Did Bitfinex kill the bull market? The US SEC may not approve a Bitcoin ETF this time

For the past few years, investors have been waiting for the arrival of a Bitcoin exchange-traded fund (ETF) regulated by U.S. regulators. However, news of the shaky financial situation of iFinex, the operator of Bitfinex and Tether Limited, two companies integral to the cryptocurrency market, may have temporarily dashed those already unrealistic hopes.

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New York Attorney General Investigates iFinex's Finances

The Bitfinex incident could put Bitcoin ETF applications at risk. An ETF is a purchasable security that tracks an index and is backed by shares or units of an underlying asset. Due to the highly regulated nature of ETFs, it could make it easier for more risk-averse investors to enter the Bitcoin market. As a result, some believe that the introduction of a Bitcoin ETF could be a positive catalyst for a rise in Bitcoin prices.

On Thursday, the New York Attorney General’s (NYAG) office issued a press release stating that iFinex may have been involved in an “ongoing campaign” that “could have defrauded” cryptocurrency investors. A 23-page document signed by Assistant Attorney General Brian Whitehurst revealed more about the situation.

Allegedly, according to the agency’s investigation, Bitfinex currently has a $850 million hole in its books, as the funds were handed over to Crypto Capital, a Panama-based payment processing company, which now has access to the funds. Crypto Capital’s assets under management are believed to be frozen by the governments of Poland, Portugal, and the United States. As a result, Bitfinex was thrown into a scramble to find funds to meet customer withdrawal requests and business expenses. Ultimately, the exchange’s management decided that the best course of action would be to obtain a line of credit from Tether Limited, the affiliated company behind the USDT stablecoin. Whitehurst then revealed that Bitfinex still has a $700 million line of credit backed by their shares in iFinex, indicating that USDT is not fully backed by fiat reserves. The press release further explained:

“The documents show that Bitfinex has withdrawn at least $700 million from Tether’s reserves. These transactions—also undisclosed to investors—treated Tether’s cash reserves as Bitfinex’s corporate treasury and were used to conceal Bitfinex’s massive, undisclosed losses and inability to process customer withdrawals.”

Bitfinex CFO Giancarlo Devasini then told Chinese stakeholder Zhao Dong that the exchange would take "a few weeks" to unfreeze the funds. However, if the standoff continues between iFinex or the NYAG's office, it could cause long-term damage to the cryptocurrency market.

What does this mean for Bitcoin ETFs?

Over the past 24 months, the U.S. Securities and Exchange Commission (SEC) has been suppressing applications for Bitcoin ETFs, citing concerns about manipulation, lack of investor safety, and insufficient market regulation. In the context of iFinex’s legal problems, the two events may seem unrelated, but they are not. As the SEC’s statement of responsibility states:

“The SEC’s mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”

In other words, the core mission of this regulator is to protect investors, ensure fraud is kept to a minimum, and overall help businesses and investors by facilitating “appropriate disclosure of market-related information.” The key terms in this case are “appropriate disclosure” and “market-related information.” As the NYAG notes, Bitfinex and Tether conducted these backdoor transactions without notifying investors. Rather than issuing a public statement, Tether quietly amended its terms of service, and Bitfinex remained silent, subsequently running into trouble with severe withdrawal delays and a shaky relationship with its banks.

According to data provided by BitcoinTradeVolume.com, a Bitwise-owned company, Bitfinex is currently the second-largest spot exchange for Bitcoin trading. In a closed-door seminar at the U.S. Securities and Exchange Commission (SEC), an exchange that Bitwise called "trusted/bonafide" did not properly update customers on their fund status. This could easily annoy SEC commissioners and give them reason to doubt the Bitcoin market.

The SEC has yet to comment on the Bitfinex incident, and it likely won’t. Regardless, the entire drama could give the SEC reason to believe that these nascent markets are not conducive to the safety of American investors.

However, Bitcoin ETF is not completely hopeless

Although the Bitfinex incident may cause further delays in Bitcoin ETFs, there is still hope in the long term. Currently, the SEC is considering two Bitcoin ETFs. In a recent interview with CNBC, Hunter Horsley of Bitwise believes that Bitcoin as an asset is in its "most viable" state ever. Horsley added that Bitcoin funds could therefore be the next logical stage in the crypto industry's journey toward finance - which is important for speculators.

When the CNBC host asked the savvy CEO about the SEC’s concerns about the current state of cryptocurrency trading, Horsley responded with confidence, noting that the SEC now has “more understanding” of the nuances of Bitcoin, especially that “the numbers you see on various crypto-related websites are not accurate.” Ultimately, he explained that what really matters is having a fleshed-out understanding of the ins and outs of this ecosystem, rather than confirming that all Bitcoin exchanges, investors, and other participants are infallible.

However, this interview with Horsley took place before the Bitfinex incident broke out. The fact remains that as one of the largest trading platforms in the cryptocurrency ecosystem, Bitfinex's financial transactions may have violated the rights of its users and shareholders, not to mention cryptocurrency holders around the world. The SEC will definitely take notice.