commodity and Futures Trading Commission (CFTC) has been investigating whether Tether actually had a stockpile of cash to support the currency. The DoJ is also looking into issues raised by the NYAG.

Meanwhile, bitcoin is selling for a $300 to $400 premium on Bitfinex — a sign that traders are willing to pay more for bitcoin, so they can dump their tethers and get their funds off the exchange. This isn’t the first time we’ve seen this sort of thing. Bitcoin sold at a premium on Mt. Gox and QuadrigaCX before those exchanges collapsed.

Bitfinex is still in the ring, but it needs cash. The exchange is now trying to cover its Tether shortfalls by raising money via—of all things—a token sale. It plans to raise $1 billion in an initial exchange offering (IEO) by selling its LEO token. CoinDesk wrote a story on it, and even linked to my Tether timeline.

Did a sex-trafficking site sparked the Crypto Capital investigation? Also, Decrypt’s Tim Copeland takes a look at the payment processor’s dark past.

Tether wants to move tethers from Omni to the Tron blockchain. Tron planned to offer a 20% incentive to Omni USDT holders to convert to Tron USDT on Huobi and OkEx exchanges. But given the “recent news” about Bitfinex and Tether, it is delaying the rewards program.  

Kara Haas has an article on AccountingWeb and a Twitter thread on the potential accounting implications of Tether’s definition of “reserves.”

Coinbase is bidding adieu to yet another executive. Earn.com founder Balaji Srinivasan, who served as the exchange’s CTO for a year, is leaving. It looks like his departure comes after he served the minimum agreed period with Coinbase. 

Elsewhere, BreakerMag is shutting down. The crypto publication had a lot of good stories in its short life, including this unforgettable one by Laurie Penny, who survived a bitcoin cruise to tell about it. David Gerard wrote an obituary for the magazine.

The Los Angeles Ballet is suing MovieCoin, accusing the film finance startup of trying to pay a $200,000 pledge in worthless tokens—you can’t run a ballet on shit coins.

Police in Germany and Finland have shut down two dark markets, Wall Street Market and Valhalla. And a mystery Git ransomware is wiping Git repository commits and replacing them with a ransom note demanding Bitcoin, as this Redditor details.

# # #

 

US Government wants man at center of massive ‘cryptocurrency scheme’ held without bail

The U.S. government wants a football businessman linked to an investigation into $850 million of missing Tether and Bitfinex funds to be held without bail.

According to a memorandum in support of detention filed with the District Court of Arizona on May 1, Reginald Fowler poses a serious flight risk due to his overseas connections and access to hundreds of millions of dollars.

The court doc also presents startling new twists in an already tangled plot—a “Master US Workbook,” which details the financial operations of the “cryptocurrency scheme,” fake bond certificates worth billions of dollars, and a counterfeit money operation.

Reggie Fowler

Screen Shot 2019-05-02 at 1.33.58 PMFowler, 60, is a former minority owner of the Minnesota Vikings and the original main investor in the Alliance of American Football —an attempt to form a new football league. The AAF collapsed when Fowler withdrew funding—after the Department of Justice froze his bank accounts in late 2018.

I did a search on Pacer and got a number of hits showing Fowler has been in and out of courts for years. In fact, in 2005, ESPN reported that he had been sued 36 times.

Most recently, Fowler was charged with bank fraud and operating an unlicensed money services business. These crimes relate to his alleged involvement in a “shadow bank” on behalf of cryptocurrency exchanges, in which hundreds of millions of dollars passed through accounts that he controlled in jurisdictions around the world. 

Fowler operated Global Trading Solutions LLC in the US, which provided services for Global Trade Solutions AG, the Zug, Switzerland-based parent company of Crypto Capital Corp, a third-party payment processor. At one time or another, Crypto Capital serviced QuadrigaCX, Bitfinex, Kraken, Binance, and BitMEX—some of the top crypto exchanges.

In October and November 2018, five U.S. bank accounts were frozen—three of them were Fowler’s personal accounts and two were held under Global Trading Solutions. On April 11, Fowler was indicted in the Southern District of New York. And on April 30, he was arrested in Chandler, Arizona, where he lives. 

Fowler is looking at spending the rest of his life in prison—the bank fraud counts alone carry a maximum sentence of 30 years. 

The cryptocurrency scheme was not limited to the U.S. Fowler set up bank accounts around the world and coordinated the scheme with co-conspirators in Israel, Switzerland, and Canada, according to court documents. The scheme involves a “staggering amount of money,” and the government believes that Fowler still has access to overseas bank accounts.  

Master US Workbook

Even more revealing, via email search warrants, federal prosecutors have obtained a document entitled “Master US Workbook,” which details the operations of the scheme. The workbook lists 60 bank accounts. It shows the scheme received over $740 million in 2018 alone. As of January 2019, the combined bank balance was $345 million. Approximately $50 million is held in U.S. accounts. The rest is located overseas. 

Apparently, Fowler had “shown a willingness to help himself to these funds in the past.” In mid-2018, he sent $60 million from scheme accounts to his personal bank accounts, feds said. Scheme members set up a “10% fund” from client deposits, available for his personal use. The government does not know the location of those accounts.

After Fowler’s bank accounts were seized in October 2018, he agreed to cooperate with FBI agents and keep the investigation confidential, which he did not do. When agents sent him emails, he would share those with other scheme members.  

Other illegal activity

Fowler appears to have been involved with other illegal activities, such as wire fraud related to the 10% fund. He also tried to take out loans by presenting banks with fraudulent bond certificates worth billions of dollars. 

FBI agents also found evidence that Fowler was involved in a counterfeit money operation. They found $14,000 in fake bills consisting of sheets of $100 bills in a filing cabinet in his Chandler, Arizona office.

After examining the sheets, a special agent for the U.S. Secret Service “determined that they were undergoing a process common in counterfeiting schemes to turn paper bills into passable currency. In fact, the FBI also recovered black carbon paper from the office, which is often used as part of this process for making believable counterfeit bills.”

# # #

New York Attorney General: Bitfinex is hiding $850 million in losses

Screen Shot 2019-04-26 at 7.04.55 AMAccording to an April 24 court filing, New York State Attorney General Letitia James has alleged that crypto exchange Bitfinex lost $850 million and then tried to pull the wool over people’s eyes by dipping into Tether’s reserves.  

Tether issues a dollar-pegged stable coin of the same name. According to the Office of the Attorney General (OAG), Bitfinex has so far siphoned $700 million from Tether funds, meaning that tethers are not fully backed. Given that tether is an essential source of liquidity in the crypto markets—currently, there are 2.8 billion tethers in circulation—this is not good news for bitcoin. 

I’ve updated my Bitfinex/Tether timeline to bring you up to speed on the full history of these companies’ past shenanigans. Bitfinex and Tether are operated by the same individuals, and their parent company is Hong Kong-based iFinex. I recommend reading  the entire 23-page court document. It reveals a lot about what has been going on under the covers at Tether/Bitfinex. I’ll try and summarize.

What happened

Bitfinex was allowing residents of New York to trade on its platform. This is not supposed to happen. Effective August 8, 2015, any virtual currency company that wants to do business in New York State needs to have a BitLicense. This led the OAG to launch an investigation into Bitfinex and Tether in 2018.

Banking has been an ongoing struggle for Bitfinex since April 2017, when it was cut off by correspondent bank Wells Fargo and its main banks in Taiwan. At different periods, Bitfinex has turned to Puerto Rico’s Noble Bank, Bahamas’ Deltec Bank, and more recently, HSBC via a private account with Global Trading Solutions LLC.    

Meanwhile, Bitfinex has had to rely on third-party payment processors to handle customer fiat deposits and withdrawals—a fact that it has never been completely up front about. (In fact, the HSBC account turns out to be part of the shadow banking network set up by its payment processor.)

Since 2014, Bitfinex has sent $1 billion through Panama-based Crypto Capital Corp. Bitfinex also told the OAG that it had used a number of other third-party payment processors, including “various companies owned by Bitfinex/Tether executives,” as well as other “friends of Bitfinex” — meaning human-being friends of Bitfinex employees willing to use their bank accounts to transfer money to Bitfinex clients.

This is basically Bitfinex setting up shell companies and playing cat and mouse with the banks—and it sounds a lot like what Canadian crypto exchange QuadrigaCX was doing before it went belly up in January. (Quadriga also used Crypto Capital, but the payment processor is not holding any Quadriga funds.)

By mid-2018 Bitfinex customers were complaining they were unable to withdraw fiat from the exchange. This is apparently because Crypto Capital, which held “all or almost all” of Bitfinex funds, failed to process customer withdrawal requests. Crypto Capital told Bitfinex that the reason the $850 million could not be returned was because the funds were seized by government authorities in Portugal, Poland and the U.S.

Bitfinex did not believe this explanation. “Based on statements made by counsel for Respondents to AG attorneys… Respondents do not believe Crypto Capital’s representations that the funds have been seized,” the court document states.

(This is not in the court filings but Crypto Capital shared this letter with its customers in December 2018. The letter is from Global Trade Solutions AG, the parent company of Crypto Capital Corp——not to be confused with Global Trading Solutions LLC. The letter states that GTS AG is being denied banking services in the U.S., Europe, and elsewhere “as a result of certain AML and financial crimes investigations” by the FBI and cooperative international law enforcements and/or regulatory agencies.”)

In communication logs from April 2018 to early 2019 shared with the OAG, a senior Bitfinex executive “Merlin” repeatedly beseeched an individual at Crypto Capital, “Oz,” to return funds. Merlin writes: “Please understand, all this could be extremely dangerous for everybody, the entire crypto community. BTC could tank to below $1K if we don’t act quickly.” A Crypto Capital customer, who asked not to be named, told me that Merlin is Bitfinex CFO Giancarlo Devasini

Borrowing money from Tether

Rather than admit it was insolvent, Bitfinex/Tether tried to cover up the problem. According to the court docs, in November 2018, Tether transferred $625 million in an account at Deltec in the Bahamas to Bitfinex. In return, Bitfinex caused $625 million to be transferred from an account at Crypto Capital to Tether’s Crypto Capital account.

Essentially, Bitfinex tries to create the money by doing a one-for-one transfer of real money at Deltec for funds that don’t actually exist at Crypto Capital. Once they realized that this was probably a terrible idea, they re-papered the transfer as a loan.

Bitfinex then borrowed $900 million from its Tether bank accounts. The loan is secured with shares in iFinex stock. In case you didn’t quite follow that, Bitfinex and Tether are basically the same company, so you can think of this as Bitfinex borrowing money from itself—and then backing the loan with shares of itself.

According to the OAG, “The transaction documents were signed on behalf of Bitfinex and Tether by the same two individuals.”

OAG is fed up with the nonsense. It has obtained a court order against iFinex. Under the court order, Bitfinex and Tether are to cease making any claim to the dollar reserves held by Tether. iFinex is also required to turn over documents and information as the OAG continues its probe.

The court has also ordered that iFinex identify all New York and U.S. customers of Bitfinex whose funds were provided to Crypto Capital and the amount of any outstanding funds—and provide a weekly report evidencing any issuance or redemption of tethers. 

Bitfinex responds

Bitfinex has issued a response (archive), stating that the OAG court filings “were written in bad faith and are riddled with false assertions.” It claims the $850 million are not lost but have been “seized and safeguarded.” 

The exchange continues to deny any problem. It writes:

“Both Bitfinex and Tether are financially strong—full stop. And both Bitfinex and Tether are committed to fighting this gross overreach by the New York Attorney General’s office against companies that are good corporate citizens and strong supporters of law enforcement.”  

What does this mean?

It means Bitfinex is in real trouble. The New York’s Attorney General is one of the most powerful in the nation. That should worry Bitfinex.  

New York law allows the AG to seek restitution and damages. On top of that, there is also the Martin Act, a 1921 statute designed to protect investors. The Act vests the attorney general with wide-ranging enforcement powers. Under the Act, the attorney general can issue subpoenas to compel attendance of witnesses and production of documents. Those called in for questioning do not have a right to counsel.

The attorney general‘s decision to conduct an investigation is not reviewable by courts. As Stephen Palley, partner at Anderson Kill, points out, the iFinex action arises out of a Martin Act investigation and “Violations of the Martin Act can be civil and criminal.”

Finally, if $850 million is really missing, not just stuck somewhere, Bitcoin is in real trouble, too. Tether could lose its peg and drop substantially below $1. Remarkably, tether’s peg seems to be holding steady now.  

Since the news broke, the price of bitcoin has dropped several hundred dollars. A valiant effort is being made to pump the price back up, and it’s working, sort of—for now.  

Screen Shot 2019-04-26 at 6.54.29 AM

News: 51-foot yacht for sale, Bitfinex enables margin trading with Tether, Craig Wright threatens legal action

Spring is in the air! What are your summer plans? If you are considering buying a boat—or maybe even an “almost new” 51-foot Jeanneau with “very, very few hours” for half a million USD—now would be the time!

Screen Shot 2019-04-13 at 7.26.10 PM

The yacht belonged to Quadriga’s now-deceased CEO Gerald Cotten. Here is a video of him putting Canada’s plastic money into a microwave. Here he is tossing Winnie the Pooh into a bonfire. And this is him playing with Pokémon cards.

The latest on QuadrigaCX

I wrote about how Michael Patryn and Cotten appear to have been working together at Midas Gold, a Liberty Reserve exchanger, prior to founding Quadriga. David Z. Morris at Breakermag covered the topic as well. (He credited me, so I’m real pleased about that.)

At a court hearing on April 8, Quadriga was given the go-ahead to shift into bankruptcy. The move will save costs and give Ernst & Young (EY) more power as a trustee. 

“The trustee can also sell QuadrigaCX’s assets and start lawsuits to recover property or damages,” Evan Thomas of Osler, Hoskin & Harcourt told Bitcoin Magazine. “The trustee will collect whatever it can recover for eventual distribution to creditors.”

An “Asset Preservation Order” for Jennifer Robertson, Cotten’s widow, was filed on April 11. Law firm Stewart McKelvey is setting up three separate trusts to “collect and preserve” any surplus funds from estate assets, personal assets and corporate assets. Depreciable assets, such as Cotten’s yacht, will be sold.

Per the order, Robertson will continue to receive her drawings from her business Robertson Nova Property Management “in accordance with current levels, for the purposes of satisfying ordinary living expenses.” She will also have access to cash from the “personal assets” account to maintain her properties and to cover legal expenses.

Robertson has 10 days from the court order to provide EY with a list of all her assets—including cash on hand.

A cap on pay for Miller Thomson LLP and Cox & Palmer has been raised from CA$250,000 to CA$400,000. The team will continue to represent Quadriga’s creditors in the bankruptcy.

Quadriga’s third-party payment processors now have 10 business days (as opposed to five previously) from when they receive this court order to deliver the following to EY:

  • VoPay—CA$116,262.17.
  • Alto Bureau de Change—assets and property.
  • 1009926 BC—all records and transaction-related information.
  • POSConnect—access to Quadriga’s online account to George Kinsman, who is a partner at EY.
  • WB21 (now Black Banx)—all records and account statements related to its Quadriga dealings.

The next hearing to discuss issues remaining from the Companies’ Creditor Arrangement Act, including those tied to third-party payments processors, is scheduled for April 18.

Other crypto exchanges

Popular US-based crypto exchange Coinbase suspended trading of BTC-USD pairs for two hours on April 11 due to a “technical issue” with its order book. BTC-USD is a critical trading pair due to its volume and its impact on bitcoin price measures.

It appears that somebody dumped a load of BTC into the exchange’s buy orders causing liquidity to dry up. Coinbase doesn’t want that to happen, so likely that is why it wiped the books, cancelling any outstanding buy or sell orders.

Coinbase Pro, Coinbase’s professional exchange, is continuing to expand its altcoin reach. The exchange is listing three more altcoins: EOS (EOS), Augur (REP), and Maker (MKR). Coinbase first committed to listing MKR in December, but according to The Block’s Larry Cermak, due to low volume, Coinbase decided to hold off listing MKR.

Crypto credit cards are back in vogue. Coinbase has launched a Visa debit card. The “Coinbase Card” will allow customers in the U.K. and EU to spend their crypto “as effortlessly as the money in their bank.” The exchange says it will “instantly” convert crypto to fiat when customers complete a transaction using the debit card. PaySafe, a U.K. payment processor, is the issuer of the card. In the past, these crypto Visa cards have been known to suddenly lose access to the Visa network, so fingers crossed.  

Another executive is leaving Coinbase. The firm’s institutional head Dan Romero has announced he is leaving after five years. This is the third executive to depart Coinbase in six months. Director of institutional sales Christine Sandler left last month, and ex-vice president and general manager Adam White quit in October.

Switzerland-based crypto exchange Bitfinex has lifted its $10,000 minimum equity requirement to start trading. This will undoubtedly bring more cash into the exchange. “We simply could not ignore the increasing level of requests for access to trade on Bitfinex from a wider cohort than our traditional customer base,” CEO Jean-Louis van der Velde said in a blog post (archive).

Meanwhile, Bitfinex customers are complaining (here and here) that they are unable to get cash out of the exchange. Now some are saying they are having trouble getting their crypto out of Bitfinex as well. 

Reddit user “dovawiin” says, “Ive been trying repeated attempts for 2 weeks to withdraw funs and it always says processing. Ive submitted multiple tickets with delayed answers. Ive cancelled and attempted again a few time after waiting 48Hours with no results. Im currently trying again and nothing for over 24 hrs. This is ridiculous.”

Bitfinex also enabled margin trading on Tether. Margin pairs include BTC/USDT and ETH/USDT. Tether has already admitted to operating a fractional reserve, so this is basically adding more leverage to what’s already been leveraged. I’m sure it’s fine though—nothing to worry about here.  

Johnathan Silverman, a former employee of Kraken, is suing the crypto platform for allegedly failing to pay him for work he did. Kraken says it got out of New York in 2015. Silverman says the exchange still maintained an over-the-counter trading desk in the state, which requires licensing for crypto businesses. Kraken told Bloomberg, Silverman “is both lying and in breach of his confidentiality agreement.”

Finally, Malta-based Binance, one of the largest crypto exchanges by volume, is partnering with blockchain analytics firm CipherTrace to boost its AML procedures.

Other interesting stuff

All hell broke lose on Twitter Friday when news got out that Craig Wright is making legal threats against Twitter user “Hodlonaut,” who has been publicly calling Wright a “fraudster” and a “fake Satoshi.” Wright has never been able to prove that he is Satoshi.  

In a letter shared with Bitcoin Magazine, SCA ONTIER LLP, writing on behalf of Wright, demands that Hodlonaut retract his statements and apologize, or else Wright will sue him for libel. The letter even includes this bizarre prescribed apology:

“I was wrong to allege Craig Wright fraudulently claimed to be Satoshi. I accept he is Satoshi. I am sorry Dr. Wright. I will not repeat this libel.”

Hodlonaut deleted his Twitter account upon receiving the news. And the crypto community formed a giant backlash against Wright. Preston Byrne is assisting Hodlonaut pro-bono, Peter McCormack is selling T-shirts that say, “Craig Wright is a Fraud,” and Changpeng Zhao, the CEO of crypto exchange Binance threatened to delist Bitcoin SV—the token spearheaded by Wright and billionaire backer Calvin Ayre.

Ayre is also demanding apologies related to some photos of him circulating on Twitter with extremely young-looking women. Coin Rivet writes, “We have agreed to pay Mr Ayre substantial damages for libel. We have also agreed to join in a statement to the English High Court in settlement of Mr Ayre’s complaint.”

China’s National Development and Reform Commission (NDRC) released guidance that includes shutting down Bitcoin mining. “The risk to Bitcoin in the longer term is other governments taking their cue from China—and taking proof of work more seriously as a problem that needs to be dealt with,” writes David Gerard.

Another Bitcoin mining company has gone belly upBcause llc filed for Chapter 11 in Illinois. (Steven Palley uploaded the docs on Scribd.) The company is based in Chicago, but its mining rigs are in Virginia Beach. In January 2018, Virginia Beach Development Authority gave the firm a $500,000 grant to build the $65 million facility. Bcause promised to create 100 full-time jobs, with average salaries of $60,000 a year. 

But by January, the price of Bitcoin was already on its way down—so much for all those jobs. At least the neighbors won’t have to suffer the noise anymore.

Last summer, Virginia Beach resident Tommy Byrns, told Wavy News:

“The issue is the noise, the relentless noise … it’s kind of created an atmosphere where we can’t talk to each other in the backyard. You have to go in the house to talk … this was pushed through without any warning into anybody … and now look what we have.” 

Crypto, the movie, is out. Gerard wrote a full review for DeCrypt on his new battery-powered AlphaSmart Neo 2 keyboard—a 1990s flashback that keeps him from shit posting on Twitter. The film was mediocre—but it stars KURT RUSSELL.

 

 

The curious case of Tether: a complete timeline of events

  • I originally wrote this article in January 2019. It is based off an earlier story that I wrote for Bitcoin Magazine in February 2018.
  • This timeline only goes up until May 2021; however, it documents all of the early shenanigans of Bitfinex and Tether.

Stablecoins—virtual currencies pegged to another asset, usually, the U.S. dollar—bring liquidity to crypto exchanges, especially those that lack ties to traditional banking. Putting it simply, if you are a crypto exchange and you don’t have access to real dollars, stablecoins are the next best thing.

Today, there are several stablecoins to choose from. But by far the most popular and widely traded is tether (USDT), issued by a company of the same name. Of the three or four main stablecoin models, Tether follows the I.O.U. model, where virtual coins are supposed to represent actual money and be redeemable at any time. It all sounds well and good, but for one thing: There is no evidence to suggest Tether is fully backed.

Currently, there are 1.9 billion tethers in circulation. (At its peak in May 2022, there were more than 83 billion tethers in circulation, according to Tether’s Transparency page.) That means, there should be a corresponding $1.9 billion tucked away in one or more bank accounts somewhere. Bitfinex, the crypto exchange closely linked to Tether, claims the money exists, but has yet to provide an official audit to support those claims. (We have seen snapshots of bank account balances at certain points in time, but these are not full audits.) 

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

A timeline of events reveals a full picture of the controversy surrounding Tether and Bitfinex.

Timeline

2012 — iFinex Inc., the company that is to become the parent company of Bitfinex and Tether, is founded in Hong Kong. (Like its parent company DigFinex, iFinex is registered in the British Virgin Islands. An org chart from NY AG court filings is here.)

2013 — Bitfinex incorporates in Hong Kong. The cryptocurrency exchange is run by the triad: Chief Strategy Officer Phil Potter, CEO Jan Ludovicus van der Velde and CFO Giancarlo Devasini.

Potter used to work at Morgan Stanley in New York in the 1990s, but lost his job after bragging about his opulent lifestyle to a New York Times reporter. Van der Velde is somewhat elusive. And in 1996, Devasini was caught pirating and selling a substantial volume of Microsoft Software

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

September 5, 2014  Appleby, an offshore law firm, assists Bitfinex operators Potter and Devasini in setting up Tether Holdings Limited in the British Virgin Islands, according to the Paradise Papers. (Offshore Leaks Database)

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

October 6, 2014 — The very first tethers are minted, according to the Omni block explorer.

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

January 15, 2015 — Bitfinex enables trading of tether on their platform.* (Bitfinex blog. Archive.)

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

May 22, 2015  Bitfinex is hit with its first hack. The exchange claims it lost 1,500 bitcoin (worth $400,000 at the time) when its hot wallets were breached. The amount represents 0.05 percent of the company’s total holdings. Bitfinex says it will absorb the losses.  

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

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

August 2, 2016 —Bitfinex claims it has been hacked again when 119,756 BTC, worth $72 million at the time, vanish. This is one of the largest hacks in bitcoin’s history, second only to Mt. Gox, a Tokyo exchange that lost 650,000 BTC in 2014. Bitfinex never reveals the full details of the breach. (Chapter 8 of David Gerard’s book “Attack of the 50-Foot Blockchain” offers an in-depth explanation of the hack.)  

August 6, 2016  Bitfinex is unable to absorb the losses of the hack. The exchange announces a 36% haircut across the board for its customers. It even takes funds from those who were not holding any bitcoin at the time of the hack. In return, customers receive an I.O.U. in the form of BFX tokens, valued at $1 each.

One large U.S. customer reportedly didn’t get the full haircut. “Coinbase, got a better deal after threatening to sue, multiple sources told me,” said NYT’s Nathaniel Popper.

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

August 17, 2016  Bitfinex announces it is engaging Ledger Labs, a blockchain forensic firm founded by Ethereum creator Vitalik Buterin, to investigate its recent breach. Bitfinex hires Ledger to do a computer security audit, but leads customers into believing that Ledger is also going to perform a financial audit. A financial audit is key to knowing whether Bitfinex was even solvent at the time of the hack.   

“We are also in the process of engaging Ledger Labs to perform an audit of our complete balance sheet for both cryptocurrency and fiat assets and liabilities,” Bitfinex says in a blog post (archive).

A footnote added to the blog post on April 5, 2017, makes a correction: “Ledger Labs has not been engaged to perform a financial audit of Bitfinex. When in initial discussions with Ledger Labs in August 2016, we had initially understood that they could offer this service to us.” The exchange goes on to say that it is in the process of engaging a third-party accounting firm to audit its balance sheet.

This audit, as we are to learn, never happens.

October 12, 2016 — Bitfinex tries to reach out to the hacker. In a blog post (archive), titled “Message to the individual responsible for the Bitfinex security incident of August 2, 2016,” the firm writes: “We would like to have the opportunity to securely communicate with you. It might be possible to reach a mutually agreeable arrangement in exchange for an enormous bug bounty.”

October 13, 2016 — Bitfinex announces (archive) that its largest BFX token holders have agreed to exchange over 20 million BFX tokens for equity shares of iFinex, the exchange’s parent company. Many Bitfinex customers accept the offer, having already watched BFX tokens drop far below $1. One Redditor even reported the price dropping to $0.30.

As a way to incentivize BFX holders to convert, Bitfinex creates yet another new token: a tradable Recovery Rights Token (RRT). According to the exchange, if any of the stolen bitcoins are recovered, any excess of funds after all BFX tokens have been redeemed will be distributed to RRT token holders.

If you convert your BFX to iFinex shares before October 7, you get one RRT for each BFX token converted. If you convert between Oct. 8 and Nov. 1, you get half an RRT for each BFX token converted. After that, you get 1/4 of an RRT per BFX token converted. No further RTTs are given after November 30.

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

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

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

Meanwhile, Potter reveals in an audio that all of the remaining BFX tokens have been converted to tethers. In a nutshell, this means that none of the victims of the August 2016 Bitfinex hack got back any of their original funds—they were all compensated with BFX tokens, RRT tokens and USDT.

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

April 10, 2017  A pseudonymous character known as “Bitfinex’ed” debuts online. In a relentless series of tweets, he accuses Bitfinex of minting tethers out of thin air to pay off debts. At this point, the number of USDT in circulation is 55 million, and BTC’s price has begun a steep ascent that will continue to the end of the year.

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

April 17, 2017 — Following a notice about wire delays, Bitfinex announces (archive) it has been shut off by its four main Taiwanese banks: Hwatai Commercial Bank, KGI Bank, First Commercial Bank, and Taishin Bank. Bitfinex is now left to shuffle money between a series of banks in other countries without telling its customers where it is keeping its reserves.

In an audio, Bitfinex CSO Phil Potter tries to calm customers by telling them that Bitfinex effectively deals with this sort of thing by setting up shell accounts and tricking banks.

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

Around this time, Bitfinex begins to rely increasingly upon Crypto Capital Corp, a Panamanian shadow bank, to shuffle funds around the globe—but it does not make this clear to customers. Also, Bitfinex never engages in a formal contract with Crypto Capital, according to later court documents.

April 24, 2017 — Amidst reports that Bitfinex has lost its banking, USDT temporarily dips to $0.91.

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

June 21, 2017 —The Omni foundation and Charlie Lee announce that tether will soon be issued on the Omni layer of Litecoin, but apparently it never panned out, according to Lee. (Omni Blog, archive)

August 5, 2017 — Bitfinex’ed publishes his first blog post titled: “Meet ‘Spoofy.’ How a Single Entity Dominates the Price of Bitcoin.” The post explains how an illegal form of market manipulation known as spoofing works. The post includes a video showing a Bitfinex trader putting up a large order of BTC just long enough to push up the price of bitcoin, before canceling the order. 

(This is not the first time a crypto exchange has manipulated the price of bitcoin. Mt. Gox, a Tokyo exchange that handled 70% of all global bitcoin transactions before its 2014 collapse, also manipulated its markets. Former Mt. Gox CEO Mark Karpeles admitted in court to operating a “Willy Bot.” An academic paper titled “The Willy Report” shows how the bots were responsible for much of bitcoin’s 2013 price rise.)

September 11, 2017 — Tether announces they will begin making ERC-20 tokens for US dollars and euros on the Ethereum blockchain. (Ethfinex blog, archive)

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

In the morning, Tether opens an account at Noble Bank. And Bitfinex transfers $382 million from Bitfinex’s account at Noble Bank into Tether’s account at Noble Bank. Friedman conducts 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 in its later findings.

The attestation included $61 million held at the Bank of Montreal in an a trust account controlled by Tether and Bitfinex’s general counsel Stuart Hoegner.

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

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

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

The news follows regulatory crackdowns in the U.S. (The previous month, the U.S. Securities and Exchange Commission issued an investigative report that deemed that tokens issued by the DAO—an investor-directed fund built on top of Ethereum that crashed spectacularly in June 2016—were securities.) 

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

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

After this hack, Tether notes on its website (archive) that redemption of USDT for real dollars is no longer possible via the Tether website. (It is worth noting that there is no public record of anyone having redeemed their USDT for dollars at any point before this either.)

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

From now until December 2018, tether purchases and redemptions can be made only from Bitfinex. (After December 2018, they switch back to tether.io.)

November 30, 2017 — Bitfinex hires 5W, a scrappy New-York public relations firm led by Ronn Torossian. 5W promptly issues a press release stating that an “audit” from Friedman LLP is forthcoming. The agency also tells journalists they can view Bitfinex’s bank accounts if they sign a non-disclosure agreement first. No journalist takes the bait. “We plan to release regular financial statements and are working with journalists who can review our finances as wel[l],” Torossian says in a tweet.

December 4, 2017  Bitfinex threatens legal action against its critics, according to Bitcoin Magazine. The exchange does not specify who those critics are but the obvious target is Bitfinex’ed, the cynical blogger who continues to accuse Bitfinex of manipulating markets and printing more tether than it can redeem. Bitfinex never actually sues Bitfinex’ed, though Bitfinex’ed collects donations and hires a lawyer just in case.

December 6, 2017  The CFTC subpoenas Bitfinex and Tether, Bloomberg reports. The actual documents are not made public.   

December 16, 2017 — The price of bitcoin reaches an all-time high of nearly $20,000, marking the end of a spectacular run-up and bitcoin’s biggest bubble to date. A year before, BTC was only $780.

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

December 31, 2017 — Tether has issued roughly $1.4 billion USDT to date.

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

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

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

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

January 31, 2018 — The 2017 bitcoin bubble has burst. As the price of BTC plummets, tether issuance takes on a rapid, frenzied pace. In January, Tether issues 850 million USDT, more than any single month prior. Of this, roughly 250 million were created during a mid-month bitcoin price crash.

February 2018 — an ex-NFL owner named Reginald Fowler registers a company called Global Trading Solutions LLC. He goes on to set up bank accounts under the company’s name at HSBC.

February 20, 2018 — Bitfinex posts a fiat transactions delays notice, specifically noting delays between Jan. 10 through Feb 5.

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

March 28, 2018 — Bitfinex weighs a move to Switzerland. Bitfinex CEO J.L. van der Velde tells Swiss news outlet Handelszeitung: “We are looking for a new home for Bitfinex and the parent company iFinex, where we want to merge the operations previously spread over several locations.” They end up moving their servers to Switzerland.

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

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

These individuals had past dealings. In 2014, Betts led a group called Sunlot Holdings to try and acquire the failed Mt. Gox exchange. Pierce, along with former FBI director Louis Freeh were also involved in that effort. (Freeh has his own Twitter whistleblower, by the way.)

May 24, 2018 — The U.S. Justice Department launches a criminal probe into bitcoin markets. The focus is on illegal practices like spoofing, the process of putting up a large sell or buy and then cancelling, and wash trading, where a trader simultaneously buys and sells assets to increase trading volume. The criminal probe will bring in other agencies, including the CFTC.

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

FSS is not an accounting firm. Further, there appears to be a conflict of interest. FSS Senior Partner Eugene Sullivan is also an advisor to Noble Bank, where Bitfinex and Tether hold accounts.

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

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

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

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

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

October 6, 2018 — According to a report in The Block, Bitfinex appears to be banking at HSBC—a bank previously fined $1.9 billion in 2012 for money laundering—under the shell account “Global Trading Solutions.” (We find out later that the shell was registered by Arizona businessman Reginald Fowler.)

October 10, 2018 — Four days after reports comes out that Bitfinex is banking at HSBC, Bitfinex temporarily suspends all cash deposits, suggesting that the exchange is once again on the hunt for a new reserve bank. (As it turns out, the DoJ froze these accounts, so the money became inaccessible.)

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

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

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

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

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

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

November 27, 2018 — In a blog post (archive), Tether says its customers can once again redeem tether for actual dollars via tether.io. “Today marks an important step in Tether’s journey, as we launch a redesigned platform allowing for the verification of new customers and direct redemption of Tether to fiat.” All accounts require a minimal issuance and redemption of $100,000 USD or 100,000 USDT.

December, 18, 2018 — A Bloomberg reporter says that he has seen Tether bank statements from accounts at Puerto Rico’s Noble Bank and the Bank of Montreal taken over four separate months. The article suggests Tether holds sufficient dollars to back the tether tokens on the market. But again, these are attestations, not the full audit Tether has been promising for months. Notably from the report: $61 million Canadian dollars in the Bank of Montreal is listed under Stuart Hoegner, Bitfinex’s general counsel.

December 19, 2018 — Crypto Capital shares a letter with its customers. The letter is from Global Trade Solutions AG, the parent company of Crypto Capital Corp—not to be confused with Global Trading Solutions LLC, which is a shell set up by Reginald Fowler. The letter states that GTS AG is being denied banking services in the U.S., Europe, and elsewhere “as a result of certain AML and financial crimes investigations” by the FBI and cooperative international law enforcements and/or regulatory agencies.”

December 31, 2018 — By the end of 2018, roughly 1.9 billion tethers are in circulation.

January 16, 2019 — Bitfinex opens a data center in Switzerland, according to Handelszeitung. Previously, Bitfinex was relying on Amazon cloud servers. An earlier Bitfinex blog post confirms the move.

February 25, 2019 — In a blog post (archive), Bitfinex claims the U.S. government has located 27.7 BTC (worth about $100,000 at this time) taken from Bitfinex in the August 2016 hack and returned the funds to Bitfinex. The exchange says it has converted those bitcoin into USD and distributed the money to its RRT token holders. What is odd here is that the U.S. Department of Justice hasn’t issued any statement about recovered bitcoin. And Bitfinex doesn’t share a transaction record to show it actually received the recovered funds. 

February 26, 2019 — Tether admits, for the first time that it is operating a fractional reserve and that tethers are no longer backed by cash alone. An update on the company’s website reads:

“Every tether is always 100% backed by our reserves, which include 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 (collectively, “reserves”). Every tether is also 1-to-1 pegged to the dollar, so 1 USD₮ is always valued by Tether at 1 USD.”

Here is what the text read before:

“Every tether is always backed 1-to-1, by traditional currency held in our reserves. So 1 USD₮ is always equivalent to 1 USD.”

The change is also updated in Tether’s legal section

April 9, 2019 — Bitfinex lifts its $10,000 minimum equity requirement to start trading. “We simply could not ignore the increasing level of requests for access to trade on Bitfinex from a wider cohort than our traditional customer base,” J.L. van der Velde says in a blog post (archive). Meanwhile, customers continue to complain that they are unable to get cash off of the exchange. And now some are saying they are having trouble getting their crypto off the exchange as well. 

April 11, 2019 — Reginald Fowler, an ex NFL minority owner, and Ravid Yosef, who lives in Los Angeles and Tel Aviv, are indicted in the U.S. for charges related to bank fraud. The two were allegedly part of a scheme that involved setting up bank accounts under false pretenses to move money on behalf of series of cryptocurrency exchanges. (CoinDesk

Also on this day, Bitfinex enables margin trading on tether. Margin pairs include BTC/USDT and ETH/USDT. 

April 17, 2019 — Tether goes live on the Tron network as a TRC-20 token, a standard used by the Tron blockchain for implementing tokens, similar to and compatible with Ethereum’s ERC-20 standard. You can view the issuance on Tronscan.

April 24, 2019 — The New York Attorney General has been investigating Tether and Bitfinex for Martin Act violation. Allegedly, Bitfinex has been dipping into Tether’s reserves when it lost access to $850 million in the hands of its payment processor, Crypto Capital Corp. The investigation become public for the first time when the NY AG office sues iFinex, the parent company of Bitfinex and Tether, saying that the company has been commingling client and corporate funds to cover up $850 million in missing funds. 

From 2014 to 2018, Bitfinex placed over $1 billion with Crypto Capital because it was unable to find a reputable bank to work with it. Crypto Capital then either lost, stole, or absconded with $850 million.

In order to fill the gap, Bitfinex dipped into Tether’s reserves for hundreds of millions of dollars. According to the NY AG, “Despite the sheer amount of money it handed over, Bitfinex never signed a contract or other agreement with Crypto Capital.” 

April 26, 2019 — In a response to to the NY Attorney General’s allegations, Bitfinex says the $850 million has not been lost, but rather “seized and safeguarded.” Meanwhile, according to CoinDesk, Zhao Dong, a Bitfinex shareholder, claims that Bitfinex CFO Giancarlo Devasini told him that the exchange just needs a few weeks to unfreeze the funds.

April 30, 2019 — In response to the NYAG’s ex-parte order, Bitfinex general counsel Stuart Hoegner files an affidavit accompanied by a motion to vacate from outside counsel Zoe Phillips of Morgan Lewis.

In the affidavit, Hoegner admits that $2.8 billion worth of tethers are only 74% backed. And in its motion to vacate, Morgan Lewis argues that the NYAG has no jurisdiction over Tether or Bitfinex’s actions. 

On this same day, Reginald Fowler is arrested. A grand jury has accused him of setting up a network of bank accounts to move money for cryptocurrency firms. He is linked to Crypto Capital’s $850 million in missing funds. (DoJ press release and indictment.)

May 2, 2019 — The U.S. Government wants Fowler held without bail due to flight risk. 

May 3, 2019 — The NYAG files an opposition to Bitfinex’s motion to vacate. Bitfinex follows two days later with a response to the opposition. 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.” 

May 8, 2019 — iFinex has a new plan to raise $1 billion: a token sale. The company releases a white paper for a new LEO token. One LEO is worth 1 USDT, a flashback to when Bitfinex offered BFX tokens to cover the $70 million lost in a hack.

Meanwhile, Fowler is out on $5 million bail. He is required to give up his passport. Bail is posted in the Southern District of New York, where he is to appear for arraignment on May 15. His travel is restricted to parts of New York and Arizona. 

May 6, 2019 — New York Supreme Court District Judge Joel M. Cohen rules that the NY AG’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.

May 13, 2019 — Attorneys for the NYAG and iFinex failed to come to a consensus on what Tether should be allowed to do with its holdings. They submit separate proposals. iFinex is asking for a 45-day limit on the injunction and wants Tether employees to get paid using Tether’s reserves. The NYAG is not opposed to employees being paid, but it wants Tether to to pay them using transaction fees—not reserves.

May 16, 2019 — Judge Cohen grants Bitfinex’s motion to modify a preliminary injunction. The preliminary injunction is limited to 90 days, and Tether is allowed to use its reserves to pay its employees. The judge holds that the Martin Act “does not provide a roving mandate to regulate commercial activity.” Bitfinex and Tether still have to handover documents that the NYAG requested in its November 2018 investigative subpoena. 

May 21, 2019 — Bitfinex files a motion to dismiss the proceeding brought by the NYAG on the grounds that Bitfinex/Tether do not do business in NY, the Martin Act does not apply to its business, and the Martin Act cannot be used to compel a foreign corporation to produce documents stored overseas. Bitfinex and Tether also seek an immediate stay of the NYAG’s document demands.

May 22, 2019 — Judge Joel M. Cohen of the New York Supreme Court grants Bitfinex’s motion for an immediate stay of the document demands. He issues an order requiring the companies produce only documents relevant to the limited issue of whether there is personal jurisdiction over the companies in New York but staying the document order in all other respects. The NYAG has until July 8 to file a response. And the judge schedules a hearing on the motion to dismiss for July 29.

July 8, 2019 — The NYAG has filed its response

July 22, 2019 — iFinex files court docs arguing once again that Bitfinex/Tether 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).

October 24, 2019 — Crypto Capital President Molina Lee is arrested by Polish authorities in connection with laundering money for Columbian drug cartels via Bitfinex, according to several Polish news sites.

February 23, 2021Tether settles with the office of the NY AG for $18.5 million. Per the terms of the settlement, Tether and Bitfinex are required to post quarterly transparency reports—something they have never done before.

March 30, 2021 — Tether releases another attestation, essentially saying that Tether has $35 billion in assets backing 35 billion tethers at a blink in time on Feb. 26, 2021. The report was done by Moore Cayman, an accounting firm in the Cayman Islands. It means nothing, as it is not a full audit and doesn’t say what sort of assets tethers are backed by. (David Gerard’s blog, Tether press release)

April 23, 2021 — Coinbase announces that it is listing USDT. (My blog)

May 13, 2021 — Tether publishes a breakdown of the assets behind tethers. It’s a one-pager consisting of two silly pie charts. A critical look reveals there’s only a tiny bit of cash left. (My blog)

# # #

*Update Feb. 20, 2021 — an earlier version of this article said Bitfinex listed tether in Feb. 25, 2015. It was Jan. 15, 2015.)

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