Bitfinex and Tether seek dismissal, but admit to non-cash reserve gambits


The continuing saga of BitGrail and Nano reaches a verdict in Italian court

Management for Bitfinex and Tether had their day in court, which may have resulted in more disclosures than its executives may have wanted. While the beleaguered crypto exchange and stablecoin manager was alleged to have mishandled cash reserves for Tether’s “USDT” stablecoin, the revelations in the courtroom confirmed what had been rumored for months. Executives had crossed the fiduciary line that is supposed to exist between operations and a reserve trust fund. The team now admitted to investing the reserve assets in more than just cash and cash equivalents, including Bitcoin.

For those that missed earlier news, an alleged scandal hit the airways during the last week in April. The New York Attorney’s Office claimed iFinex, the entity that manages both Bitfinex, a crypto exchange, and Tether, which manages its “USDT” stablecoin, supposedly backed by cash reserves of nearly $3 billion, had used reserve funds to cover up a $700 million shortfall in the accounts of Bitfinex.

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.”

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.”

After the original court filings, investigative reporters discovered that the missing funds from Bitfinex might have been seized by government authorities while prosecuting another entity, Crypto Capital, for alleged money laundering activities. Bitfinex had employed Crypto Capital ostensibly for processing services, but details for what the $850 million payment between the two entities was for have not been disclosed.

Lawyers for Bitfinex and Tether moved quickly to ask for a dismissal of the case, due to a lack of jurisdiction. Per their motion: “The Office of the New York Attorney General (“OAG”) initiated this special proceeding ostensibly ‘to protect New York investors.’ […] But OAG chose to target two virtual currency businesses that have nothing to do with New York investors — the businesses do not allow New Yorkers on their platforms and do not advertise or otherwise do business here.”

During the back and forth that occurs during this type of proceeding, David Miller, an attorney for Bitfinex said: “Prior to the April 24th order … Tether actually did invest in instruments beyond cash and cash equivalents, including bitcoin, they bought bitcoin.” Every USDT token is supposed to be backed “1:1” by cash reserves held in trust. Traditional fiduciary rules dictate that only “cash and cash equivalents” are justifiable investments, such that the risk of capital depreciation is not an issue.

New York Supreme Court judge Joel M. Cohen questioned the logic of Mr. Miller’s remarks on the spot: “Tether sounded to me like sort of the calm in the storm of cryptocurrency trading. And so if Tether is backed by bitcoin, how is that consistent? If some of your assets are in a volatile currency that Tether is supposed to somehow modulate, that seems like it’s playing into what they are saying.”

Miller countered that only a small amount had been invested in Bitcoin, but the point is that unregulated entities seem to think they are not bound by fiduciary guidelines. For those that have followed the constantly changing disclosures on Tether’s website, Miller’s next comment suggested that a simple disclosure was all that was necessary.

He argued that the disclosures, “especially the disclosure of February 25th, demonstrate that Tether is not just taking it in cash or cash equivalents. It does make other investments, including purchasing other assets.” On Feb. 25th, the 100% cash backing was changed to read “traditional currency and cash equivalents”, as well as “other assets and receivables from loans made by Tether to third parties.” The press had previously reported that a line-of-credit had been substituted for the missing reserves.

The judge responded by allowing Tether some leeway in their investment practices, but also issued a “preliminary injunction ordering Tether and Bitfinex to:

  • Restrain access to credit lines on USD reserves held by Tether
  • Principals, executives, and agents of Bitfinex shall not receive distribution or dividends from funds received from Tether
  • Not tamper with the documents that NYAG originally requested
  • The preliminary injunction expires in 90 days, before which time the NYAG can file an extension up to 14 days to petition a longer time-frame on its provisions.”

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Bitfinex and Tether seek dismissal, but admit to non-cash reserve gambits

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