This post will break down the Office of Attorney General of New York State's (OAG) court filing so that investors and traders can understand what is going on in the market. As an avid day trader and educator with Voodoo Crypto, my goal is to provide the tools and information traders need to be as effective as possible.
TL:DR - OAG has submitted a report describing their investigation into Bitfinex and Tether for securities fraud and that they intend to pursue civil or criminal convictions against the business and its owners.
Bitfinex has experienced significant banking problems including potential theft, loss, or embezzlement of over $850 million and has engaged in ethically and legally dubious inter-company loans. Critically, the OAG is requesting an absurd amount of documentation from Bitfinex/Tether about their business dealings, clients, customers, and anyone who has used Bitfinex or hodls Tether who might be from the United States. (Including KYC documents!)
The document in its entirety can be found here. Bitfinex has since posted a response to the allegations, linked here.
Tons of legal jargon at the start of the report, but the critical pieces are as follows. First, the OAG begins its report introducing itself [SUPER 1] and stating its intention to “commence action against [Bitfinex] pursuant to the Martin Act, GBL § 352 et seq.” From Wikipedia,
The Martin Act [...] is a New York anti-fraud law, widely considered to be the most severe blue sky law in the country. Passed in 1921, it grants the Attorney General of New York expansive law enforcement powers to conduct investigations of securities fraud and bring civil or criminal actions against alleged violators of the Act.
The next section, paragraphs 7 through 17 weave a complicated web of who actually owns Bitfinex/Tether, which really would have been better described with a picture.
Paragraphs 18 through 25 explain for the less technologically savvy in the room what Bitfinex as a crypto exchange is, and specifically notes that people from the state of New York have used Bitfinex and its services.
One gem that can’t be overlooked is the following quote:
Bitfinex is one of the relatively few virtual currency trading platforms that allows traders to deposit and withdraw so-called "fiat" currency, including U.S. dollars, euros, pounds, and yen. Personally, I’m going to ignore the context of that quote and choose to believe that the OAG was throwing serious shade at fiat and not our wonderful community’s jargon..
Paragraphs 26 through 31 introduce Tether to the mix by defining USDT as a stablecoin and highlighted Tether’s statements that tether is always backed 1 to 1 by USD. Web archive.
Paragraph 32 describes how Tether updated their website to read: Web Archive.
Every tether is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities (collectively, “reserves”). Every tether is also 1-to-1 pegged to the dollar, so 1 USD₮ is always valued by Tether at 1 USD.
This change caused individuals to question if Tether engaging in fractional reserve banking - meaning that only a fraction of the funds backing USDT were in fact held by Tether but instead that Tether was using those funds for loans and other purposes. Others questioned if some of the assets backing tether are cryptocurrencies, and further pondered the implications of a dramatic drop in value of those underlying assets that could cause Tether to become insolvent should people attempt to redeem tethers for USD en masse.
Paragraphs 33 through 39 describe how individuals acquire, trade, and redeem tethers. Notably, paragraph 37 ties these individuals back to residents of New York to defend their assumed jurisdiction over the case.
Paragraphs 40 through 47 comment on the initiation of the investigation and the first communications with the Bitfinex/Tether legal teams, the first subpoenas, and the planning of a face to face meeting held on February 21st 2019.
Starting with paragraph 48, the report outlines the challenges Bitfinex has faced maintaining relationships with banks. Before 2017 Bitfinex used wire transfers out of Taiwan, using Wells Fargo as the correspondent bank. Wells Fargo then pulled the rug out from under them in March 2017.50 Bitfinex filed51 and quickly withdrew52 a lawsuit against Well’s Fargo, and instead switched to Noble Bank, based in Puerto Rico.53
Paragraph 54 continues to describe that Bitfinex stopped using Noble in October 2018, apparently “due to low-interest rates and a lack of capacity to process a high volume of wire transfers to clients”. Interestingly, as of early 2019 Noble is not in operation.55
The relationship between Tether and Noble is a curious one in and of itself. Apparently the CEO of Noble, John Betts, “has a previous professional relationship with Tether co-founder Brock Pierce, stemming from a failed bit to take over now-defunct Bitcoin exchange Mt. Gox.” Source.
Paragraph 56 notes that starting in November 2018, Tether formed a relationship with Deltec Bank & Trust Limited, as well as quoting Tether reaffirming its USD backing claim.
This is where it starts to get interesting, and where new information is presented.
Paragraph 57 makes it clear that Bitfinex uses “third party ‘payment processors’ to handle client withdrawals,” and that Bitfinex has not disclosed that they are doing so or who they are.
Bitfinex’s lawyers told the OAG that they use a "Panamanian entity called Crypto Capital to act as one of their 'payment processors'" with which they "had placed over one billion dollars of co-mingled customer and corporate funds".58 Followed by freely stating that "no contract or similar written agreement was ever entered into between Crypto Capital and Bitfinex or Tether."59
This was followed with another bombshell revelation, that “Bitfinex [...] used a number of "third party payment processors" [...] including [...] companies owned by Bitfinex/Tether executives and "other friends of Bitfinex - meaning, human being friends of Bitfinex employees that were willing to use their bank accounts to transfer money to Bitfinex clients who had requested withdrawals."60
Paragraphs 61 and 62 transition to a discussion about Bitfinex’s difficulty honoring withdrawals because Crypto Capital was refusing to process them or return funds to Bitfinex, followed by a specific example provided in paragraph 63: a chatlog from Bitfinex exec “Merlin” to Crypto Capital “Oz”. imgur
Paragraphs 64 through 67 describe this coming to a head in the public’s eye in October, with statements from Bitfinex saying withdrawals are proceeding without interruptions and several additional chatlogs submitted as evidence that claim is untrue. imgur
Crypto Capital told senior Bitfinex execs that their “funds were seized by governmental authorities in Portugal, Poland, and the United States.” which apparently the Bitfinex executives did not believe.68 Regardless, those funds are inaccessible to Bitfnex69 and Bitfinex has not publicly disclosed that fact.70
At the meeting with the OAG on February 21st, Bitfinex’s lawyers said they were “contemplating” raiding the Tether reserves to make up that shortfall on an as needed basis72 and to the tune of up to $700 million.73
After the meeting, the OAG sent out requests for further information78 followed by Tether missing deadlines and sending information that the OAG deemed useless or irrelevant.81-84
Finally, on March 29th Bitfinex sent the OAG a letter described the following sequence of events. In November 2018, Tether transferred $625 million from its account holding Tether reserves at Deltec into Bitfinex’s account. In return, Bitfinex “transferred” the corresponding $625 million from its account with Crypto Capital into Tether’s account with Crypto Capital, even though Crypto Capital stated that those funds were “seized” or otherwise unavailable. Furthermore, Bitfinex opened up a line of credit with Tether for an additional $900 million from its tether backing reserves using collateral in the form of 60,000,000 shares of iFinex (the company and owner of the subsidiaries that are collectively “Bitfinex”) that were owned by DigFinex, which is also owned by the same two people that own Bitfinex and Tether.86 Link to the letter. imgur
The OAG then proceeds to request a mind boggling amount of documentation and other information from Bitfinex and Tether. The request every piece of information that Bitfinex or Tether have on anyone who might be residing or doing business in the United States that:
- Uses Bitfinex’s trading platform
- All hodlers of tether
- Any business relationships that Bitfinex or Tether may have had
- Every transaction made into or out of the reserves backing tether
- Every USD withdrawal request
- Every piece of documentation on redemptions or issuance of tether for any currencies
- All current accounting ledgers related to Bitfinex’s or Tether’s corporate, banking, trading, and client accounts including transactions made in US or foreign currencies or virtual currencies
- KYC documents for every account whose funds were provided to Crypto Capital and the amount of outstanding funds
- Years of tax filings
The OAG report then finishes by requesting an injunction to ensure that Bitfinex maintains the status quo of operations until the case is concluded to protect investors and traders.
This analysis was shared in real time with the traders at Voodoo Crypto. If that's something that would be useful for you, look us up.
No comments:
Post a Comment