The first "stablecoin" is no longer supported by $ 1 per coin.

A New York judge has ordered Bitfinex, a cryptocurrency purse that shares a parent company with the "stablecoin" Tether, to hand over a series of documents to New York Attorney General Letitia James. James announced the order in a press release on Thursday. She also unsealed legal documents from her office asking for the order.

These documents suggest that Bitfinex could have serious financial problems. The company was not able to recover $ 851 million in cash that it had outsourced to a little-known Panamanian payment processor called Crypto Capital. James' office writes that the information discovered during the investigation "raised serious questions about the viability of Bitfinex as a permanent concern".

In a statement, Tether said New York's attorney general's statements were "written in bad faith and fraught with false assertions". According to Tether, the $ 851 million missing "is not lost but has been seized and retained". The company added that "Bitfinex and Tether are both financially sound".

The critical situation of Bitfinex is important, not only because its customers risk losing hundreds of millions of dollars, but also because the link has become a kind of global monetary standard in the world of cryptocurrencies. Tether (the company) promised that each bonding unit (cryptocurrency) will have a value of $ 1 and the company has been remarkably successful in keeping this ankle for several tumultuous years. This stability has led a number of exchanges to consider fasteners as substitutes for the dollar, a substitute that can be bought and sold without attracting the undesirable attention of US regulators.

Bitfinex reportedly attempted to solve his financial problems by borrowing money from Tether, questioning Tether's promise to keep a dollar in the bank for each bond issued. While we can expect this to shake the market's confidence in the dollar, it does not seem to have happened. By the time I write this Monday afternoon, Tether continues to trade for $ 0.98 to $ 1 on various scholarships.

Bitfinex has long been concerned about solvency issues

Bitfinex is a popular cryptocurrency exchange that seems to operate mainly from Hong Kong and Taiwan. The exchange allows people to buy and sell bitcoins, ether, litecoins and other blockchain assets, and shares a parent company with Tether.

Over the past three years, critics have repeatedly asked questions about the financial health of both companies. After hackers stole $ 70 million worth of bitcoins from Bitfinex in 2016, the stock market issued IOUs to cover the shortfall. In April 2017, Bitfinex supposedly repaid all the outstanding IOUs. But one wondered if the exchange had been fueled by its Tether reserves to finance that.

Bitfinex promised to publish a professional audit of his books, but the firm never kept his promise. At the beginning of 2018, a company that Bitfinex had hired to conduct the audit had abruptly withdrawn from work without publishing its results.

During the same period, Bitfinex found that it was increasingly difficult to obtain banking services. One bank after the other broke his relationship with Bitfinex and Tether. Banks have not publicly explained their reluctance to work with Bitfinex, but it is generally accepted that banks are worried about regulatory risks.

Limited access to the conventional financial system has prevented Bitfinex and Tether from accepting customer withdrawal requests. In late 2017 and early 2018, clients began to experience long delays in withdrawing funds. Bitfinex has started to rely heavily on a Panamanian payment company called Crypto Capital to make payments to customers.

"By 2018, Bitfinex had placed more than $ 1 billion in client and business funds mixed with Crypto Capital," New York Attorney General Brian Whitehurst wrote in a legal deposit last week. The companies told New York officials that "no contract or similar written agreement has ever been reached between Crypto Capital and Bitfinex or Tether".

It has happened as well as you wish. "By mid-2018, Bitfinex was having a hard time honoring requests from customers to withdraw their money from the trading platform," reports Whitehurst. "Crypto Capital, which owns all or almost all of Bitfinex's funds, refused to process customer withdrawal applications and refused or was unable to return funds to Bitfinex."

The discussion papers obtained by New York officials show that during the second half of 2018, Bitfinex sent more and more desperate messages to Crypto Capital.

"Dozens of people are now waiting for a cryptocapital withdrawal [sic]"We are at the end of the month and you have not sent a single wire," said the same representative Tether at the end of November. "I'm not your enemy, I'm here to help you and I've been very patient right now, but you have to cut the crap and tell me what's going on."

According to Whitehurst, Crypto Capital told Bitfinex that the $ 851 million was not available because funds had been seized by officials in Portugal, Poland and the United States – an assertion that Bitfinex considered skeptical.

Bitfinex borrows from Tether

Instead of revealing this situation to its customers, Bitfinex reacted by drawing on Tether's cash reserves. Bitfinex acknowledged to New York regulators that in November, it had drawn $ 625 million from Tether's account at the Deltec Bahamian bank and transferred it to Bitfinex's account at the same bank. In exchange, Bitfinex transferred $ 6.25 million of its frozen Crypto Capital funds to Tether.

Obviously, it was not a very good deal for Tether, as he was selling $ 625 million in real money for $ 625 million, the reality of which was debated. A month later (December), Bitfinex "worries about the possibility that Crypto Capital executives are involved in a fraud."

Once again, Bitfinex did not inform its customers of what was going on. Instead, the exchange attempted to crush everything by doing another dubious transaction with Tether. Tether has granted Bitfinex a $ 900 million credit line backed by shares in Bitfinex's parent company (which in turn shares a parent company with Tether). Bitfinex used this line of credit to "buy back" the $ 625 million blocked funds from Tether's Crypto Capital. Of course, none of these maneuvers changed the fact that he was missing $ 851 million from their shared parent company.

Around this time, Tether changed the language on his website. Previously, the website stated that "each attachment is always individually protected by traditional currency held in our reserves". From now on, the site states that "each bond is always 100% guaranteed by our reserves, which include the traditional currency and cash equivalents and may, from time to time, include other assets and receivables from loans granted. by Tether to third parties, which may include: affiliated entities. "

Markets seem insensitive to Tether's difficulties

So, how did the market react to this news? In the hours that followed the announcement last Thursday, the price of bitcoin dropped by almost 10%. It remains about 6% lower than its value since last Thursday.

Meanwhile, Bitcoin has been traded with a premium on Bitfinex over other cryptocurrencies. This is a common situation when an exchange blocks withdrawals in dollars. Customers looking to withdraw their money become willing to pay extra to get bitcoins they can withdraw immediately, instead of taking the risk of never getting their money back.

But remarkably, the recent news seems to have had little impact on the value of Tether. As I write this Monday morning, CoinMarketCap shows that Tether is trading between $ 0.98 and $ 1 on various exchanges.

It is unclear why Bitfinex's financial problems have apparently had so little impact on Tether's price. The value of Tether has been remarkably stable over the last three years of turbulent news, suggesting that the company has developed ways to preserve the anchor against the hostility of the official banking system.

In the short term, Tether could simply have enough money in the bank, supposed to have more than a billion dollars even after the $ 851 million loss, to support the value of the currency. As long as the total demand for fasteners will never be less than $ 851 million, Tether will be able to buy fasteners whenever they fall below $ 1.

Nevertheless, money bases are fundamentally based on trust. If the market began to worry about Tether's declining demand, it could become a self-fulfilling prophecy, triggering a race against the motto as people struggle to cash in while there remains l & # 39; money.

But…

Until now, it has not happened. And this perhaps testifies to the central role that attachment plays in many cryptocurrency exchanges.

Because of the friction between crypto-currencies and the conventional banking system, there are a number of "crypto-only" exchanges that do not offer payment in conventional currencies such as the dollar or the euro. On these exchanges, Tether is the closest way for traders to get dollars for their crypto-currencies. As long as there is a strong demand for links for daily use, the demand may never go down enough so that we can seriously question the viability of Tether.

If that's what happens, it would be an ironic parallel here with conventional currencies like the US dollar, which was backed by gold until the 1930s. Between 1933 and 1971, the US government has gradually cut the link between gold and the dollar. This has led to the modern dollar, which can not be traded for anything. The dollar retains its value as it is a convenient way for daily transactions.

Similarly, fasteners have become the most convenient way to make dollar transactions in the world of cryptocurrency. As long as this is true, their demand may be strong, with each tie leaning against a dollar on a bank account somewhere.