The New York Attorney General’s office has alleged that cryptocurrency exchange Bitfinex lost $850 million and then secretly used funds from the Tether stablecoin operator to cover the shortfall.
In a press release issued Thursday, New York Attorney General Letitia James said she obtained a court order against iFinex Inc., the company that operates both Bitfinex and Tether, directing it to stop violating New York law and defrauding the state’s residents.
Details of the alleged Bitfinex cover-up
James stated that an investigation by her office found that iFinex “engaged in a cover-up to hide the apparent loss of $850 million in commingled customer and corporate funds,” adding:
“The State of New York led the way in requiring virtual currency companies to operate under the law. We will continue to protect investors and seek justice on their behalf when they are misled or deceived by any of these companies.”
The press release explains that Bitfinex transferred $850 million in customer and corporate funds to Crypto Capital Corp., a payment processor that reportedly held funds for other exchanges as well, such as QuadrigaCX. Funds from Tether’s reserve were later used to fill the gap, but neither the loss nor the transfers from Tether were disclosed to customers.
According to an affidavit attributed to Deputy Attorney General Brian Whitehurst, the probe began in 2018 after the office concluded that, despite contrary claims, “the Attorney General’s Office has reason to believe that Bitfinex continues to allow individual investors located in New York to deposit, trade, withdraw virtual currency and engage in other transactions on the Bitfinex trading platform.”
Under the court order, iFinex’s directors, officers, agents, employees, contractors, assignees or any other persons associated with the company are barred from accessing Tether’s dollar resources, from lending them, or from asserting any rights over them.
Likewise, individuals affiliated with iFinex are prohibited from altering any documents, including records, that describe these actions.
The filing makes clear that the Attorney General’s office is not seeking to halt legitimate trading on Bitfinex or transactions involving Tether; rather, it is asking the court for a preliminary injunction to “preserve the status quo” while the investigation is completed.
Is Bitfinex an exchange in deep trouble?
The affidavit attributed to Deputy AG Brian Whitehurst lays out Bitfinex’s escalating banking problems and its efforts to keep services running, including a now-terminated relationship with Noble Bank in Puerto Rico that ended in October 2018. Bitfinex and Tether ended their relationship with Noble, the companies’ lawyers told the Attorney General’s office, citing the bank’s inability to handle a large volume of wire transfers and low interest rates.
Tether later established a banking relationship with Deltec in the Bahamas.
The Attorney General’s office says the inability to access the $850 million in customer/corporate funds—which it attributes to the payment processor Crypto Capital—impaired Bitfinex’s ability to process withdrawal requests. Some customers reported long response times and delays receiving their money.
“Documents provided to the Attorney General’s Office show that by mid‑2018 Bitfinex was struggling to honor customers’ requests to withdraw funds from the trading platform because Crypto Capital, which held all or substantially all of Bitfinex’s funds, was refusing to process customer withdrawal requests and was refusing or unable to return funds to Bitfinex,” the affidavit states.
In mid‑October 2018, Bitfinex issued a statement saying withdrawals were occurring “without any interference,” but that “processing complications” had led to a suspension of fiat deposits. Despite that statement, some customers continued to complain about slow withdrawals.
The Attorney General’s office says that statement was false. “Documents provided to the AGO by the respondents show that during this period Bitfinex was experiencing serious issues processing customer withdrawals,” the affidavit asserts.
Bitfinex responded by saying that “Bitfinex and Tether are both financially sound. Bitfinex and Tether are committed to fighting back against what they describe as a blatant overreach by the New York Attorney General’s office against companies that are law‑abiding corporate citizens and staunch supporters of law enforcement. Bitfinex and Tether will vigorously contest this action, and any other actions, by the New York Attorney General’s office.”