Cryptos crash over alleged $850 million fraud at Bitfinex – BTC down 7%


Crypto markets are in turmoil. A “Black Swan” has flown in from New York, where the local Attorney General’s office has revealed that, “iFinex, the operator of both Bitfinex and Tether Limited (the firm behind USDT), had come under legal pressure from a key U.S. legal entity.” An alleged fraud of $850 million is the storyline. Bitcoin prices immediately fell from $5,550 down to $5,050, but have recovered to $5,200.

According to reporting from Ethereum World News: “A document unveiled by the New York Attorney General’s (NYAG) office on Thursday has revealed that iFinex, the company behind both Tether (USDT) and Bitcoin exchange Bitfinex, is being sued. Per a lawsuit issued by official Letitia James, iFinex Inc, which is the company behind the two aforementioned crypto startups, promoted the “issuance, distribution, exchange, advertisement, negotiation, purchase, investment advice, or sale of securities” in New York State, which is illegal without the proper licensing and documentation. The suit has also revealed that Bitfinex purportedly sent $850 million to a Panama-based company, failed to secure the funds later, and went on to raid almost $1 billion of Tether’s cash reserves to satisfy its customers.”

According to the actual court filings:

Bitfinex has already taken at least $700 million from Tether’s reserves. Those transactions – which also have not been disclosed to investors – treat Tether’s cash reserves as Bitfinex’s corporate slush fund, and are being used to hide Bitfinex’s massive, undisclosed losses and inability to handle customer withdrawals.

Prior to the news, Tether’s market capitalization for its USDT stablecoin was $2.88 billion. The coin’s price has declined from $1.01 to $0.997 in overnight trading, while its market cap fell to $2.85 million.

The controversy, however, swept through the crypto market with a vengeance, driving prices for Bitcoin down 7%. Other tokens have not fared as well. The bombshell’s shockwave, unfortunately, may have a lasting impact on the industry, as noted by this reporting:

If Bitfinex did lose $850 million in a transaction the company sent to a company based in Panama called Crypto Capital Corp and granted itself access to $900 million worth of Tether’s cash reserves, it could have a long-lasting effect on the public image of the cryptocurrency market.

The gyrations in the crypto market, together with a mild recovery, are an indication that things may not be as bad as they first seemed for the crypto industry. Experts contend that the news does reflect that Tether actually does have cash reserves to back USDT, as required, even if a portion of the coverage is a line of credit. Stories had circulated months back that the full amount of cash reserves necessary many not have been there. Company officials had denied the claims at the time.

Per reporting from Forbes:

Bitfinex’s operations, including its connections to Tether, have long been a subject of rumor and controversy. While the executives have claimed the two entities operated at arms length, the attorney general challenges this claim, and points out that the same individuals appear to control both of them.

Forbes went on to add:

Bitfinex, which is incorporated in the British Virgin Islands, relied on a shadowy network of money agents, including “human being friends of Bitfinex employees that were willing to use their bank accounts to transfer money to Bitfinex clients”… The fallout for investors from all this remains to be seen. Cascarilla, of Paxos, noted that most of those exposed to Tether are in Asia, and added that a crisis in confidence in the currency could result in short-term liquidity problems in the cryptocurrency markets. He also said the episode points to the need for crypto investors to rely on exchanges and stablecoins that comply with U.S. regulations.

According to Julie Plavnik, CBDO of Xena Exchange:

It’s not fair enough to call Tether scam because not 100% USDT are backed by fiat equivalents. To be objective, 74 percent collateral is not that little, and this number itself doesn’t make it obvious that Tether investors are under the significant risks, and this is where the panic should come in.
If we look at how many traditional banks approach the reserves requirements, not all them are fully backed as well. However, Tether is not a bank, and therefore, should not be under the same heavy regulatory standard. Strictly speaking, it’s disputable whether Tether does really fall under the requirement to hold 1$ for every USDT issued, from the legal perspective.
It’s notable that, despite the recent negative news around USDT, its market price remains more or less stable. This might be explained by the “stabilizing” purpose of USDT – firstly to be an instrument of value transition, rather than a promising high yields investment tool. Due to that it’s linked with the traditional currency (i.e. US dollar), its price appears to be less sensitive to any external factors, if compared with other cryptocurrencies.
Herewith, all these accusations seem to stem mostly from Bitfinex competitors interests, rather than from the “abused” investors. We’re not living in an ideal world, and the crypto space is too unpredictable for its participants being 100% faultless, when trying to stay afloat. What should be really examined in the Tether’s case is how well this 74% reserve is equipped? Are there non-fiat assets, which are high-liquid and capable to ensure the investors stability?
It’s better to avoid immediate accusations and wait until there would be more details on the case.

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