NEW YORK (WWTI) — The New York Attorney General took steps to limit fraudulent virtual currency trading platforms in the state.
Attorney General Letitia James announced that following an investigation, her office has ended the virtual currency trading platforms Bitfinex and Tether’s trading activity in New York State.
According to the Office of the Attorney General an investigation found that iFinex, the operator of Bitfinex, and Tether made false statements regarding the backing of “tether” stablecoins, which claimed that each coin was backed by one U.S. dollar. Additionally it found that hundreds of millions of dollars was moved between the two companies to cover up losses by Bitfinex.
Following the investigation, Bitfinex and Tether will be required to pay $18.5 million in penalties to the State of New York, cease any further trading activity and will be required to take steps to increase transparency.
Bitfinex and Tether recklessly and unlawfully covered-up massive financial losses to keep their scheme going and protect their bottom lines,” said Attorney General James. “Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie. 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. This resolution makes clear that those trading virtual currencies in New York state who think they can avoid our laws cannot and will not.”
Attorney General James investigation specifically detailed the following:
The OAG’s investigation found that, starting no later than mid-2017, Tether had no access to banking, anywhere in the world, and so for periods of time held no reserves to back tethers in circulation at the rate of one dollar for every tether, contrary to its representations. In the face of persistent questions about whether the company actually held sufficient funds, Tether published a self-proclaimed ‘verification’ of its cash reserves, in 2017, that it characterized as “a good faith effort on our behalf to provide an interim analysis of our cash position.” In reality, however, the cash ostensibly backing tethers had only been placed in Tether’s account as of the very morning of the company’s ‘verification.’
On November 1, 2018, Tether publicized another self-proclaimed ‘verification’ of its cash reserve; this time at Deltec Bank & Trust Ltd. of the Bahamas. The announcement linked to a letter dated November 1, 2018, which stated that tethers were fully backed by cash, at one dollar for every one tether. However, the very next day, on November 2, 2018, Tether began to transfer funds out of its account, ultimately moving hundreds of millions of dollars from Tether’s bank accounts to Bitfinex’s accounts. And so, as of November 2, 2018 — one day after their latest ‘verification’ — tethers were again no longer backed one-to-one by U.S. dollars in a Tether bank account.
As of today, Tether represents that over 34 billion tethers have been issued and are outstanding and traded in the market.
In 2017 and 2018, Bitfinex began to increasingly rely on third-party “payment processors” to handle customer deposits and withdrawals from the Bitfinex trading platform. In 2018, while attempting to “move money [more] efficiently,” Bitfinex suffered a massive and undisclosed loss of funds because of its relationship with a purportedly Panama-based entity known as “Crypto Capital Corp.” Bitfinex responded to pervasive public reports of liquidity problems by misleading the market and its own clients. On October 7, 2018, Bitfinex claimed to “not entirely understand the arguments that purport to show us insolvent,” when, for months, its executives had been pleading with Crypto Capital to return almost a billion dollars in assets.
On April 26, 2019 — after the OAG revealed in court documents that approximately $850 million had gone missing and that Bitfinex and Tether had been misleading their clients — the company issued a false statement that “we have been informed that these Crypto Capital amounts are not lost but have been, in fact, seized and safeguarded.” The reality, however, was that Bitfinex did not, in fact, know the whereabouts of all of the customer funds held by Crypto Capital, and so had no such assurance to make.
This matter was handled by Senior Enforcement Counsel John D. Castiglione and Assistant Attorneys General Brian M. Whitehurst and Tanya Trakht of the Investor Protection Bureau; Assistant Attorneys General Ezra Sternstein and Johanna Skrzypczyk of the Bureau of Internet and Technology; and Legal Assistant Charmaine Blake — all supervised by Bureau of Internet and Technology Chief Kim Berger and Senior Enforcement Counsel for Economic Justice Kevin Wallace. The Investor Protection Bureau is led by Chief Peter Pope. Both the Bureau of Internet and Technology and the Investor Protection Bureau are part of the Division for Economic Justice, which is overseen by Chief Deputy Attorney General Chris D’Angelo and First Deputy Attorney General Jennifer Levy.
The full investigation can be read on the New York Attorney General‘s website.