Bitfinex and Tether back in the news amid a potentially devastating controversy for the crypto industry

Tether FUD is back and this time it may be serious as it could take one of the biggest crypto exchanges down with it. The seriousness of the financial discrepancies surrounding Tether has gone all the way up to the top watchdogs in the land, namely the New York Attorney General’s office (NYAG). They are officially investigating iFinex Inc, the company that operates both Bitfinex and Tether, as the Attorney General Letitia James accuses the crypto exchange Bitfinex of losing $850 million and taking funds from the Tether reserves to secretly cover the shortage.

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Not only is Bitfinex at risk of going down but so is Tether, which is huge but it could get even worse because this kind of scandal around the most popular stable coin in the cryptocurrency economy could shake the entire crypto market and cause a ripple effect in the Bitcoin price itself. In the past 48 hours around $90 million has left Bitfinex cold wallets since the news. According to the NYAG the iFinex company is in violation of NY law due to activities that could have defrauded NY-based crypto investors.

“Our investigation has determined that the operators of the ‘Bitfinex’ trading platform, who also control the ‘tether’ virtual currency, have engaged in a cover-up to hide the apparent loss of $850 million dollars of co-mingled client and corporate funds. New York state has led the way in requiring virtual currency businesses to operate according to the law. And we will continue to stand-up for investors and seek justice on their behalf when misled or cheated by any of these companies.” New York Attorney General Letitia James

IFinex may be registered in the British Virgin Islands – an ideal tax haven – but it deals with NY clients without a license to engage in virtual currency business there and that is enough to bring it up on the NYAG radar.

According to international tax attorney and CPA Selva Ozelli, the New York attorney general has jurisdiction over offshore matters under New York's “Martin Act”. Since September 2018 already Bitfinex and Tether have been under investigation by them due to “substantial potential for conflicts between the interests of the platform, platform insiders, and platform customers.” Crypto traders and enthusiasts have known for many months that Tether is suspect, having never really properly been audited. In order to print so much new Tether every few months - millions of dollars worth at a time – iFinex must have as much fiat in dollars to back it, stored in a bank account somewhere. But this has never been convincingly proven.

And during all this time, numerous other stable coins have emerged which are being used to a degree, but Tether still has the dominant share of trade by far. There is still more trade in Tether than for all the other stable coins put together, certainly on Binance, for example. For some reason TUSD, USDC Paxos, and USDS are not able to take much of the market share from Tether. But that may be about to change. Even now, days after the news of potential serious crimes of fraud against Tether and Bitfinex, volume of trade in the stable coin is hardly affected at all and its peg to the dollar still holds.

Admittedly Tether is currently around $1.03 to the other stable coins on Binance and was even up as high as $1.07 a few days ago when the news emerged. On CoinmarketCap Tether is still eighth in volume of all cryptocurrencies and back up to a close par with the dollar, despite its dip on the 26th when the news broke. So for some reason USDT is holding its ground despite the phenomenal FUD sweeping the industry.

Despite Tether getting a bad rap last week by the NYAG, some argue that they used double standards in invoking the “Martin Act” on iFinex yet refusing to do the same when Merrill Lynch did something similar in 2009/12. Merrill Lynch and other Wall St firms play this same game as iFinex or Bitfinex has done but they seem to be above reproach. So even the top watchdogs, the NYAG, cannot really be trusted when it comes to the attitude of mainstream finance regarding cryptocurrency.

They will rather protect their cronies in the corrupt old monetary system and bring down cryptocurrency institutions instead it seems.

Still, since their subpoena Bitfinex and Tether have been obliged to hand over their records for inspection and it has come to light just how many unsuccessful banking relationships they have had all over the world over the past few years. They were simply unregulated during all this time and other companies are obviously reluctant to do any business with them. Bitfinex used “payment processors” to move money but has never had an actual reliable bank to work with for years. And it transpires that Bitfinex has been having major problems with its clients’ withdrawal requests. In other words they had no money.

And this is since October 2018, when rumors emerged from Bitfinex clients who were unable to withdraw their money.

The exchange tried to hide this and released statements back then that withdrawals were running as usual, but a private correspondence from a Bitfinex executive from the same time revealed him telling his contact at Crypto Capital that there are “too many withdrawals waiting for a long time,” which is why he urgently needed the money from Crypto Capital, “in Tether or any other form…Please understand all this could be extremely dangerous for everybody, the entire crypto community,” The most telling words from the Bitfinex executive, known as “Merlin” were the statement that “BTC could tank to below 1k if we don’t act quickly.”

Back then in October last year Bitfinex actually had to temporarily halt fiat deposits in euro, dollar, yen and pound, without a specific reason. It then appears as if $851 million had been seized by the governments of Portugal, Poland and USA from the iFinex accounts. As a result they had to take a line of credit to cover the shortfall in customer funds. They began using their Tether backings to fund their clients, leaving them open to being dissipated and unrecoverable. As a result we now have the current ongoing case by the NYAG “to determine, among other things, the extent to which New York investors are exposed to ongoing fraud being carried out by Bitfinex and Tether.”

The umbrella company iFinex has of course denied any wrongdoing, saying the NYAG court filings are written in bad faith and are riddled with false assertions. They insist that the missing funds have merely been seized and safeguarded, while Bitfinex and Tether remain financially strong. The CEO, Jean Louis van der Velde is currently scrambling to keep customers happy and save Bitfinex from a potential PR disaster.

With the scandal now unfolding it seems like Bitfinex customers are realizing the need to possibly withdraw their funds from the exchange to prevent any loss.

This case could be a landmark event as it sets a president for future crypto-related cases. New federal laws are being tested here and applied in relation to the new digital currency field, possibly bringing on further regulation in future. And Bitfinex and Tether could bite the dust here for violating state laws. Nevertheless Tether have already added another $100 million USDT to its total supply since the news broke a few days ago.

Tether has actually been around since 2014, known then as “Realcoin”. It was released by Brock Pierce, the director of the Bitcoin Foundation and although its website says that all Tether is backed by fiat dollars, it remains to be seen how real this coin turns out to be. Actually since the release of the recent FUD, the Tether website has been changed and now no longer says Tether is backed by fiat but rather that it is backed by “reserves” that include currency, cash equivalents and other assets and receivables. That may tell you something about the validity of Tether.

According to Alex Kruger, a market analyst, Tether is currently backed 75% by USD and 25% by a loan (described by iFinex as a “line of credit”). In other words USDT is only really worth $0.76, with $700 million worth only backed by the loan.

• Does this make you cautious about using USDT?

• Or would you recommend carrying on with the use of Tether for trading?

• And what is your opinion of Bitfinex after the recent news?

Leave your opinions in the comments below regarding this potentially massive development in the cryptocurrency industry.