Bitfinex’s NYAG probe, Tether ends in $ 18.5 million settlement

A closely watched legal case involving Bitfinex and Tether with major implications for the cryptocurrency industry has been resolved.

The New York Attorney General’s Office (NYAG) has settled with Bitfinex in a 22-month investigation into whether the cryptocurrency exchange was seeking to cover the $ 850 million loss in customer funds and business held by a payment processor.

The NYAG office announced the settlement on Tuesday, formally ending the investigation which began in April 2019. Under the terms of the settlement, Bitfinex and Tether will not admit any wrongdoing, but will pay $ 18.5 million and provide quarterly reports describing the composition of Tether’s reserves for the next two years. More importantly, these reports will match the information Tether has already provided to NYAG on its reserves. The NYAG will not incur any costs as part of the settlement.

In a statement, New York Attorney General Letitia James said, “Bitfinex and Tether recklessly and illegally covered massive financial losses to maintain their plan and protect their bottom line. Tether’s claims that its virtual currency was fully backed by US dollars at all times were a lie.

The regulation may help solve, one way or another, an issue that has long plagued the entire global $ 1.6 trillion cryptocurrency market. By forcing Tether to provide a higher level of transparency than ever before on the backing of its USDT stablecoin – a fundamental part of the crypto plumbing – the arrangement could replace whispering and guesswork with regular data. Depending on the level of detail provided, investors might have better tools to assess the claim that the company printed unsecured tokens to artificially drive up the price of bitcoin, the market’s sign.

According to the settlement, the NYAG claims that Bitfinex and Tether held part of Tether’s reserves in trust for several months in 2017 and failed to disclose its issues with Crypto Capital Corp. in a timely manner in its findings of fact. The NYAG also criticized a blog post published by Bitfinex after the investigation was announced, in which the exchange said funds held by Crypto Capital had been “seized and protected.”

Charles Michael, a partner at the law firm Steptoe & Johnson LLC who represented the companies in the investigation, said the settlement “resolves public disclosure allegations” regarding Tether’s loan to Bitfinex.

“To the credit of the Attorney General’s office, after two and a half years of investigation, their conclusions are limited only to the nature and timing of certain disclosures,” Michael said. “And unlike online speculation, there has been no discovery that Tether has ever issued ties without support or to manipulate crypto prices.

However, the settlement states: “As of November 2, 2018, the ties were no longer supported 1 to 1 by US dollars to a Tether bank account, as a substantial part of the support from the Deltec account had been transferred to Bitfinex. to offset funds withdrawn by Crypto Capital, while the corresponding funds transferred from Bitfinex’s Crypto Capital account to Tether’s Crypto Capital account were written down by Crypto Capital’s shares.

The $ 18.5 million companies are paying as part of the settlement “should be seen as a measure of our willingness to put this case behind us and focus on our business,” said Stuart Hoegner, general counsel for Bitfinex and Tether, in a statement.

He said Tether “voluntarily” provided the NYAG with information on Tether’s reserves, and would continue to do so for two years.

“We proposed that as part of the settlement agreement, we would disclose – both to the attorney general’s office and to the public – additional information about Tether’s reserves on a quarterly basis,” Hoegner said.

The information to be provided will include a breakdown of cash and cash equivalents held in reserves. It is not known whether this will take the form of attestations or some other type of update, or whether a third-party auditor or a law firm will write the reports. The settlement only said the disclosures would “substantially” match what the companies provided to NYAG during its investigation. Bitfinex and Tether must also disclose any information about fund transfers between them.

“Setting aside the Attorney General’s characterization of these disclosure issues as false statements or breaches of any legal obligation, the Attorney General’s office concluded, in essence, that Bitfinex and Tether could have done better by publicly disclosing these events, ”said Michael.

New York Attorney General Letitia James first announced the legal investigation in the spring of 2019, revealing that Bitfinex lost access to nearly $ 1 billion and covered the losses using funds from its sister company Tether. Tether, who shares ownership and key executives with the exchange, loaned Bitfinex $ 550 million euros and extended a line of credit.

The NYAG investigation obtained an injunction to freeze that line of credit, prevent any further transfer of funds and force the companies to turn over any documentation on the deal, something both companies objected to in court. A judge ruled in favor of the NYAG, which also won an appeal.

In the end, the companies produced more than 2.5 million documents, Hoegner said.

“The loan was granted to ensure the continuity of Bitfinex customers. It has since been redeemed early and in full, including interest. At no point did the loan affect customers or Tether’s ability to process redemptions, ”said Michael.

The NYAG investigation did not reduce demand for USDT, the dollar-indexed stablecoin issued by Tether. Since the start of the case, the value of the dollar-indexed tokens in circulation has grown from $ 2 billion to more than $ 34 billion, according to Tether’s transparency page.

The price of bitcoin recently went into tears, hitting a new high of over $ 58,000.

“We are pleased that our customers have shown loyalty and commitment to our businesses over the past two years while this investigation was ongoing. … We look forward to the two companies continuing to lead the industry and serve our customers, ”said Hoegner.

Since the case entered the public sphere, Bitfinex has attempted to recover funds held by Crypto Capital held by law enforcement agencies in Portugal, Poland and the United States. It’s unclear how long it might take for these cases to resolve, given the different jurisdictions and the ongoing case against the Crypto Capital operators.

Last year, Bitfinex filed subpoenas in three different states, seeking to deposit banks that may have held funds for the payment processor.

At the time, Hoegner told CoinDesk through a spokesperson that the efforts “were squarely aimed at getting more information” about Crypto Capital and its funds. “Bitfinex is the victim of fraud and asserts its rights on funds taken by Crypto Capital through legal measures initiated in various countries.”

The exchange received some of these assignments. The Bitfinex settlement is among the largest in the history of crypto. EOS-maker Block.one settled with the SEC for $ 24 million in 2019 over allegations that its token sale of $ 4 billion was an unregistered securities offer. Telegram, at the time a budding digital currency issuer, also settled with the SEC for $ 18.5 million after raising $ 1.2 billion for the TON network, which was ultimately scrapped.

UPDATE (February 23, 2021, 13:15 UTC): Updated with additional context.