- Cryptocurrency exchange Bitfinex and the stablecoin Tether agreed to pay $18.5 million to settle allegations they hid the loss of commingled client and corporate funds and lied about their reserves, New York's attorney general's office said Tuesday.
- As part of the settlement, Tether agreed to give state officials quarterly reports for the next two years detailing the composition of Tether's reserves by type and percentage, and to release the reports publicly. The companies also agreed to end trading activity with New York residents.
- "The settlement amount we have agreed to pay to the Attorney General's Office should be viewed as a measure of our desire to put this matter behind us and focus on our business," Bitfinex said in a statement posted on its website. "Under the terms of the settlement, we admit no wrongdoing."
The attorney general's investigation into Bitfinex's parent company, Hong Kong-based iFinex, and Tether grew out of a wider probe of cryptocurrency exchanges in 2018, after the office warned that several exchanges lacked basic safeguards for consumers.
The attorney general's office discovered in April 2019 that iFinex took $700 million from the Tether reserve and moved it to Bitfinex's balance sheet — without publicly disclosing the transfer — after the exchange lost access to about $850 million of its clients' funds that were being held by Panama-based payments processor Crypto Capital.
Bitfinex has paid back that money but is still trying to recover the original $850 million. Crypto Capital and its operators are the target of a Justice Department investigation.
"Bitfinex and Tether recklessly and unlawfully covered up massive financial losses to keep their scheme going and protect their bottom lines," New York Attorney General Letitia James said in a statement Tuesday.
New York's investigation also found that iFinex and Tether made false statements about the backing of Tether, which is pegged to the value of a dollar. For several months in 2017, Tether had no access to banking anywhere in the world, the attorney general's office found. Wells Fargo, previously the companies' correspondent bank, chose in March of that year to no longer process U.S. dollar wire transfers from the companies' accounts, according to the settlement. Bitfinex and Tether did not open another bank account until September 2017. During that time, the companies could not have held reserves to back Tethers in circulation, New York officials said. iFinex and Tether also falsely claimed they did not allow trading activity by New Yorkers, state officials said.
"Tether's claims that its virtual currency was fully backed by U.S. dollars at all times was a lie," James said. "These companies obscured the true risk investors faced and were operated by unlicensed and unregulated individuals and entities dealing in the darkest corners of the financial system."
The nearly two-year investigation hasn't slowed the proliferation of Tethers in the market. About 34 billion of the stablecoins are in circulation now, compared with 2 billion at the start of the probe, Bitfinex said in its statement Tuesday.
"On the grand scale of things, it's less than a speeding ticket," Antoni Trenchev, co-founder of the crypto lender Nexo, said of the settlement, according to Bloomberg.
Tether isn't an investment vehicle like Bitcoin or Ether but can serve as a source of liquidity for exchanges. About 55% of all Bitcoin purchases are conducted with Tether, researcher CryptoCompare found, according to Bloomberg. Unlike other currencies that are "mined," Tether officials say they create new coins based on customer orders. Allegations have persisted, though, that the company was printing unbacked Tethers and using them to manipulate the market.
"Contrary to online speculation, there was no finding that Tether ever issued Tethers without backing, or to manipulate crypto prices," Jason Weinstein, a partner at Steptoe & Johnson, which represented the companies, told The Wall Street Journal.
For Trenchev, the increased transparency resulting from the settlement is fueling enthusiasm.
"I'm just excited that they will be revealing more numbers so that we can accurately assess and hopefully that will create some comfort for the market participants," he said.