NY cracks down on Bitfinex’s alleged cover-up of $851M loss with Tether funds

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Cryptocurrency exchange Bitfinex has found itself in legal hot water again, this time with New York’s top cop accusing the company and its affiliated firm, Tether, of cooking a series of “conflicted corporate transactions” to hide a shortfall in mid-2018 amounting to $851 million of client and corporate funds.

Bitfinex began to struggle with client withdrawal requests in October 2018, which, according to the New York State Attorney General’s Office, was due to the loss—or possibly theft—of $851 million.

To secretly cover up the “apparent loss,” Bitfinex and Tether’s parent company, Hong Kong-based iFinex Inc., allegedly engaged in transactions that resulted in Bitfinex gaining access to $900 million of Tether’s USDT stablecoin cash reserves, according to the 23-page legal filing.

At least $700 million was drained from Tether’s cash reserves, according to the attorney general’s office. Neither the loss nor the fund movements from Tether’s reserves were disclosed to customers to date.

“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,” the attorney general’s office said in a statement, noting that Bitfinex and Tether also “obfuscated the timing of these corporate transactions” during the investigation.

That investigation, which began in 2018, was prompted by suspicion that Bitfinex continued to allow investors in New York to deposit, trade, withdraw virtual currencies, as well as engage in other transactions on its trading platform. Bitfinex exited the U.S. market in November 2017, citing a “challenging” regulatory landscape among its reasons.

The lawsuit also claimed that Bitfinex, which has been reportedly struggling to find a banking partner, has teamed up with Panama-based payment processor Crypto Capital to handle the customer withdrawals. The two firms, however, do not have a signed, formal agreement, according to the attorney general’s office.

According to the filing, Bitfinex “placed over one billion of co-mingled customer and corporate funds with Crypto Capital.” Aside from Crypto Capital, the respondents’ counsel said Bitfinex and Tether “also used a number of other third party payment processors to handle client withdrawal requests including various companies owned by Bitfinex/Tether executives, as well as other friends of Bitfinex.”

On Wednesday, the New York Attorney General’s Office obtained a court order against iFinex Inc., ordering the firm and its subsidiaries to “cease further dissipation of the U.S. dollar assets” that back the USDT tokens while the investigation continues. Bitfinex, along with its sister companies, are also forbidden from destroying documents and communications that are potentially relevant to the investigation.

In response to the court order, Bitfinex claimed that the “financially strong” Bitfinex and Tether will fight the “gross overreach” by the attorney general’s office.

“The New York Attorney General’s court filings were written in bad faith and are riddled with false assertions, including as to a purported $850 million ‘loss’ at Crypto Capital. On the contrary, we have been informed that these Crypto Capital amounts are not lost but have been, in fact, seized and safeguarded,” Bitfinex stated. “We are and have been actively working to exercise our rights and remedies and get those funds released. Sadly, the New York Attorney General’s office seems to be intent on undermining those efforts to the detriment of our customers.”