Bitfinex Accused Of Co-Mingling Tether Funds To Cover $850 Million In Missing Crypto

FinTech, Investing, News, Regulation | April 26, 2019 By:

The New York Attorney General is accusing the Bitfinex exchange of using funds from its digital coin Tether to disguise $850 million in missing funds.

The revelations were made Thursday by state Attorney General Letitia James and reported by the Wall St. Journal. Hong Kong-based iFinex Inc., which operates the Bitfinex cryptocurrency exchange and owns Tether Ltd., is accused of co-mingling funds from Tether with exchange monies to cover up the losses. The losses occurred in mid-2018 and would represent the biggest loss of funds ever from a cryptocurrency exchange.

Bitfinex and Tether have long been under a cloud of suspicion over financing, with many claiming Tether did not have enough reserves to back its stated circulation. The cross ownership of the companies has also raised eyebrows at times.

The market reacted to the Attorney General’s news with a sharp price plunge, knocking about $300 immediately off bitcoin’s price.

James said she has a court order directing iFinex to halt moving money from Tether reserves to Bitfinex, stop  any dividends or other distributions to executives, and to surrender information and documents on its transactions. At least $700 million was taken from Tether funds, the AG said.

Bitfinex and Tether have not yet responded to the allegations.

The charges stem from an ongoing investigation by the AG office in 2018.  The attorney general said Bitfinex’s began to experience problems when it gave $850 million to third-party payments processor Crypto Capital Corp. to handle customers-withdrawal requests. Panama-based Crypto Capital failed to process the orders, the attorney general said, and Bitfinex realized by November that it had lost access to the funds.

Industry reaction was predictable, with calls for tighter regulation.

“The industry is trading billions of dollars worth of cryptocurrencies daily – and relying on exchanges and stablecoins that have no licensing, no registration, no oversight – is bad for business and reckless in the long term,” said Chad Cascarilla, the CEO and co-founder of Paxos, which has its own stablecoin, PAX, and operates an exchange. “We knew this was coming – and we’ve been expecting the tide to turn.”

Martin Weiss, CEO and founder of Weiss Crypto Ratings, said the New York AG “has confirmed for us something we’ve long suspected: Bitfinex is allowed to “borrow” money from Tether to cover operational expenses. This essentially means what we thought was a “stable” coin is actually backed by loans to a crypto exchange, thus creating more counterparty risk for USDT than any other stablecoin we know of.”

“All of this was happening behind the scenes,” Weiss added. “Bitfinex clients and USDT users were simply unaware. This underscores the urgency and importance of audits, transparency by entity that holds investors funds as collateral. This is especially true for critical functions such as exchanges and stablecoins. These businesses are creating counterparty risk and contagion. And ironically, they’re doing so in an industry that was created to remedy precisely those same threats.”