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Tether, Bitfinex prohibited from operating in New York, pays $18.5M settlement in NYAG case

New York Attorney General Letitia James has announced the outcome of her office’s investigation into Tether and Bitfinex, ordering Bitfinex and Tether to end all trading activity with New Yorkers together with the payment of an $18.5 million settlement.

The statement is long and highly critical of Bitfinex and Tether, accusing them of “recklessly and unlawfully [covering up] massive financial losses” and “illegally trading virtual currencies in the state of New York.”

Bitfinex and Tether must also provide quarterly reports to the NYAG demonstrating that they are now properly segregating corporate and client accounts as well as submitting to mandatory reporting regarding any transfer of assets between the two entities. It must also offer public disclosures of how its Tether is backed.

The statement also goes into detail surrounding the degree to which Tether is actually backed by fiat, exposing a scheme to mislead customers into believing that each Tether was indeed fully backed. According to the statement, e thcompany announced that it had verified that each Tether was fully backed by cash at a rate of 1:1. The very next day after the announcement, Tether began moving the funds out of this account, immediately reverting to a state of affairs in which Tether was not backed without any indication that this was the case.

Of course, you wouldn’t think any of this if you were only going by Bitfinex’s statement on the outcome. In its statement, Bitfinex says:

“The Attorney General’s Office concluded, in essence, that we could have done better in publicly disclosing these events. Contrary to online speculation, after two and half years there was no finding that Tether ever issued tethers without backing, or to manipulate crypto prices.”

However, the NYAG statement isn’t exactly ambiguous:

“The OAG’s investigation found that, starting no later than mid-2017, Tether had no access to banking, anywhere in the world, and so for periods of time held no reserves to back tethers in circulation at the rate of one dollar for every tether.”

For Bitfinex to claim victory on this particular point is highly misleading. Though the NYAG doesn’t clearly say the Tethers were backed when they were issued, it does say that it discovered that each Tether did not remain unbacked and in fact was unbacked for a significant period of time.

This is a continuing pattern for Bitfinex and Tether, who in the past have shown themselves willing to make any representation that suits them as long as they are able to get away with it. Recall that up until the NYAG investigation left them with no other choice, Tether was still promoting themselves via their website as keeping each Tether completely backed by USD.

Bitfinex’s attitude toward the investigation is especially galling given some of the statements made by the AG in announcing the end of the investigation, including referencing several instances in which Bitfinex/Tether had lied to the public and investigators. In April of 2019, the company issued a statement giving assurances that the money it had transferred to Crypto Capital were not lost but had been seized and safeguarded. “The reality,” according to the NYAG’s statement, “was that Bitfinex did not, in fact, know the whereabouts of all of the customer funds held by Crypto Capital, and so had no such assurance to make.”

The NYAG’s investigation is over, but even a generous reading of the NYAG’s announcement would indicate that the investigation was well-founded. The conduct described there is certainly going to grab the attention of would-be litigants and other regulators.

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