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The cryptocurrency markets fell on Thursday night after the New York Attorney General accused the owners of a major exchange, Bitfinex, for using illicit transactions to hide $ 850 million in missing funds.
According to a 23-page legal document, Bitfinex raided the reserves of a so-called stablecoin called Tether, a digital currency allegedly backed by US dollars, to pay customers demanding withdrawals.
The news has dropped Bitcoin by nearly 6% to about $ 5,100, raising questions about the viability of Tether, which many investors use as a substitute for the dollar to enter and exit different cryptocurrencies.
According to the Attorney General's file, the funds recovered by Tether amount to 850 million dollars. According to Chad Cascarilla, who runs a company called Paxos, which manufactures a competing stablecoin, this figure would represent at least 27% of Tether's dollar reserves.
Instead of US dollars, the $ 850 million is instead supported by a revolving line of credit from the Bitfinex stock exchange. But as explained Thursday's ranking, Bitfinex seems to have borrowed this amount to cover a shortfall.
The document also reproduces messages written by a Bitfinex official last August, which plead for a capital of a Panamanian payment processor to which he has transferred funds.
"The situation seems bad. We have more than 500 withdrawals pending and they continue to arrive … [T]oo much money is in reserve with us and we are currently walking on a very thin layer of ice, "reads in a message from a Bitfinex official who used the name" Merlin ".
Merlin also warned his contact, "Oz," that the situation posed a serious threat to the crypto industry and that Bitcoin "could yield" less than $ 1,000 if they did not act quickly.
The exact identity of the Panamanian payment processor, Crypto Capital, is not clear. According to the Attorney General, Bitfinex, which is part of the British Virgin Islands, relies on a ghostly network of monetary agents, including "human friends of Bitfinex employees willing to use their bank account for transfer money to Bitfinex customers ".
Bitfinex did not immediately respond to a request for comment on the allegations.
The record also indicates that Bitfinex's banking arrangements were severely tested in March 2017 after Wells Fargo told the company that it would no longer facilitate wire transfers between Bitfinex and Tether.
Bitfinex's operations, including its connections with Tether, have long been the subject of rumors and controversy. While the leaders claimed that the two entities operated independently, the Attorney General disputes this badertion and points out that the same people seem to control both.
In his document, the Attorney General describes an investigation that has been going on for months and looks for numerous documents to find out whether New York investors are exposed to ongoing fraud by Bitfinex and Tether.
The Attorney General's activities are civil in nature, but as the office regularly cooperates with the FBI and other federal agencies, it is possible, if the facts alleged are true, that criminal charges are laid.
Meanwhile, the forces of order seem to look more closely at the stable identity coins. According to research firm Chainalysis, the company has recently responded to police requests by adding tracking software for four coins, including Tether.
The benefits for investors of all this remain to be seen. Cascarilla, of Paxos, noted that most of the people exposed to Tether were in Asia and added that a crisis of confidence in the currency could lead to short-term liquidity problems in the cryptocurrency markets . He also said that the episode underscored the need for cryptographic investors to rely on trade and stable parts that comply with US regulations.
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