Will New York's investigation of Bitfinex and Tether be a turning point for the cryptocurrency industry? The state's attorney general has alleged that the company behind the popular cryptocurrency exchange Bitfinex as well as Tether, a "stablecoin" whose value is pegged to US dollars that are meant to be held in reserve, engaged in fraudulent dealings using client funds.
If true, that would not be a surprise to many critics who for more than a year have been accusing Bitfinex and Tether of underhanded dealings. It would also be yet another reminder (and the first since the Quadriga debacle began late last year) of how untrustworthy cryptocurrency exchanges can be. On the other hand, Letitia James, the New York AG, is in a unique position to try to address the problem productively.
According to James, executives of iFinex, the Hong Kong-based company that operates Bitfinex and Tether, "engaged in a cover-up" to hide the loss of $850 million. James alleges that the group used at least $700 million from Tether's reserves to cover the loss, and hid this from investors. Now, her office has obtained a court order that bars Bitfinex's operators from "further draining the cash reserves of Tether" and requires them to turn over relevant documents.
It's perhaps the most dramatic moment yet in the saga of Bitfinex and Tether, which stretches back more than a year. Tether has long faced criticism and suspicion due to its failure to provide conclusive evidence that its digital coins are in fact backed one-to-one by real dollars, as its executives claim. In January of 2018, US financial regulators subpoenaed Bitfinex and Tether, and suspicions began to grow that the former was using the latter to prop up the price of Bitcoin. Last June, a high-profile academic study suggested that a few big players may have used Tether to manipulate Bitcoin prices in 2017.
Bitfinex has responded to the new allegations, saying they have been made in "bad faith" and contain "false assertions." The company says the $850 million was not lost to a third-party payment processor, as the AG's report states, but actually was "seized and safeguarded." It's not clear what that means, but Bitfinex says it's working on getting the funds released.
Bitfinex and Tether have been great for headlines. But a lack of transparency and poor consumer protection practices are widespread problems among cryptocurrency exchanges. Last September, the New York AG's office published a bleak report based on surveys of 10 of the most popular exchanges, describing a pervasive lack of "necessary policies and procedures to ensure the fairness, integrity, and security" of the trading taking place. Many see this unruliness as a major impediment to adoption of crypto-assets by traditional financial institutions.
In the US, no federal agency has the authority to directly oversee exchanges. The New York AG, meanwhile, has broad authority to police fraud in the state's securities and commodities markets, and the office has shown more than once that it is willing to take cryptocurrency exchanges to task. Assuming the goal is mainstream adoption, that seems like a good thing for the industry.
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Loose Change
Fill your pockets with these newsy tidbits.
- Popular brokerage firm E*Trade is apparently preparing to add support for trading Bitcoin and Ether trading on its platform. (Bloomberg)
- A recent breach of Microsoft's Outlook email services appears to have targeted cryptocurrency users. (Motherboard)
