“Sam Bankman-Fried walks into the courtroom. his pants split with a sound like thunder and guns and cocaine spill out all over the floor. he spins around and punches a security officer hard in the face sending him flying. he turns, sits down calmly on his chair and says, to thunderous applause from the fans gathered to hear his famous catchphrase, ‘OK your honour, here’s what I think happened’”
Mycrimes.txt (2) (FINAL) (USE THIS ONE).docx.pdf
The criminal indictment against Sam Bankman-Fried has been updated, with a superseding indictment on February 23. [Superseding indictment, PDF]
The new charges are clearly informed by the cooperation of Sam’s former co-conspirators — and by his crime confession tours in the press and on Twitter.
The Federal Election Commission is now listed as a victim of Sam’s fraud, with allegations that SBF tried to buy influence over crypto regulation in Washington.
The indictment details all the tricks that Sam (allegedly) pulled to influence both Democrats and Republicans, in concert with other FTX executives — and how he tried to conceal his influence.
Other new allegations include bank fraud. The act of misleading a bank in the course of business is a crime all by itself — such as when you accept money in the name of one entity (Alameda) for another entity (FTX), or when you set up a shell corporation (North Dimension) and lie to your bank (Silvergate) about what that shell does.
Sam also used Alameda to fill a $45 million hole in FTX US. He gave Alameda a $65 billion credit line, which allowed it unlimited access to customer funds on FTX. Customer and company funds were thoroughly commingled.
The indictment doesn’t specify the cause of the hole in FTX US, but Sam has repeatedly claimed that FTX US was solvent.
Sam ultimately controlled both FTX and Alameda, even after claiming to have stepped away from Alameda.
The indictment also lists billions of dollars worth of assets that have been forfeited, including multiple SBF accounts at Binance.
FTX and its subsidiaries was never a legitimate business. It was Sam’s piggy bank.
New York goes after CoinEx
The New York Attorney General’s office is suing the CoinEx crypto exchange. The NYAG alleges that CoinEx sold securities and/or commodities, did not register with the CFTC or SEC, and misrepresented itself as registered. [Press release; Complaint, PDF; Affidavit of OAG Detective Brian Metz, PDF]
CoinEx, which is based in Hong Kong, has responded by barring all US citizens. You have until April 24 to get your cryptos off the exchange. [Twitter]
New York alleges that CoinEx offered to New York customers various cryptos that are securities — AMP, LUNA, RLY, and LBC — while the exchange was not registered to deal in securities.
AMP is the token of Flexa, who want to use it to sell burritos. LBC is the token of video site LBRY, which the SEC recently had a slam-dunk win against in court, finding that it was absolutely the security it clearly was. Luna is the twin coin of TerraUSD, which crashed all of crypto last May.
New York says these tokens are all securities under New York’s Waldstein test: “any form of instrument used for the purpose of financing and promoting enterprises, and which is designed for investment, is a security.” They say the tokens are also securities under the federal Howey test — as LBC was recently shown to be.
It happens to be a violation of New York commercial law to call yourself an “exchange” if you offer trading in securities or commodities and you’re not registered with the CFTC or SEC.
CoinEx also failed to respond in any way to a previous NYAG subpoena — and, per General Business Law §353(1), failure to comply with a subpoena is prima facie proof that the subpoenaed entity “is or has been engaged in fraudulent practice.”
New York wants CoinEx to block New York from its website, pay restitution, disgorgement, and costs, “and provide New York investors with the option to rescind their transactions.”
New York is bringing a “special proceeding” — it wants the court to rule on its filing. “A special proceeding goes right to the merits. The Court is required to make a summary determination upon all the pleadings, papers, and admissions to the extent that no triable issues of fact are raised.”
Why did New York go after CoinEx in particular? This complaint is detailed, but it also looks like a template. We suspect this may be the first of many such complaints against crypto platforms. CoinEx ignoring the subpoena probably annoyed New York a lot too.
The SEC previously called out each of the tokens on CoinEx that the NYAG names as securities:
In a July 2022 insider trading complaint against Coinbase, the SEC said AMP and RLY were securities. [Complaint, pdf]
In Feb 2023, the SEC said LUNA was a security [Complaint, pdf]
In November 2022, the SEC won in court against LBRY on whether its LBC token was an unregistered security offering. [SEC]
Binance US has delisted AMP. But Coinbase still lists AMP and RLY. Gary Gensler has been saying for a while that he thinks nearly all crypto tokens are securities and that Coinbase should register with the SEC.
Coinbase posts another loss
Coinbase’s Q4 earnings report is out, as part of its 10-K annual report for the year ending December 31, 2022. Trading volumes are down even further, and they’re still losing money. [10-K]
As a public company, Coinbase has to put on a happy face for investors — but they’ve been bleeding money for a year now. Net loss for 2022 was $2.625 billion, per GAAP. The COIN stock price has gone down 70% in the past 12 months.
Coinbase would prefer you to look at non-GAAP “adjusted EBITDA,” which comes out to a loss of only $371.4 million. Their “adjusted EBITDA” excludes stock-based compensation expenses in particular. Yes, we’re sure your numbers look better if you exclude the bit where you have to pay your employees.
Coinbase makes its money from (1) BTC and ETH trading, and (2) their share of the interest on the USDC reserve. Also, the majority of their volume comes from a few large customers. So Coinbase would extremely much like to diversify.
CFO Alesia Haas said in the investor earnings call: “Our fourth quarter net revenue increased 5% quarter-over-quarter to $605 million. This was driven by strong growth in our subscription and services revenue.” She means that Q4 revenue was only up because of interest on USDC. [Coinbase, PDF]
Coinbase wants to list every token going — even as many of the hottest tokens are blitheringly obviously securities under the Howey test. Coinbase has spent the past several years helping their very good venture capital friends such as a16z dump their bags on retail.
Coinbase goes on at length about the amazing ambiguity in what constitutes a security under US law. Who can even know what might be deemed a security tomorrow? It is a mystery.
Sure, the Howey test is simple and broad, and sure the SEC has won every case it’s ever brought where it claimed a given crypto was a security. But do you feel lucky?
The 10-K even includes a list of tokens Coinbase trades that the SEC has already said are securities! Coinbase questions whether these tokens are really securities, and confidently asserts that “Despite the SEC being the principal federal securities law regulator in the United States, whether or not an asset is a security under federal securities laws is ultimately determined by a federal court.”
This is true. But it’s also true that the SEC has won every single time. And the consent orders in these cases — because almost nobody was stupid enough to take their case to trial — note that the tokens in question were always offerings of securities. It wasn’t a court finding that made the token a security.
But Coinbase is desperate to diversify and makes it clear that they really want to risk their backsides on this business line of maybe-securities that don’t even make them a lot of money.
The SEC shut down Coinbase’s Earn staking product in 2022 before it could be launched. Haas explained in the analyst call why Coinbase thinks its staking product isn’t a security: “we are passing on rewards directly from the protocol. We are not establishing an APY, we are not establishing the reward rate. That is established at the protocol level. And then we are passing that through and collecting a fixed commission on that amount.” We guess we’ll see if the SEC concurs. [Coinbase, PDF]
Coinbase literally lists Satoshi Nakamoto as a risk factor for its business:
“the identification of Satoshi Nakamoto, the pseudonymous person or persons who developed Bitcoin, or the transfer of Satoshi’s Bitcoins”
The FTX fallout continues
FTX Japan K.K. users are getting back 100% of their cryptos. Users in other jurisdictions are likely to get cents on the dollar, if that. This is because the US crypto lobby viciously fought any sensible regulation for years — but Japan locked crypto down hard after Mt. Gox exploded in 2014. Taste the freedom! [Bloomberg]
Galois Capital, a real-money hedge fund that thought they’d get into some crypto, shuts its doors after losing $40 million, half its assets, in the collapse of FTX. Whoops! [Twitter, FT, archive]
The Bank for International Settlements — the central bank for central banks — reports that the fall of FTX didn’t have much impact on the rest of the financial world: [BIS bulletin, PDF, Coindesk]
“Nevertheless, despite crypto’s large user base and the substantial losses to many investors, the market turmoil in 2022 had little discernible impact on broader financial conditions outside the crypto universe, underlining the largely self-referential nature of crypto as an asset class.”
We’ve mentioned previously that the Canadian Securities Administrators (CSA) is introducing new rules for crypto exchange registration in the wake of the collapse of FTX. The new regulations, which will apply in all provinces, have been released:
Customer cryptos will need to be segregated into an address per customer.
Exchanges cannot pledge or rehypothecate customer cryptos. Margin trading is forbidden.
Proprietary tokens — in-house supermarket loyalty card points, in the manner of FTT or BNB — require prior written consent and can’t be counted as an asset in your accounts.
No stablecoin dealing without prior written consent.
These apply to any exchange with Canadian customers, including non-Canadian exchanges. [Press release; OSC, PDF]
The Financial Action Task Force, the multi-country advisory group set up to combat money laundering, is not happy that its rules on crypto traceability, such as the travel rule, have not been implemented sufficiently widely. At the FATF Plenary on February 22-24, “delegates further agreed on an action plan to drive timely global implementation of FATF standards relating to virtual assets.” [FATF]
The International Monetary Fund has put out a paper, “Elements of Effective Policies for Crypto Assets,” with guidelines that any country that ever might want to hit up the IMF for a loan would be well advised to follow — “amid the failure of various exchanges and other actors within the crypto ecosystem, as well as the collapse of certain crypto assets. Doing nothing is untenable as crypto assets may continue to evolve despite the current downturn.” [Press release; paper, PDF]
Hong Kong’s Securities and Futures Commission is consulting on licensing requirements for crypto exchanges to be allowed to sell to retail customers. Hong Kong wants safe custody of customer cryptos — they’re not demanding third-party custodians, an arms-length subsidiary will be sufficient — KYC, cybersecurity, accounting and auditing, risk management, AML, and prevention of market misconduct. So, the very basic requirements of being a financial institution. Responses should be in by March 31. [SFC; SFC, PDF]
In the US, the SEC got a lot of stick for not going after crypto harder in the bubble. Then it came out that the Blockchain Eight group of representatives had written to Gary Gensler telling him to back off. Now the legislature has demanded action, and Gensler is delivering. Here’s how the Blockchain Eight got the opposite of what they wanted. [The American Prospect]
“Gensler also made clear that he has been grappling with the same question as many of the rest of us: What, exactly, is the point of crypto?” [Intelligencer]
John Naughton on the latest UK Treasury crypto consultation paper. “The second lesson is that permissionless blockchains can never be allowed within the financial services sector.” [Guardian]
FTX in Chapter 11 is suing Voyager Digital in Chapter 11 for the return of a loan that Alameda paid back to Voyager just before it went into bankruptcy protection. FTX, Voyager and both companies’ Unsecured Creditors’ Committees have come to a settlement! An ad-hoc group of Voyager creditors objects to the deal. [Doc 1048, PDF; Doc 1084, PDF]
The Voyager UCC has subpoenaed the ex-top brass of FTX for depositions — Caroline Ellison, Gary Wang, Sam Bankman-Fried, Sam Trabucco, and Daniel Friedberg. The notices to the court don’t detail what the UCC wants to ask — just that they are asking. Voyager’s link to FTX is the huge pile of FTT that the company counted as part of its assets. [e.g., Doc 1018, PDF]
SBF’s lawyers have already moved that the subpoena was deficient because it was handed to Sam’s mom Barbara Fried and not into Sam’s own hands personally. [Doc, PDF]
Celsius Network and your pension
Caisse de Dépôt et Placement du Québec (CDPQ) was the pension fund that invested USD$150 million into equity in Celsius Network. Executive vice-president and CTO Alexandre Synnett, who was the executive involved in the Celsius investment, “left the organization on his own volition about two weeks ago,” said CEO Charles Emond in the 2022 earnings call. CDPQ will not be touching crypto going forward. [BetaKit; The Logic, paywalled]
Other good news for bitcoin
Bitcoin miners are diversifying because mining is sucking as a business. Riot Blockchain has changed its name to Riot Platforms. [Coindesk]
Crypto firm Phoenix Community Capital and its founder Luke Sullivan, with links to various UK parliamentary groups, appears to have vanished. Some of the firm’s assets and its name appear to have been sold to a new company run by an individual called “Dan,” who has told investors it has no obligation towards them. [Guardian]
Data Finnovation, who took out BUSD, now looks into weird bridging on Tether. [Medium]
Image: Coinbase CEO Brian Armstrong is being patted down with a makeup sponge as a big green screen looms behind him. Fortune
Tether, the world’s most popular stablecoin issuer, released a breakdown of the composition of its reserves backing tethers on May 13.
The breakdown is no surprise to Tether followers: Two lame pie charts showing, at best, only a fraction of assets are in cash, and the rest are in risky assets.
Specifically, this is a breakdown of the composition of Tether’s reserves on March 31, 2021, when Tether had roughly 41.7 billion tethers in circulation. (As of this writing, Tether now has nearly 58 billion tethers in circulation.)
According to its settlement agreement with the NY AG, Tether must issue these breakdowns quarterly for two years—though it may have to provide more detail to the NY AG, in addition to what it has made public today.
Let’s take a closer look at the two pie charts. (This information may be updated, as I get more feedback.)
The blue pie chart
According to the first pie chart—the blue one—the majority of Tether’s assets (nearly 76%) are socked away in cash and cash equivalents. (Tether breaks all this down in a second chart, which I’ll get to in a moment. Hint: these can barely be considered cash equivalents.)
But first, let’s look at what else is here:
12.55% is in secured loans — Loans to who, secured by what? We have no idea. These could well be loans to large tether customers backed by shitcoins, other worthless assets, or promissory notes.
9.96% is in corporate bonds, funds, and precious metals — A corporate bond is a bond issued by a corporation in order to raise financing. The question is, who is issuing these bonds? If it is a blue chip company, great. But if it’s some dodgy crypto start-up, these are likely worthless.
1.64% is in other investments, including digital currency — Tether wants us to believe that only a fraction of Tether’s reserves are in bitcoin. (Tether/Bitfinex general counsel Stuart Hoegner told The Block that “digital tokens” refers exclusively to bitcoin.) I have a funny feeling Tether will get into a great deal of trouble if it admits to using tethers to purchase bitcoin en masse. (Recall this interview, where Hoegner completely avoids the question pertaining to, are you using tethers to buy bitcoin?”)
The orange pie chart
Tether further breaks down the largest slice of its blue pie chart—which shows that more than three-quarters of its reserves are in cash and cash equivalents. Just a tiny bit is in cash and there’s a big question as to whether any of the non-cash items are cash equivalents at all.
Here’s how Tether divvies it up:
65.39% is commercial paper — Commercial paper refers to a short-term loan for up to 12 months. It is similar to a bond in that you have the ability to transfer and trade it. The problem is we don’t know who the issuer of the commercial paper is. If it’s IBM or Amazon, that’s as good as cash. But if Tether is giving tethers away to their largest customers (FTX, Binance) and counting that as loans, this is meaningless rubbish.
Frances Coppola, an economist and bitcoin skeptic, suggests Tether’s commercial paper is probably unsecured. “In which case it is NOT a ‘cash equivalent’ as the analysis says. It’s a current asset with significant credit risk.”
25.2% is fiduciary deposits — These are deposits placed by a customer with a third bank (recipient bank) through an agent bank. Who are the holders of these fiduciary deposits? We have no idea.
3.87% is cash — This is such a tiny bit of cash. What happened to all the cash backing tethers? Recall that up until a few years ago, Tether maintained tethers were fully backed by cash.
3.6% is reverse repo notes — This appears to be a made-up term. Martin Walker, a director for banking and finance at the Center for Evidence-Based Management, isn’t familiar with the term either. “I’ve never heard of a Reverse Repo Note before, and I am the product manager for a couple of repo trading systems and used to run repo technology at an investment bank,” he said in a private chat.
2.94% is treasury bills — T-bills are a short-term financial instrument issued by the U.S. Treasury with maturity periods from a few days up to 52 weeks. These are as good as cash. In fact, this is the only slice of pie, other than cash, that can be considered cash.
The bottom line
For a company with nearly $60 billion in assets, these pie charts are pathetic. I’m sure the folks at the Office of the NY AG are rolling their eyes. The only thing backing tethers is once again, smoke and mirrors.
To be clear, Tether has no obligation to redeem any money in the Tether bank accounts. Per its terms of service:
“Tether reserves the right to delay the redemption or withdrawal of Tether Tokens if such delay is necessitated by the illiquidity or unavailability or loss of any Reserves held by Tether to back the Tether Tokens, and Tether reserves the right to redeem Tether Tokens by in-kind redemptions of securities and other assets held in the Reserves. Tether makes no representations or warranties about whether Tether Tokens that may be traded on the Site may be traded on the Site at any point in the future, if at all.”
With that in mind, we may as well consider these pie charts a window into the personal bank accounts of the Tether/Bitfinex triad. The crumbs of remaining cash? It is just their “bonus” money that they haven’t withdrawn yet.
Jorge Stolfi, a computer scientist from Brazil, quoted privately: “If someday [Tether/Bitfinex] get tired of making real money with their sucker mining machine, they can just close Tether Inc and divide its assets among them. They won’t even have to leave the traditional crypto good-bye word on their website.”
Updates on March 13— Added quote from Martin C. Walker on Reverse repo notes, as even he is not familiar with the term. Defined treasury bills, and noted they are the only cash equivalent in the mix, and added Trolly’s brilliant tweet. Also, added a link to Gerard’s post and later, the graph.
Coinbase, the largest crypto exchange in the U.S., just announced it is listing tether (USDT), the world’s dodgiest stablecoin.
Tethers, for the uninitiated, are a stand-in for real dollars, used mainly on offshore crypto exchanges that can’t get proper banking. Now tethers can be found on Coinbase, a banked exchange—overseen by the SEC.
The timing of this is incredible, only a week after Coinbase debuted on Wall Street.
Nobody knows for sure what is backing the nearly 50 billion tethers sloshing around in the bitcoin markets—maybe cash, maybe third-party loans, maybe hot air. But the price of Coinbase shares (COIN) is slipping, and so is the price of bitcoin. Desperate times call for desperate measures, so what can Coinbase do?
Why not list tether? That way, Tether (the company that issues tethers) looks legit, and more people can pile into bitcoin without worry. When BTC goes up, demand for $COIN follows. Problem solved!
Starting immediately, you can now send your dubiously backed tethers to Coinbase Pro—Coinbase’s online platform for professional traders. (Coinbase has a separate platform for casual traders called simply “Coinbase,” but tether is limited to Coinbase Pro for now.)
Coinbase only supports ERC-20 USDT, a reference to the nearly 24 billion tethers that live on the Ethereum blockchain. (Another 26 billion are on Tron, with a smattering on Omni, Algorand, EOS, Liquid, SLP, and Solana.)
Coinbase Pro will list the following trading pairs:
At the moment, you can only transfer USDT onto Coinbase Pro; you cannot move tethers off the exchange—although there is some expectation that could change once trading is established.
What does this mean?
This is a terrible, dumb, bad move for Coinbase.
The exchange clearly wants to rake in as much business as possible before the regulators step in and throttle its trading. (Regulatory ambiguity is written into the company’s S1 risk factors.) And right now, business is slipping.
Coinbase started selling its shares on Nasdaq on April 14. Its stock has since taken a dip, going from $381 at opening (and as high as $429 in the first few minutes of trading) to $293 when markets closed on April 22.
At the same time, BTC has also taken a hit. Just ahead of Coinbase’s direct listing, BTC reached an all-time high of $63,700. Now it’s below $50,000.
Tether has been trying to lift up the price of BTC with larger and larger issuances of tethers—prints of 2 billion at a time, bigger than anything we’ve seen before—but nothing seems to be working.
At some point, it won’t matter how much USDT Tether prints. It won’t be enough to make up for all the real money that is exiting the bitcoin ecosystem on a daily basis. (The real money that investors put into the system, goes to pay the bitcoin miners who are selling 900 newly minted BTC per day for cash.)
Bitcoiners are ecstatic over Coinbase’s listing of USDT. They say the move legitimizes Tether.
This is absolute madness. How do you legitimize a company that has been full of shenanigans since day one? The reverse is true: Tether is delegitimizing Coinbase.
Here is the irony: Coinbase—an exchange that has a BitLicense (issued by the New York Department of Financial Services) to operate in the state of New York—is listing a token sanctioned by the New York attorney general.
The NYAG began investigating Tether for fraud in late 2018, claiming that Tether and its sister company Bitfinex, a crypto exchange, lied to customers in saying that tethers were fully backed, when in fact, they were not.
“Bitfinex and Tether recklessly and unlawfully covered-up massive financial losses to keep their scheme going and protect their bottom lines,” the NYAG said.
The companies settled with the NYAG in February. Under the terms of the settlement, starting in May, Tether has to publish the categories of assets backing tethers. It also has to specify the percentages of each category, and spell out whether a category constitutes a loan or receivable.
This is a level of transparency that Tether has never lived up to before, and it could spell disaster for the BVI-registered company, if it’s revealed that Tether is simply printing money out of thin air.
Three other U.S. crypto exchanges—Kraken, Binance.US, and Bittrex*—also list tether, but Coinbase’s public listing means the SEC is watching a lot more closely. Coinbase CEO Brian Armstrong is well aware of this.
“We’re going to increasingly be having scrutiny about what we’re doing,” he told CNBC.
Based on that reasoning alone, Coinbase’s listing of tether seems shortsighted at best, but maybe that’s the plan? If COIN crashes, Armstrong—along with Coinbase backers like Andreessen Horowitz, Union Square, and Ribbit Capital—will have made their riches, while retailers will be stuck holding the bag.
(*Updated to include Bittrex as another US exchange that lists USDT.)
February is coming to an end. I’m waiting to get vaccinated, so I can travel without worry again. Maybe I’ll go to some crypto conferences later this year? I still have fond memories of Coindesk’s Consensus in May 2018—when you could hear the rumble of lambos coming through midtown Manhattan—and sitting in a coatroom with scant Wifi and a broken water cooler. (It was a big coatroom, but a coatroom nonetheless, and that’s where non-Coindesk journalists were put.)
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So, what’s new? Tether now has close to 35 billion tethers in circulation—the last print was on Feb. 21 and nothing since. Also, the price of bitcoin is $46,300. That’s down 18% from last week. I’m not sure we will ever see bitcoin reach $57,000 again. The nonsense could ebb and flow for a while, but I do think the end is nigh for Tether.
NY shuns Bitfinex/Tether
Last week I said likely nothing earthmoving would happen in the NY attorney general’s probe of Bitfinex and Tether this month, other than maybe a status update, according to what Bitfinex said in its January letter to the court. I was wrong.
In an unexpected turn of events, Tether and Bitfinex reached a settlement with the NY AG.
According to the terms of the settlement, the sister companies agreed to a penalty of $18.5 million—without admitting guilt. They are also banned from doing business in New York, and they have agreed to an impossible level of transparency.
The bitcoiners are jumping for joy over the settlement because they interpret this to mean that Tether is liberated and we’re back to business as usual. This could not be further from the truth.
The NY AG has given Tether enough rope to hang itself—with Tether agreeing to publish quarterly updates on what’s backing tethers. I mean, how crazy is this: Bitfinex and Tether are also supposed to reveal who their payment processors are. These payment processors are called shadow banks for a reason.
But the real punishment is not the fine imposed on Tether. The real punishment is that Tether and Bitfinex are banned from doing business in New York—the beating heart of finance and banking in the U.S.
They are prohibited from serving any person or entity in the state—defined as “any person known or believed to reside in or regularly conduct trading activity from New York,” and any business “that is incorporated in, has its headquarters in, regularly conducts trading activity in, or is directed or controlled from, New York.”
If the CFTC and the DoJ follow up—and you can bet they will—then Tether could soon be banned from the entire U.S.—a penalty much more significant than an $18.5 million fine.
In the meantime, the Tether printer has mysteriously paused. The settlement agreement was signed on Feb. 18, and the last Tether print was on Feb. 21 for 800 million USDT.
Why has Tether stopped printing? It may be that providing the transparency reports is proving more onerous than they expected. If they pop out another billion tethers, they have to show what is behind those—cash, a loan, crypto, or whatnot.
But this is a problem. Tethers are the main source of liquidity on unbanked exchanges where the price of BTC is largely determined. If Tether stops printing tethers—or otherwise ceases to function—the price of bitcoin could take a serious dive.
Recently, a Twitter profile called @deltecleaks emerged and posted what looked like evidence of a database dump from Deltec, the Bahamian bank that Bitfinex and Tether have been using since 2018. That Twitter account was quickly suspended.
Then @LeaksTether appeared and posted several presumably leaked emails—conversations between Deltec and Tether execs.
These leaks are unverified. I am not completely convinced they are real, but I am also not convinced they are fake either.
Some of the alleged emails look interesting. Trolly wrote up a thread on one—in an email (archive) from Tether to Deltec, dated May 28, 2020, Tether asks for help in “presenting their reserves in the best possible light.” Their reserves, according to the email, are crypto and stakes in other crypto companies. Trolly calls this email a “crucial piece of the puzzle.”
Around the same time that the email was sent, crypto exchange Binance—one of Tether’s biggest customers—switched from BTC to USDT as collateral for leveraged trading. In return, Trolly believes Tether got a stake in Binance.
This could explain why USDT’s 1:1 peg never falters. Tether is in cahoots with the exchanges, who are in charge of maintaining the peg, Trolly believes.
In another allegedly leaked email, Tether talked about allowing the exchanges to “ignore the peg and move the price upwards.” If this is real, it means Tether is getting ever desperate to find ways to make money out of thin air.
Oddly, Deltec has removed the bios from their About Us page. (This is silly, because we have the archive.) And Tether has released its official word on the leaks, calling the leaks “bogus” and implying it is an extortion attempt.
Tether adds that “those seeking to harm Tether are getting increasingly desperate.” This is typical of Tether and Bitfinex. They blame “Tether FUDers” for all their problems—as opposed to being upfront and honest about their dealings.
Coinbase is going public via a direct listing on Nasdaq under the symbol COIN. The San Francisco-based company published its S-1 filing on Thursday, after confidentially submitting the filing to the SEC in December.
The filing lays out Coinbase’s finances, including a profitable 2020 driven by a huge surge in the price of bitcoin. Coinbase brought in $1.2 billion in revenue in FY2020 for a profit of $322 million—the first time it has turned an annual profit.
In 2019, Coinbase incurred a net loss of $30 million.
Brian Armstrong, Coinbase CEO, also did well last year, taking home $60 million in salary, stock options and “all other compensation.” He also received $1.78 million to cover “costs related to personal security measures.”
There is no doubt that the skyrocketing price of bitcoin—boosted by 17 billion tethers issued in 2020 alone—helped Coinbase’s profits. But there are many unknowns ahead.
If the price of BTC continues to drop, if Tether gets taken out by the DoJ, or if the SEC cracks down on some of the coins Coinbase lists—many of which appear like they may not pass the Howey test—Coinbase profits could take a hit.
No doubt, Coinbase is timing its listing carefully. The exchange has received more than $500 million in funding, with backers including Andreessen Horowitz, Y Combinator and Greylock Partners. And the VCs will want to dump their Coinbase shares on retail suckers before the bitcoin market collapses.
MoneyGram dumps Ripple
MoneyGram was supposed to have been a big success story for Ripple. Now, it’s just another sign of Ripple’s failures.
Ripple agreed to invest up to $50 million in the money transfers business. In return, MoneyGram was shilling Ripple by saying it would use the startup’s XRP currency and platform in its back office for moving funds across borders.
MoneyGram was essential because it gave XRP a supposed use case, so Ripple execs could argue their business was legit and not simply a way for them to line their own personal pockets with $600 million.
Last year, MoneyGram received $38 million from Ripple, representing about 15% of its adjusted earnings. But after the SEC announced it was suing Ripple, charging that XRP was an unlawful securities offering, MoneyGram stepped back, saying it faced logistical challenges in using the platform—as well as legal risks.
A rumor is afoot that the SEC is investigating Elon Musk for his dogecoin tweets that helped pump the market. Musk says a probe would be “awesome.” More lulz for Musk. (Teslarati)
Fedwire, the system that allows banks to send money back and forth, went down for several hours on Wednesday. Bitcoiners thought this was marvelous, because bitcoin is decentralized, see? How quickly they forget bitcoin is valued in USD. (CNBC)
Grayscale’s GBTC premium went negative for the first time in years. (It was close to 40% at one point in December.) When the premium is down, the arbitrage opportunity for institutions in buying bitcoin dries up—and that means less real money flowing into the system. (Hedge funder Harris Kupperman wrote a blog post last year explaining how the arb works.) (Decrypt)
FT poked fun of Anthony Pompliano, cofounder of Morgan Creek. Pomp is forever shilling bitcoin but his tweets have been inconsistent. At one time he called Tether “the biggest racket ever.” Now he has changed his tune. Apparently, he’ll say whatever to make “number go up.” (FT)
Treasury Secretary Janet Yellen is warning people about bitcoin. She doesn’t think it’s used widely as a payment system. “To the extent it is used, I fear it’s often for illicit finance. It’s an extremely inefficient way of conducting transactions, and the amount of energy that’s consumed in processing those transactions is staggering.” (CNBC)
Jack Dorsey’s Square purchased another 3,318 bitcoins for $170 million. This adds to Square’s October purchase of 4,709 bitcoins. The company has already lost $10 million on its latest investment. (Coindesk,Square press release)
The Securities and Exchange Board of India tells company owners: before you IPO, sell your crypto. (Economic Times India)
Kraken is reportedly in talks to raise new capital. (Coindesk)
I wrote a quick article this morning about the New York attorney general settlement, wherein Bitfinex and Tether agreed to pay $18.5 million in penalties, stop servicing New York customers, and submit quarterly transparency reports.
But there are more details to highlight. Namely, the settlement agreement reveals the games Bitfinex and Tether have played over the years—games they will keep on playing until someone puts an end to their shenanigans.
It also reveals how the firms have long misled the public about Tether’s reserves. From 2014 until late February 2019, Tether advertised that tethers were fully backed 1:1 by cash in some bank accounts somewhere—but that was not true.
Tether now has 34 billion tethers in circulation—a number that is growing by leaps and bounds every day.
Here are my random thoughts and notes from the 17-page agreement.
In the agreement, the office of the NY attorney general writes: “During the time period relevant to the OAG’s investigation, and as late as early-to-mid 2018, one of Bitfinex and Tether’s senior executives lived in, and conducted his work from, New York.”
I’m assuming this is Phil Potter, Bitfinex and Tether’s chief strategy officer, and one of its three top execs. Potter allegedly stepped away from the company in mid-2018, about the time the NY attorney general started its investigation. Though the public did not learn of the investigation until April 2019.
The fact that Bitfinex and Tether had one executive and large customers in the state—and no BitLicense—opened the door to the NY attorney general’s probe. Per the terms of the settlement, Bitfinex and Tether can no longer do any business in the state, which means New York crypto firms can no longer use tethers.
Previously, although Bitfinex and Tether claim to have barred New York residents (retail investors) in January 2017, they still served eligible contract participants, meaning individuals or trading firms with assets in the millions.
Tether and Bitfinex lost their banking in March 2017 when they were cut off by Wells Fargo, a correspondent bank. Subsequently, their banks in Taiwan also dumped them.
Two months later, when Tether had 108 million tethers in circulation, Bitfinex opened an account at Noble Bank in Puerto Rico. (Noble Bank, by the way, was co-founded by Brock Pierce, the child star who also created Tether.)
Tether, however, did not open an account at Noble—or at any bank—until September 2017, according to the office of the NY attorney general’s findings.
Instead, Tether deposited the “vast majority” of its cash into a trust account held by its general counsel, Stuart Hoegner, at the Bank of Montreal in Canada. The account never held more than $61.5 million dollars.
The rest of Tether’s money was mixed in with Bitfinex customer money at Bitfinex accounts at Noble Bank. Between June 1 and September 2017—Bitfinex held hundreds of millions of dollars in Tether’s funds in its accounts, the prosecutor said.
Commingling of funds is a terrible idea—legally and logistically. (Failed crypto exchange QuadrigaCX also commingled funds. And its now-allegedly-deceased CEO used customer money like his own personal slush fund.)
Mystery NY trading firm
Because Tether had no bank account between March and September 2017, it could not directly take money for tethers. At the same time, according to the NY attorney general, “neither the Tether website or Bitfinex allowed for the direct purchase or exchange of tethers in exchange for any other virtual currency, including the two most popular virtual currencies, bitcoin and ether.”
Between June and September 2017, “Bitfinex’s Noble Bank account received USD deposits from only two institutional trading firms, one of which was located in New York. Neither of those firms purchased tethers directly from Bitfinex or Tether during this time period.”
This part of the NY attorney general’s findings puzzles. Why were these trading firms sending money to Bitfinex if they were not getting tethers in exchange? What were they getting instead? And who was the New York firm?
Mike Novogratz’s Galaxy Digital is based in New York. And we know it was onboarding as a Bitfinex customer in October 2018, based on court documents that point to letters Galaxy sent to Bitfinex. But it is not clear if Galaxy was a customer of Bitfinex or Tether in 2017. (In April 2019, Novogratz claimed Galaxy had “zero exposure” to Bitfinex and Tether.)
Staging the Friedman audit
According to the office of the NY attorney general, until September 15, 2017, the only U.S. dollars held by Tether backing 442 million tethers in circulation was $61 million at the Bank of Montreal.
Whatever other money Tether had was held in Bitfinex accounts.
In the summer of 2017, rumors were afoot that tethers were not fully backed. To quash those rumors, Tether and Bitfinex arranged for accounting firm Friedman LLP to perform an attestation on September 15, 2017.
They had to move quickly to set things up though.
On that morning, Tether opened an account at Noble Bank. And Bitfinex transferred $382 million from Bitfinex’s account at Noble Bank into Tether’s account at Noble Bank. Friedman conducted its verification of Tether’s assets that evening.
“No one reviewing Tether’s representations would have reasonably understood that the $382,064,782 listed as cash reserves for tethers had only been placed in Tether’s account as of the very morning that Friedman verified the bank balance,” the NY attorney general wrote. The attestation included the money at the Bank of Montreal as well.
It’s never a good sign when your auditor quits. Worse, there was no official announcement—Friedman simply deleted all mention of Bitfinex from its website, including past press releases.
Massive loss of funds
In 2017 and 2018, Bitfinex began to increasingly rely on Crypto Capital to handle its customer deposits and withdrawals. Oz Yosef, was Bitfinex’s contact at the Panamanian payment processor.
By 2018, Crypto Capital held over $1 billion of Bitfinex funds. That’s when the real trouble started.
In April 2018, the government of Poland froze a Crypto Capital bank account holding $340 million. Adding to that, Oz told Bitfinex that a Crypto Capital account in Portugal containing $150 million of Bitfinex client funds also had been frozen.
These events threw Bitfinex into a liquidity crisis. And in the summer of 2018, Bitfinex began dipping into Tether’s cash reserves to fund customer withdrawals. Bitfinex told customers that rumors of its insolvency were false, but behind the scenes, the crypto exchange was pleading with Oz to release the money.
(Later we learn that another $350 million in missing Crypto Capital funds were linked to 60 accounts held by Arizona businessman Reginald Fowler, who was indicted in April 2019 for bank fraud. Some of these accounts were frozen in 2018. Oz’s sister, Ravid Yosef, was also indicted for her role in assisting Fowler set up those accounts. She is still at large.)
(And in October 2019, Crypto Capital President Molina Lee was arrested by Polish authorities in connection with laundering money for Columbian drug cartels via Bitfinex.)
Deltec Bank & Trust
In October 2018, Bitfinex and Tether ended their relationship with Noble bank. Soon after, they announced they were banking with Deltec in the Bahamas.
In a letter dated Nov. 1, 2018, Deltec said Tether’s account held $1.8 billion, enough to back the tethers in circulation at the time. The letter was signed but had no name under the signature. The signature itself was illegible.
The following day, Tether began moving hundreds of millions of dollars out of its bank account at Deltec to Bitfinex’s bank account at Deltec. And as part of a “loan arrangement,” between the two closely related firms, Tether assumed Bitfinex’s losses on its own balance sheet. (We can’t be sure of the total loan amount, but an estimate is $750 million.)
Tether’s misrepresentation that tethers were fully backed continued to Feb. 2019 when it updated its terms of service to say that tethers are backed by “traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities.”
Bitfinex says it paid off the loan to Tether in January, and the firms now claim tethers are fully backed—but the question is, backed by what? Loans? Bitcoins? We’ll find out in 90 days when Tether and Bitfinex publish their first transparency report. Per the terms of the settlement agreement, the firms will need to publish these reports quarterly for two years.
Also, $18.5 million—the amount of the settlement—is no small number. We have no idea how much cash Tether and Bitfinex actually have on hand.
The bitcoin community is calling the settlement a win for Tether and Bitfinex. They say the fine is nothing but a slap on the wrist. In reality, it’s another way for Tether and Bitfinex to buy time. The NY attorney general has set its trap; now we wait.
Updated Feb. 24 to note that Novogratz claimed zero exposure to Bitfinex and Tether in 2019.
In the meantime, I am concerned crypto is going retail again. Friends are calling and asking about bitcoin. One of my friend’s offspring was talking up dogecoin on Facebook. And I am overhearing conversations about crypto in grocery stores and parking lots—flashbacks of 2017, but this is worse. Retailers are going to get hurt all over again.
Another reminder, I have a Patreon account. If you want to support my writing, please consider subscribing. I’m currently making $572 a month on Patreon, which is fantastic because I can now buy decent bottles of wine. But at some point, I would love to bring that up closer to $2,000 or find a way to make a living doing this.
Tether: We’re done with the baby prints
On Thursday and again on Saturday, Tether issued $1 billion in tethers. These are the biggest single prints of USDT ever—and there were two in a row. Previously, the biggest prints were $600 million, which was rare. Normally, bigger prints were $400 million, and if Tether needed more, it would simply issue several in a row. But that’s clearly not enough to feed the monster now.
By monster, I mean this snowball is getting so big, Tether is struggling to manage it. Seventy percent of bitcoin is traded against tethers, and as real money keeps getting siphoned out of the system, Tether needs to create more and more fake dollars to fill the ever-widening chasm. Tethers are counterfeit. They are not real dollars, but they are treated as such on offshore exchanges.
You can’t have a system built entirely on fake money. Eventually, it will collapse under its own weight. We saw this with QuadrigaCX. As soon as enough people tried to cash out, the exchange’s founder Gerald Cotten flew to India and pulled off what appears to have been one of the most bizarre exit scams in history—unless you believe he is really dead.* I’m still getting calls from reporters and filmmakers wondering what the hell happened.
Tether CTO Paolo Ardoino says the $1 billion prints were for replenishments and chain swaps—wherein a customer sends in tethers and gets them reissued on a different blockchain. If it were a chain swap, you would see a corresponding burn. But we aren’t seeing any burns, meaning those tokens went almost immediately into circulation.
Luca Land tracked the first 1 billion print and found that the entire amount—previously, I said “majority,” but Luca says all of it—went to Bitfinex, Huobi, RenrenBit, Binance, and FTX.** The largest recipient was FTX, followed by Binance. Those of us who follow @whale_alert are accustom to seeing tethers flying off to “unknown wallets.” Luca thinks those unknown wallets serve as intermediate wallets to throw us off the trail.
The Block published a story on Thursday, right after Tether’s first monster print, with lots of quotes from Ardoino, who explains that big companies are buying USDT from over-the-counter desks and high-frequency trading firms. This explains the demand for all these tethers, he claims.
“When clients of these firms want to buy bitcoin, they send USD, and then these firms convert USD to USDT to bitcoin. This method is faster and most convenient,” he told The Block.
Why would someone go to the trouble of converting cash to USDT to buy BTC when they could simply buy BTC directly with cash on a regulated exchange? That makes no sense—unless it involves money laundering and capital flight. Tether does have a big market in Asia, Ardoino said.
Another explanation is that Tether is printing USDT out of thin air, using those to buy bitcoin with alias accounts on unregulated exchanges and cashing out via banked exchanges and OTC trading desks. Or else, they buy BTC and hold onto it as a way to make the markets more illiquid and easier to manipulate. (If they sold all the bitcoin they were buying with tethers, they would crash the markets, so until a new influx of cash comes into the system, they have to hold onto it.)
Coindesk interviewed Nouriel Roubini on CoindeskTV. Of course, he gave it to them straight, calling Tether a criminal enterprise and Michael Saylor a cokehead. The three reporters broke out into giggles. The questions they asked were naive, for instance, how is Tether printing tethers different from what is going on in Washington with all their dollar printing? Roubini made important points and predicts Tether will be dead within the year—read the transcript on my blog.
NY AG Tether investigation update
Tether has agreed to hand over a slew of documents to the NY attorney general showing how they issue tethers, what’s behind tethers, and so on. The original deadline was Jan. 15, but they needed another 30 days and the NY AG was okay with that. We are looking for another court filing to drop at some point after Feb. 15.
Don’t expect miracles anytime soon, though. The NY AG will still need time to take a position on what she has received. I’m sure her office is working with the Department of Justice in their investigation—and passing all the material along to them.
Someone was asking me on Reddit, what can the NY AG actually do to Tether? Answer: She has sweeping investigatory and prosecutorial powers, and she can issue a cease and desist. But ultimately, the U.S. Department of Justice and Homeland Security will be instrumental in taking Bitfinex/Tether down.
To put things in perspective, Tether has been in operation for six years. It took seven years and the coordinated effort of law enforcement in 17 countries to bring down Liberty Reserve. (ABC News)
Tesla buys BTC with clean car credits
The big news of the week was Tesla purchased $1.5 billion of bitcoin, as revealed in its 10-K filing. Here you have a company dedicated to clean energy buying one of the filthiest assets in the world. The bitcoin network requires the energy of a small country like Argentina, Norway or the Netherlands. Musk doesn’t give a hoot about the planet. (My blog)
Just to be clear, $1.5 billion is peanuts. It will support the bitcoin miners for about a month. Of course, on the news of Tesla buying bitcoin, the price of BTC shot up from 39,400 to 48,000 in less than 24 hours. The higher the price of BTC, the faster real money exits the system when the miners sell their 900 newly minted BTC per day.
Michael Burry, the investor from “The Big Short,” said in a series of deleted tweets (apparently, he routinely deletes tweets) that Musk bought BTC to distract from Chinese regulators looking into quality complaints with Tesla vehicles. Burry is shorting Tesla and has called on the electric-vehicle company to issue more stock at its ridiculous price. (Business Insider)
But wait! It’s green energy!
Most of the world doesn’t realize that bitcoin uses a country’s worth of electricity. They think it’s mainly used for ransomware and by criminals to buy drugs and such, so when they learn about bitcoin’s horrendous CO2 production, they become alarmed.
As a result, bitcoiners are desperately scrambling to declare that bitcoin consumes renewable green energy. Most of what they are spouting is blithering nonsense with no facts to support their claims. They are also trying to say that bitcoin consumes less energy than the rest of the financial system, which is simply dumb, as Frances Coppola points out.
Other interesting newsy bits
Gerald Cotten may be dead and buried—or more likely, sipping cocktails on a beach somewhere—but QuadrigaCX sprung to life again! However, it turns out scammers set up an imitation Quadriga website to lure in potential victims. EY, the trustee for the failed exchange, sent out a warning notice. The website has since been taken down. (EasyDNS)
India is set to ban cryptocurrency investments completely. Investors will be given a transition period of three-to-six months after the new law goes into force to liquidate their investments. (Bloomberg Quint)
Crypto Capital money mule Reginald Fowler has three more weeks to find new counsel after he stiffed his previous attorneys. (My blog)
Dogecoin has been pumping thanks to r/wallstreetbets and Musk and others tweeting about it for the lulz. David Gerard wrote a wonderful piece on dogecoin explaining its unique history. (Foreign Policy,paywalled)
Apparently, Elon Musk was tweeting about DOGE for the lulz back in April 2019. (Financial Times)
Dogecoin creator Billy Markus said on Reddit that he sold all his dogecoin in 2015 after he got laid off. He wanted dogecoin to be a force of good, and he is disappointed to see the nonsense “pump and dumping, rampant greed, scamming, bad faith actors.”
The Sydney Morning Herald did a feature on Australian-born-and-raised Greg Dwyer, one of the founders of Bitmex, who was indicted last year for violating anti-money laundering laws, but is still at large. “As recently as July, social media posts suggested Dwyer was in Bermuda, and enjoying all it had to offer.”
Miami Mayor Francis Suarez (R) wants municipal workers to get paid in bitcoin. Aside from the legal and tax ramifications and all the difficulties in setting this up, I’m sure employees will be so happy to wake up and find their paycheck lost 30% of its value whilst they were sleeping. No, this is a terrible idea. (The NY Post)
BNY Mellon, the world’s largest custody bank, said it will hold, transfer and issue bitcoin and other crypto on behalf of its asset-management clients. The bank will begin offering these services later this year. Because they are a state-chartered bank, they can do this in NY without a BitLicense. (WSJ,Coindesk)
Mastercard is planning to support crypto natively on its network. However, it’s only going to support cryptocurrencies that meet certain requirements—including stability, privacy and compliance with anti-money laundering laws. The problem is that no cryptocurrencies meet Mastercard’s criteria. (Arstechnica,Mastercard announcement)
BitPay’s bitcoin cards can be added to Apple Wallet, giving crypto holders a new way to spend via Apple Pay. BitPay converts your bitcoin to cash, so it’s no different than selling your BTC first, and merchants won’t know the difference. (Business Insider)
This Valentines Day, consider giving that special someone a CryptoFlower! It will only set you back 4 ETH ($7,200). Each flower is genetically unique and immutable. And they don’t need water or sunlight because they live on the Ethereum blockchain. (FT)
Last but not least, the CBC QuadrigaCX documentary is coming soon! It was nearly a year ago that David Gerard and I met in Vancouver for the filming. It was also one of the last times I enjoyed a meal inside a restaurant sitting next to people.
*Update, Feb. 14—Someone on Reddit was giving me a hard time, arguing that I can’t say Cotten pulled off an exit scam unless I explain that he might actually be dead. I won’t believe he is dead until someone exhumes the body and proves it’s him. See my Quadriga timeline for details.
We are three-quarters of the way through the first month of the new year. We have a new president in the Whitehouse, and people are getting vaccinated—a glimmer of hope at the end of a long dark tunnel. I’m doing some volunteer work for VaccinateCA, making calls to pharmacies. (I saw @patio11 tweeting about the project and wanted to contribute.)
Maybe toward the end of 2021, we’ll see more in-person crypto conferences, but for now, it looks like Coindesk’s big money-maker Consensus will be virtual again—only $50 to register compared to $2,500 for the real thing in past years. Currently, bitcoin is trading at around $32,000 after climbing to an all-time high of nearly $42,000 earlier this month, and Tether is closing in on $25 billion worth of tethers.
A reminder that I have a Patreon account. If you find my work useful, informative, entertaining, please become a subscriber for as little as $5 a month. I could certainly use the support.
Tether needs 30 more days, restarts presses
Jan. 15, the big document deadline day for Bitfinex/Tether in the NY AG fraud investigation, came and went. On Tuesday, after a three-day weekend, Tether’s law firm requested a 30-day extension to give them more time to turn over documents. The request was on behalf of all parties, so NYAG was apparently okay with this.
We won’t get another status update until mid-February. Until then, Tether has agreed to maintain the status quo, meaning the injunction is still in effect, and Bitfinex cannot dip into Tether’s reserves. (Court filing)
For now, it’s back to business as usual. After what appeared to be a short reprieve, Tether is once again printing tethers with abandon. (On Jan. 19, Tether printed another 400 million USDT.) They literally can’t stop, won’t stop, because they are too deep into the game.
In lieu of an audit, which would put this whole matter of “Are tethers backed?” to rest, Tether continues to recruit reporters, bank execs, and other gullible parties to profess to the world that tethers are fully backed. Meet the next actor in this ongoing charade: Gregory Pepin, Deltec Bank’s deputy CEO. Deltec is an offshore bank in the Bahamas where Tether has been doing its banking since 2018
“Every tether is backed by a reserve and their reserve is more than what is in circulation,” Pepin told Laura Shin on the Unchained Podcast. “We can see it firsthand, so I can confirm that,” he said, while repeatedly dismissing the anonymous “Bit Short” article,” mentioned in my last newsletter, as FUD.
Tethers are fully backed, but backed with what? Before they were called tethers, realcoins were supported by “one-to-one fully auditable stores of dollars,” according to a July 2014 article in the Independent Investor. “The bearer of these realcoins will have the first right to redeem them for subsequent U.S. currency.”
A reasonable assumption at this juncture is that tethers are backed by loans to third parties, bitcoins, equity in an offshore bank, a pile of shit coins, and increasingly fewer real dollars.
Tether has invested $1 million of its customer’s money into an ICO. Game publisher Exordium, the company behind Infinite Fleet—a name perhaps borrowed from a popular saline enema product—has launched a public security token offering. It is unclear if Tether invested USDT or real dollars, but public participants can put in euro, BTC, or USDT, according to a company press release. (Decrypt, Infinite Fleet)
Infinite Fleet is Samson Mow’s blockchain game. Coincidentally, Mow is the chief strategy officer at Blockstream, a company responsible for a huge chunk of Bitcoin’s source code. Bitfinex is also a Blockstream investor. These types of incestuous relationships help explain why so many Bitcoin-related company execs are so fiercely defensive of Tether.
Is Tether partnering with startup exchanges?
There is reason to suspect Tether is partnering with startup exchanges by giving them USDT. Over the past year, all kinds of smaller exchanges have been announcing sizable tether giveaways. Alex Dreyfus, CEO and founder of Chiliz, for instance, said he was preparing for a 100,000 USDT giveaway. He also admitted he is a client of Tether and Deltec Bank.
Do a search for “USDT” and “giveaway” on Twitter and plenty will come up. Kucoin is one example. (Binance, an established Tether customer, is also giving away tethers.)
GBTC’s premium melts away
Here is something that hasn’t gotten enough attention. Grayscale Investments has played a role in fueling the bitcoin bubble. By convincing institutional investors they could buy into GBTC at net asset value and sell on secondary markets at a 20% to 30% premium after a six-month lock-up, it has created a self-reinforcing market dynamic.
Accredited investors looking to take advantage of an arbitrage opportunity, bought into GBTC, pushing up GBTC assets under management, which was then used to promote the idea that institutional investors, dominated by hedge funds, were scooping up bitcoin products. All this, in turn, lured more retail suckers into the market. “Look, all the big companies are rushing in! This must be a safe bet!”
But now that premium has dried up as fewer retailers are showing an interest in bitcoin, given the price has dropped by $10,000 in recent weeks. GBTC was recently trading at just 2.8% over NAV, leaving accredited investors stuck with GBTC in an illiquid market. (Bloomberg,Trolly’s thread)
Meanwhile, it looks like Barry Silbert has left the chatroom. He stepped down as CEO two weeks ago.
Just like that, Kurson off the hook
Surprise, surprise. Former Ripple board member Ken Kurson was one of the 74 people Donald Trump pardoned at the last minute on Jan. 19. Kurson is also the co-founder of crypto rag Modern Consensus, where I worked for an intolerable six weeks. It’s just unbelievable this guy, who was criminally charged with cyberstalking, got a pardon. (Full list of pardons, NBC)
While many of Trump’s pardons went to political pals—including Steve Bannon, another pro-bitcoin guy—Kurson’s was an obvious favor to Jared Kushner, whose father, Charles, also received a pardon. Kurson’s pardon stands out, in part, because of the risk it poses to some of the women he stalked and harassed. (The Daily Beast, paywalled)
“Suffice it to say, what he was actually arrested for was part of an ongoing pattern of abuse, revenge, & sociopathy,” Deborah Copaken, a contributing writer at the Atlantic, said on Twitter. She worked for Kurson in the past, wrote about the experience, and helped the FBI with their investigation. “All jokes aside, I am worried about my own safety. @FBI – How do you protect those who helped you but who are now totally exposed because of a presidential pardon?”
Other newsworthy bits
“How can $24 billion worth of tethers move a $650 billion bitcoin market cap?” The is an insufferably dumb question, and I explain why in a recent blog post. (My Blog)
David Gerard wrote about the history of wildcat banks and early “stablecoins” with excerpts from an 1839 Michigan Bank Commissioner report. (Gerard’s blog)
Craig Wright is at it again. He is now claiming the Bitcoin white paper and Bitcoin.com are his. He is trying to force Bitcoin.org to take down the white paper, which they now refuse to do. (Coindesk)
Balaji Srinivasan outdid himself on Twitter when he compared bitcoin, one of the world’s biggest energy hogs, to a battery, setting off the “bitcoin is a battery” meme.
Stephen Diehl, a programmer, compares crypto to a “giant smoldering Chernobyl sitting at the heart of Silicon Valley which a lot of investors would prefer you remain quiet about.” His thread went viral.
Gary Gensler is officially named for SEC chair. (NYT) We can expect greater crypto oversight from him. (Bloomberg)
Meanwhile, Allison Herren Lee was sworn in as SEC acting chair until Gensler takes over. (SEC,Decrypt)
MicroStrategy bought another 314 bitcoins for $10 million cash. Saylor’s company now holds 70,784 bitcoins acquired at an aggregate $1.135 billion. (SEC Filing,Coindesk)
Among other things, it means MicroStrategy CEO Michael Saylor has replaced Patrick Bryne as the new crazy god of institutional bitcoiners. And another crypto exit scam has been invented: dying in India. (See Jorge Stolfi’s full reddit post. He is a computer scientist in Brazil.)
All Ponzi schemes eventually implode, even if it takes 25 years like Bernie Madoff’s did. When that happens, you have two choices: turn yourself in or disappear. Gerald Cotten chose to disappear. Of course, many people believe he is really and truly dead. I’m just not one of them.
With that, here is the news that I find interesting from Bitcoinlandia, an imaginary place where people keep insisting bitcoin is not a Ponzi.
MicroStrategy buys more BTC
MicroStrategy continues to funnel its excess cash into bitcoin. The analytics firm bought another $50 million worth of bitcoin, Saylor disclosed in a tweet.
MicroStrategy bought its most recent pile of bitcoins at an average price of $19,427—at the top of the market—and now owns a total of 40,824 bitcoins.
Here’s the thing: Saylor holds 73% of the voting stock of MicroStrategy, so he does not need buy-in from stockholders to make decisions. He is ruler and king, and if he wants his firm to buy more bitcoin, so be it.
Saylor also has a large private stash of bitcoins. I would be very curious to know how much BTC he owned before and after MicroStrategy’s recent purchase.
If those bitcoin hold their value, all will be fine, Jorge Stolfi said on Reddit. But, if BTC “drops back to $8,000, the other stockholders will be upset, and may have grounds to sue Michael for mismanagement or whatever—even if there are no other shenanigans. If he did sell his coins while the company bought them, it will be worse.”
Another institutional investor has jumped on the bitcoin bandwagon. In a recent SEC filing, Guggenheim Partners, a leading Wall Street investment firm, revealed that it is looking to invest 10% of its $5.3 billion Macro Opportunities Fund into Grayscale’s Bitcoin Trust.
To be clear, Guggenheim is not buying bitcoin directly. It plans to invest nearly $500 million in GBTC shares. Grayscale itself now owns more than 500,000 bitcoin.
And Guggenheim isn’t taking on any risk. The firm makes money whether the price of BTC goes up or down. The retailers who are invested in the fund are the ones who carry all the risk.
Bitcoin is highly volatile and has no role in retail investor portfolios. As Economist Nouriel Roubini explained in a lengthy Twitter rant:
“Investing in BTC is equivalent to [taking] your portfolio to a rigged illegal casino & [gambling]; at least in legit Las Vegas casinos odds aren’t stacked against you as those gambling markets aren’t manipulated the way BTC is. Instead BTC is manipulated heavily by Tether & whales.”
Tether’s runaway train
On to my favorite topic: Tether—a firm that mints a dollar-pegged stablecoin that’s hugely popular on unbanked exchanges.
On Nov. 28, Tether surpassed 19 billion tethers in circulation. And like a runaway train with no way of stopping, it is fast on its way to issuing 20 billion tether—worth the notional equivalent in US dollars.
So, what is going on with the New York Attorney General’s investigation into Tether and Bitfinex?
The last bit of real news we had was in September when Judge Joel M. Cohen once again ordered Bitfinex and Tether to turn over financials. However, he did not set a deadline. He left that decision to a special referee, according to Coindesk. And we haven’t heard anything on the matter since.
Stepping back, recall that Bitfinex/Tether have been resisting handing over documents since November 2018 when the NYAG—in pursuant to the Martin Act, which gives it broad powers to investigate fraud—first served subpoenas for information stretching back to January 2015.
In April 2019, when the NYAG was concerned that iFinex (parent company of Bitfinex/Tether) was insolvent and Bitfinex was dipping into Tether’s cash reserves, it sought an ex parte order compelling the companies to produce documents and staying further actions pending the ongoing investigation.
iFinex responded with a motion to dismiss. In August 2019, the Supreme Court denied the motion and the respondents sought to appeal, arguing that the NYAG did not have the power to demand documents since Bitfinex and Tether didn’t have sufficient contacts in New York.
In July 9, 2020, a New York state appeals court sided with the NYAG. (Court filing)
As I’m writing up this newsletter, Coindesk’s Nikhilesh De has just pulled up a new court filing in the case from Dec. 4 that is a bit bewildering. At first glance, it appears to be the same filing from July, repeated twice.
Drew Hinks, a lawyer not involved in the case, said the filing is a remittitur—a jurisdictional document that formally ends the life of an appeal by notifying the world that the decision is final.
I’ll update this post as I learn more—specifically why a remittitur is important after the appellate judgment has already been issued and become final. Does this help the investigation going forward?
(Update: I am pretty sure that the remittitur was just a procedural thing that signals that the appellate court is done and has kicked the ball back to the original court—i.e., Justice Cohen.)
Bitcoin sets new all-time high
On Nov. 30, the price of bitcoin reached $19,900 on Coinbase, according to the Block, surpassing its previous all time high (ATH) set on Dec. 17, 2017, by about $10.
After bitcoin reached its new high, it promptly lost 13% of its value.
When you see bitcoin getting pumped like this, what you are seeing is traders cashing out before the bubble bursts. Bitcoin is not a company. It does not create any actual revenue. Cash coming into the system goes to paying the miners, who sell their 900 newly minted BTC per day and earlier investors lucky enough to sell at the right time.
I’m sure the current pump has nothing to do with the NYAG getting closer to exposing Tether/Bitfinex’s inner workings, the recent indictment of BitMEX operators, and Binance’s latest efforts to aggressively block U.S. citizens from using its exchange.
Binance pulls in big profits
The largest tether exchange expects to earn between $800 million and $1 billion in profits for 2020, its captain Changpeng Zhao (“CZ”) told Bloomberg. The Malta-registered exchange also expected $1 billion in profits 2018.
Speaking of Binance, the crypto exchange is suing Forbes and two journalists for a recent report claiming that the exchange had a plan to dodge regulations. (Here is the complaint.) It’s unlikely CZ will get anywhere with this lawsuit because the suit will get torn apart in discovery.
Similar to when Bitfinex threatened to sue prolific critic Bitfinex’ed in December 2017, this is likely more of warning to other journalist: don’t dig too deep, or we’ll come after you.
The big news of the week is that three congressional democrats are trying to pass a bill that will require stablecoin issuers to comply with the same regulations and rules as banks.
If passed, the Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act, would require stablecoin issuers to apply for bank charters, get approval from the Federal Reserve and hold FDIC insurance. (The bill, press release.)
Stablecoin issues are like wild cat banks. Back in the 1800s banks would issue their own currency, and nobody knew what was backing the currency. And because these banks were often in remote, hard to get to locations, people often had trouble redeeming their notes for silver or gold or whatever it was that was supposed to be backing them.
Facebook’s Libra Association has announced a change of name. It is now the Diem Association. (Press release)
Tether skeptic Cas Piancy debates Sino Global Capital CEO Matthew Graham. (Podcast)
It’s no fun when the money’s all gone. Two weeks after Polish crypto exchange Bitmarket shut down due to “lack of liquidity,” the lifeless body of its CEO, Tobiasz Niemir, turned up in the woods. It’s not clear if he fell in with shady characters or he put that bullet in his head all by himself.
Here is an interviewwith Niemer done shortly before his death.
You remember BTC-e, the crypto exchange that was shut down in mid-2017? The U.S. is now suing the exchange and its operator Alexander Vinnik to recover penalties of $100 million imposed by FinCEN for allegedly violating the Bank Secrecy Act. Vinnik, a Russian national, is facing extradition requests from both the U.S. and Russia. (Here are the court docs.)
Binance has been shilling its centralized BNB token. The crypto exchange regularly burns (destroys) large numbers of the token to increase the value of whatever is left. The BNB burn is “meaningless nonsense to fool suckers,” writes David Gerard. “Anyone taking Binance posts about BNB seriously as any sort of trading signal is dumb enough to trade literally any shitcoin they see, and probably deserves to.”
The hearing for Reggie Fowler, the AAF investor tied to Bitfinex’s missing $850 million, has been moved to December. (Here are the court docs.) Also, recall that he was released on $5 million bail secured by several pieces of cheap real estate and two financially responsible people. Who were his wealthy friends? A source tells me it was his ex-wife Lori Fowler and Molly Stark, the director of Spiral Volleyball, a company he owned. It pays to stay on good terms with your exes.
(Update Dec. 22: Lori Fowler and Molly Stark signed the court documents for his release.)
Bitfinex and Tether filed court docs arguing once again that they are not doing any business in New York and tether is not a security. (Here is Bitfinex counsel Stuart Hoegner’s affidavit and an accompanying memorandum of law submitted by the company’s outside counsel). It all boils down to “yeah, but, no, but yeah.” We’ll hear from the judge on Monday, July 29 as to what he thinks.
Big whoops: Swedish crypto exchange Quickbit says it has leaked the data of 300,000 customers. According to the exchange, a third-party contractor left the data unprotected while upgrading on the exchange’s servers.
Elsewere in cryptoland
After bidding an astounding $4.5 million in a charity auction for the privilege to have lunch with billionaire Warren Buffet, Tron CEO Justin Sun cancelled last minute, claiming a bad case of kidney stones. But come to find out Sun’s been on the lam from China since November 2018. He is living in San Francisco now, which was where the lunch was supposed to have taken place.
Sun was, however, feeling well enough to attend the Tron after-party on July 25, even though nothing actually happened before the party, since lunch was cancelled.
According to Chia founder Bram Cohen, Sun also forgot to make a scheduled payment as part of Tron’s mid-2018 acquisition of file sharing service BitTorrent. Someone needs to explain to Bram that kidney stones can take a lot out of a person.
Anybody know if Justin Sun is hard up for cash? He isn't letting the last payment for BitTorrent get out of escrow.
In other news, the IRS is sending out scary letters to bitcoin holders, reminding them that they need to report any gains in crypto trading and pay their taxes. “Taxpayers should take these letters very seriously, IRS Commissioner Chuck Rettig said.
How did the IRS get all this info? Previously, a court ordered Coinbase to hand over the personal identifying information of customers who had transactions of $20,000 or more on the exchange between 2013 to 2015.
An MIT fellow thinks the structure of Facebook’s Libra was lifted verbatim from a paper that he and two other scholars published last year. What say you, Facebook? Are you stealing people’s ideas? It’s not like you’ve done anything like that in the past.
On the subject of Libra, one of the big selling points of the project was that it had 27 partners backing the project. But the CEO of Visa reminds us, no companies have officially joined yet. They’ve only signed non-binding letters of intent.
Telegram is under the gun. The popular messaging service has sold $1.7 billion worth of its Gram tokens to investors. Now it needs to build a Gram wallet into Messenger by October or give all the money back — and we’re sure it doesn’t want to do that.
Finally, Sergey Ivancheglo (aka “Come from Beyond”), the founder of IOTA and one of the project’s core developers, quit the IOTA Foundation. The two remaining directors are non-developers, but we’re sure they’ll handle everything just fine on their own. Nice bunch of people, really.
Why does it matter? Because his means NYAG has jurisdiction to push ahead with its investigation into Bitfinex and Tether’s ongoing shenanigans. Decrypt’s Ben Munster also points out that Bitfinex “loaned tethers to a New York trading firm.” There’s an open question as to whether the funds were ever paid back.
Also, Bennet Tomlin had a good thread on the NYAG’s filing.
By the way, there are now nearly $3.9 billion tether sloshing around in the markets, pushing up the price of bitcoin, which briefly crested $13,000 on July 10.
I nearly missed this bit of news from a few weeks ago: Ireland-based cryptocurrency exchange Bitsane went poof!, leaving its 246,000 users high and dry. Users began having issues withdrawing crypto from the exchange in May. And on June 17, the exchange’s website along with its twitter and facebook accounts vanished.
Bitmarket, the second largest Polish crypto exchange, has shut down citing a loss of liquidity. Approximately 1,300 bitcoin are stuck on the exchange, and users are rightfully pissed off. They have formed a Facebook group and are planning a class-action lawsuit. The exchange was acting goofy before the shutdown. Reddit user u/OdoBanks says users were asked to change passwords and provide additional KYC for withdrawals.
Founder of bitcoin stock exchange Bitfunder will be spending 14 months behind bars for lying to the SEC about a hack that cost clients 6,000 BTC. Instead of telling his customers the truth in 2013, operator Jon Montroll misappropriated funds to hide the losses.
Cryptocurrency exchange hacks don’t happen too often — only once every few weeks. Japan’s Bitpoint is the latest to make headlines. The exchange’s hot wallets were hacked to the tune of $32 million worth of crypto, most of which were customer funds. On Monday, the exchange found another $2.3 million missing on exchanges “that use the trading system provided by Bitpoint Japan,” according to Japan Today.
(Update, July 15, 11:30 a.m. EST — previously, I indicated Bitpoint located $2.3 of the missing funds, but actually the exchange found more money missing.)
Speaking of Japan, the country’s top regulator says 110 crypto exchanges are waiting for licenses right now. Under Japanese law, crypto exchanges need to register with the Financial Services Agency to operate in the country. As of now, there are only 19 licensed exchanges in Japan. The FSA has been slow to license after the Coincheck hack.
Binance burned 808,888 of its native BNB tokens — about $24 million worth. This is the eighth burn of BNB coins, which are totally not a security. The price of the remaining BNB goes up every time there is a burn. Keep in mind, until any crypto is converted to fiat, its value is completely theoretical.
BitMEX, the Hong Kong-based bitcoin derivatives exchange, has finally released the tapes (round 1 and 2) from its “Tangle In Taipei,” a July 3 debate between Bitmex CEO Arthur Hayes and NYU professor Nouriel Roubini. The two have been going at it online.
@CryptoHayes is the biggest asshole, jerk, manipulator and criminal in the world. He is sending to select media a doctored edited highlights video of the debate to make me look bad cutting off all my points.I will sue them. This is sick criminal behaviour.Will not pass you coward
You coward @CryptoHayes: I am reporting you /your rekting @BitMEXdotcom racket to US and other law enforcement and regulatory authorities so u get investigated, prosecuted and convicted. We will see how you will laugh when you rot in jail rather than hide in your Seychelles cave https://t.co/9ApOAPDXTJ
A man is suing Gemini — the NY exchange operated by the Winklevoss twins — after $240,000 was stolen from his money market account and wired to Gemini, where it was used to to purchase crypto on the exchange.
Due to heightened oversight on online crypto exchanges, users are increasingly asked to fork over their IDs and addresses. The shift is giving peer-to-peer exchanges, which typically don’t impose such KYC checks, a boost, according to Bloomberg.
Other interesting stuff
Founders of the Tezos crypto platform object to sharing emails between them regarding the Tezos “fundraiser” because they are married. Steven Palley has the full story.
New York City’s Monroe College was hit with a ransomware attack that shutdown the college’s computer systems. The attackers want the college to fork over $2 million worth of bitcoin to free up the computers.
President Trump blasted bitcoin on Twitter. He is no fan of Facebook’s Libra either. There’s only room in this country for one currency, and that’s the almighty dollar.
…and International. We have only one real currency in the USA, and it is stronger than ever, both dependable and reliable. It is by far the most dominant currency anywhere in the World, and it will always stay that way. It is called the United States Dollar!
The Federal Trade Commission has fined Facebook a gobsmacking $5 billion for privacy violations. It’s the biggest fine in FTC’s history. Surprise, surprise, Facebook’s stock went up on the news.
An angry mob burned down the home of a man behind bitcoin ponzi scheme in South Africa after he admitted all the money was gone.
Finally, police in China cracked down on a cartel of illicit bitcoin miners who stole nearly $3 million worth of electricity. A local power company tipped off authorities after they noticed a peculiar surge in power use.
Did you know, there is an actual business for horse manure?
“It’s wild,” one horse farmer told Stable Management. “You can take this stuff that nobody wants and turn it into something of value.”
You can do something similar in the crypto word. Shitexpress was a service that delivered horse poop anywhere in the world for bitcoin. Now, instead of sending actually poop, you can send tethers, a stablecoin issued by a company of the same name, Tether Limited.
Tethers are a major source of liquidity in crypto markets. In lieu of the US dollar, you can use them to enter and exit positions in times of volatility. As such, tethers are responsible for the health and wellness ofdozens of crypto exchanges, including Binance, Huobi, Bittrex, OKEx, Poloniex and others, that don’t have direct banking.
When Tether first entered the world in 2015, tethers werepromised as an I.O.U. For years, Tether assured us that every tether was worth $1—as in, one actual US dollar that Tether had on hand that you could redeem your tethers for.
Tether and its sister company Bitfinex, one of the largest crypto trading platforms by volume, are now beingsued by the New York Attorney General. As court documents reveal more of the companies’ inner workings, people are asking: What are tethers worth? Is one tether worth a dollar? Less than a dollar? What can I get for my tethers?
For a while, the thinking was, well, maybe one tether is worth 74 cents, because in hisfirst affidavit, filed on April 30, Stuart Hoegner, Bitfinex and Tether’s general counsel, said tethers were only 74% backed. In other words, Tether was operating a fractional reserve, kind of like a bank, but sans regulatory oversight or deposit insurance.
Tether updated its terms of service on February 26, to let you know tethers weren’t fully backed, but if you weren’t paying close attention—i.e., checking the Tether website every single day—you may have missed it. Tether says it can amend, change, or update its terms of service “at any time and without prior notice to you.”
Now, it’s looking like one tether is worth whateversomeone gives you for it. If someone gives you bitcoin for a pile of tethers, hurray for you, that is the value of your tethers. If the person who got your tethers can pass them off to someone else for bitcoin, or another crypto of value, then yay for them! It’s called thegreater fool theory, and, so far, it seems to be working—Tether is still trading on par with the dollar.
But if you take those tethers to Tether, the company that, so far, has shoveled $3 billion worth of them onto the markets, and say, “Hey, can I redeem these for dollars, like you have been promising me all these years?,” they will most certainly tell you, “Sorry, no.”
Are you verified?
You can only redeem tethers under certain conditions, such as you bought loads of them directly from Tether—and you are not a US citizen.
In Hoegner’s recent affirmation, filed on May 21, he says you have to be a “verified” Tether customer to redeem tethers.
“Only verified Tether customers are entitled to redeem tether from Tether for fiat on a 1:1 basis. There is no right of redemption from Tether on a 1:1 basis for any holders of tether who obtained the tokens on a secondary market platform and who are not verified Tether customers; on the contrary, such holders of tether have no relationship with Tether and are expressly precluded from redeeming tether on a 1:1 basis for Tether.”
In that paragraph, Hoegner reminds us three times—just to make sure we understand his point—that whoever you are and however you ended up with your tethers, the company is under no obligation to give you cash back for those tethers.
Per Tether’sterms of service, only those who bought tethers directly from Tether Limited—aka “validated users”—can redeem tethers. Anyone who got tethers on the “secondary market,” meaning, an exchange, is not able to redeem those tethers.
Ascourt docs reveal, from November 2017 to December 2018, you could only buy tethers for cash directly from Bitfinex. Per Tether’s website, as of November 27, 2018, you could once again buy tethers directly from Tether. However, you have to buy a minimum of $100,0000 worth. According to Tether’s definition, Bitfinex is a secondary market.
Also, if you want to redeem tethers on Tether, you have to redeem a minimum of $100,000 worth at a time, and you can’t redeem more than once a week.
Further, if you live in the US, you have zero chance of ever redeeming your tethers for cash. Hoegner says that as of November 23, 2017, Tether ceased servicing customers in the US, and at this time, “no longer provides issues or redemption to any US customers.”
To summarize, if you are a US citizen holding a bag of tethers, Tether will give you nothing for them. If you acquired tether on Bitfinex or some other exchange, Tether owes you nothing. And if you don’t like that, too bad, because Tether also says in its terms that when you buy tethers, you waive any rights to “trial by jury or proceeding of any kind whatsoever.”
Has anyone been able to buy or redeem tether via Tether? Is there anyone out there who has ever done this? Would love to hear from you. https://t.co/Xi4HjSOUX2
If you are one of the lucky few who purchased $100,000 or more worth of tethers via Tether’s website—and you are not a US citizen—and would like to redeem 100,000 or more of them, you may or may not get actual dollars back any time soon.
In its terms of service, Tether says it “reserves the right to delay redemption or withdrawal” of tether in the event of illiquidity—meaning, if they don’t happen to have cash on hand today. The company also says that it reserves the right to pay you “in-kind redemption of securities and other assets” held in its reserves.
Basically, that equates to, you could get shares of iFinex (Bitfinex and Tether’s parent company) or LEO tokens (a new token Bitfinex recently created) or whatever is in the soup bowl that day. And you may end up with something that has as much real world value as horse manure—just not as good for the roses.
Update (May 27): This story has been updated to reflect that if you buy or redeem tethers from Tether, you have to buy or redeem a minimum of $100,000 worth.
Bitfinex 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 apost 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 withoutactually 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.
Bitfinex 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 afractional 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.
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.
Bitfinex 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.”
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.”
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.
It’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 affidavitaccompanied 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.
Bitfinex: No one is willing to audit us because they don't want to damage their reputation by auditing us! Asymmetric risk!
New York Attorney General: We'll audit you! For free! Bitfinex: NOT LIKE THIS! New York Attorney General: Send documents. Bitfinex: NO GOD PLEASE NO!
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.
It's funny because LEO also means law enforcement organization
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.
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.
According 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 courtdocument. It reveals a lot about what has been going on under the covers at Tether/Bitfinex. I’ll try and summarize.
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 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.”
The Martin Act is a New York law that gives the N.Y. Attorney General very broad power to investigate securities fraud.
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.
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.
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.
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)
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.
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.)
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 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.”
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)
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.
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 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).
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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