NY AG Says Bitfinex Engaged in Fraud “Cover-up” But Exchange Denies

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On April 25th, the office of New York Attorney General Letitia James, the state’s top legal officer, declared it had successfully sued for an injunction order from the Manhattan Supreme Court against Bitfinex operators iFinex Inc. and tether (USDT) issuers Tether Limited.

Tether Report Audit

Why? In their court filing, the NY AG alleged that last year Bitfinex lost $850 million USD worth of “comingled” company and client funds and thereafter participated in a cover-up by borrowing from the reserves of tether, a stablecoin, to obfuscate the loss.

The findings, which assert $700 million was discreetly borrowed from tether’s reserves, stem from an investigation campaign the NY AG’s office launched into cryptocurrency exchanges last fall.

Bitfinex barred traders from the U.S. and New York in 2018, but Attorney General James has wide purview under the state’s Martin Act to defend New Yorkers who may still be using the platform anyways.

Per the court order, James’s office said Bitfinex’s operators and Tether Limited will be mandated to stop borrowing from tether’s reserves and to cease engaging in any potential cover-up activities while it continues to investigate the matters:

“Today’s court order requires that the operators of the companies immediately cease further dissipation of the U.S. dollar assets which back “tether” tokens while the Office’s investigation continues […] The companies are also barred from destroying, deleting, or permitting others to delete, potentially relevant documents and communications.”

The development spooked the cryptoeconomy, as market selloffs began hitting the top coins after word of the news spread. The bitcoin (BTC) price was down more than three percent, to $5,293, on the day; ether fared slightly worse, sinking closer to six percent in that span.

Whether the episode will lead only to acute sell pressure remains to be seen.

What Happened?

The massive $850 million loss in question apparently occurred after the funds became stuck for an as-yet undisclosed reason at Bitfinex’s external payments processor, the Panama-based Crypto Capital Corp (CCC).

That dynamic caused Bitfinex customers’ withdrawals to grind down to a steady trickle, and internal communications revealed by the NY AG’s lawsuit show Bitfinex struggled to receive answers as to why CCC couldn’t move faster in processing the transactions.

At one point, a Bitfinex employee told his CCC counterpart that the whole cryptoeconomy may suffer if CCC didn’t take definitive action, saying “BTC could tank below 1k if we don’t act quickly.”

Not getting the answers they needed soon enough, Bitfinex’s operators — which are intimately linked with the leadership of Tether Limited — purportedly pivoted to tether’s reserves as an emergency stopgap instead.

Bitfinex first turned to CCC for help in 2017 with the latter serving to facilitate Bitfinex customers’ fiat transactions. Notably, the Panamanian firm’s president at the time (and presumably still) was Ivan Manuel Molina Lee, a secretive executive who runs a sprawling network of offshore corporations per the Panama Papers and the Paradise Papers.

Bitfinex: NY AG Acting in “Bad Faith”

Bitfinex has since responded to the NY AG’s court order by challenging the crux of the injunction.

To that end, the crypto exchange argued the CCC funds were, in fact, safe, and that the NY AG had been acting unduly:

“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. We are and have been actively working to exercise our rights and remedies and get those funds released.”

Bitfinex has given no word for now on what entity they assert is responsible for seizing those funds.

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William M. Peaster is a professional writer and editor who specializes in the Ethereum, Dai, and Bitcoin beats in the cryptoeconomy. He's appeared in Blockonomi, Binance Academy, Bitsonline, and more. He enjoys tracking smart contracts, DAOs, dApps, and the Lightning Network. He's learning Solidity, too! Contact him on Telegram at @wmpeaster

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