New York State prosecutors have been paying attention to Bitfinex for a long time and have set up an investigation team and filed a lawsuit

This article is compiled by Caijing.com Chain Finance from the indictment filed by the New York State Attorney General (NYSAG) against the cryptocurrency exchange Bitfinex and its affiliate Tether.

The New York Attorney General’s office claims that cryptocurrency exchange Bitfinex used funds from its affiliated stablecoin operator Tether to cover up $850 million in losses. According to the NYAG, Letitia James announced that she had obtained a court order to sue iFinex, which operates both Bitfinex and Tether. And asked the company to cease operations because they violated New York law and defrauded New York residents.

James said, "We will continue to stand up for investors, and if these companies mislead or deceive investors, we will do our best to seek relevant legal means for them to resolve the situation. According to the statement, Bitfinex transferred $850 million of customer and corporate funds to Crypto Capital Corp., a payment processor. Crypto is reportedly holding funds from other exchanges, such as QuadrigaCX, in addition to Bitfinex's funds. They used Tether's reserve funds to make up for the shortfall, but the amount of the loss and Tether's fund flow were not disclosed to customers."

It is reported that Bitfinex has transferred at least US$700 million so far.

According to a filing by Assistant Attorney General Brian Whitehurst, “OAG has reason to believe that Bitfinex continues to allow retail customers in New York to trade, deposit and withdraw virtual currencies, and otherwise engage in business on the Bitfinex trading platform.”

Pursuant to the court order, iFinex’s directors, officers, principals, agents, employees, contractors, assigns, or any other affiliated individuals are prohibited from accessing, lending, or otherwise withdrawing from Tether’s U.S. dollar reserves.

At the same time, employees of iFinex and its affiliated institutions are not allowed to tamper with any documents, including meeting minutes, without authorization.

Notably, the document shows that the AG’s office is not blocking Bitfinex’s legitimate trading or ordering redemptions of Tether; instead, the office wants the court to grant a preliminary injunction “preserving the status quo” until the investigation is completed.

Tether’s reserves have been the focus of public attention, and it is related to the long-term scrutiny of the company and the USDT stablecoin. Some relevant people have questioned that USDT, with a market value of more than 2 billion US dollars, does not actually have enough funds to support it as its operators claim. In addition, Tether’s failure to publish an audit as initially promised has further aroused suspicion. In March of this year, Tether’s official website revealed that the reserves supporting USDT are no longer composed of a single fiat currency.

Caijing.com - Chain Finance compiled the indictment of the New York State Attorney General (NYSAG) against the cryptocurrency exchange Bitfinex and its affiliate Tether:

Origin: Bitfinex does not have enough cash reserves to meet user withdrawal requests

Documents provided by the OAG show that as of mid-2018, Bitfinex had difficulty responding to customer requests to withdraw deposited funds from their trading platform because Bitfinex had transferred almost all of the funds to Crypto Capital. However, Crypto Capital refused or was unable to return any funds to Bitfinex in response to customer requests.

Between April 2018 and early 2019, a Bitfinex executive (“Merlin”) repeatedly approached Crypto Capital’s personnel (“Oz”) in an effort to have the funds transferred back to Bitfinex. For example, in August 2018, a Bitfinex executive made it clear that Bitfinex was unable to meet withdrawal requests from users because it could not obtain the funds transferred to Crypto Capital:

In early October 2018, rumors spread online that Bitfinex had gone bankrupt. And many users reported that they were unable to withdraw their assets from the Bitfinex trading platform. In response, on October 7, 2018, Bitfinex issued a notice to investors, claiming that their company was not bankrupt. And marked the relevant rumors as "targeted slander, with no meaning other than fiction."

Similarly, on October 15, 2018, Bitfinex issued a statement to the market stating: “We must clarify: all cryptocurrencies are operating normally as usual... All fiat currency (USD, GBP, EUR, etc.) withdrawals are operating normally.”

But the above announcement is not true. Documents provided to OAG by the source show that during this period, Bitfinex encountered serious problems in processing customer withdrawals. On October 15, the same day as the announcement, a Bitfinex executive (“Merlin”) left a message to a contact at Crypto Capital (“CCC”):

Merlin: "I have been trying to contact you for a long time."

Merlin: “Many users’ withdrawals are on hold.”

Merlin: “Is there any way we can get funds? Through Tether or something else? Our cash reserves are very low except for Crypto Capital.”

Merlin: "Emergency! Please act quickly."

CCC: "We are also actively negotiating with the bank to resolve the issue you raised as soon as possible. However, every time we urge the bank, we are rejected without reason."

Merlin: “You have to know that this is very dangerous for the entire crypto market.”

Merlin: “If we don’t do something, BTC may drop below $1,000.”

The documents show that by the end of 2018, the foundation’s funds were running low, making it difficult for Bitfinex to enforce its obligations to investors seeking to withdraw their assets. In the last few months of 2018, Bitfinex executives continued to negotiate with Crypto Capital:

Merlin: "Oz we need emergency funds."

“Tether or USD, we need to receive at least 1 billion USD within the next week.”

"Things are looking bad right now with over 500 withdrawals to be processed and orders continuing to pour in."

"You have taken away too much money, and we are now at a dead end."

CCC: “We are also trying our best to urge it every day. The Polish Financial Bureau believed the rumors and closed the bank accounts of digital currency exchanges.”

“So now might be a good time for us to get our money back.”

Merlin: "How much money can we expect to get back from Poland?"

"Please give me the latest information. If you don't give us any funds within this week, we will be in trouble."

"We need to make a statement, but the more we hide it, the more suspicion we will arouse."

"The month is almost over and you haven't sent us even a dollar."

The report submitted by the source to the OAG and the statement provided by the source's lawyer show that a Crypto Capital insider told Bitfinex executives that the reason why the total of $851 million in funds could not be returned to Bitfinex was that the funds were seized by government officials in Portugal, Poland and the United States. However, Bitfinex lawyers said they did not believe the reasons given by Crypto Capital.

Data shows that the $851 million has not yet been transferred to Bitfinex's account.

Bitfinex has not publicly disclosed the loss of this fund.

Crypto Capital’s funds include both client funds and Bitfinex’s corporate funds. For example, documents submitted by the source show that at least $23 million of the funds appear to be from a Bitfinex customer in New York.

Using Tether’s reserve funds to cover Bitfinex’s losses

In a closed-door meeting on February 21, 2019, lawyers for Bitfinex and Tether explained that in order to make up for the $851 million lost by Crypto Capital, Bitfinex and Tether considered using Tether’s cash reserves to make up for the losses.

As the lawyers state, Bitfinex will receive a $600 million to $700 million “line of credit” on the reserve funds backing Tether. If this is done, Tether, or Tether holders, will provide the amount to cover the loss, and at the same time, the lawyers do not mention that this amount will be disclosed to the public, and has not been disclosed to traders on the Bitfinex platform or Tether holders.

When asked whether there would be a conflict since Bitfinex and Tether are run by the same team, the lawyer said the “arm’s length” principle applies.

During the closed-door meeting, when Bitfinex planned to borrow Tether’s reserve funds, the lawyers did not inform the OAG of any repayment arrangements, including the relevant terms or timetable.

The lawyers’ disclosures at the Feb. 21 meeting raise serious questions about whether Bitfinex can continue to operate as a going concern. There is a risk that the Tether reserves provided to cover losses may be exhausted or unrepayable, and there is a risk that Bitfinex and Tether misled users.

During the Feb. 21 meeting, the OAG asked the attorneys for more information on Crypto Capital’s losses and the looming “line of credit” that users had to cover Bitfinex’s losses.

On February 26, OAG requested relevant materials from Bitfinex and Tether’s lawyers and required them to be provided before March 7, 2019.

At the same time, the OAG’s letter requires Bitfinex to disclose the number of New York residents who trade on its trading platform and the number of Tether holders in the New York area.

On March 4, attorneys representing Bitfinex and Tether responded to OAG’s inquiry, saying that it would be difficult to submit the required materials and information before March 7, but did not provide a new submission date.

On March 11, 2019, the source submitted a document showing that “Bitfinex’s tweets and Bitfinex and Tether’s blog posts never mentioned the credit line.

During November 2018, Tether transferred $625 million from Deltec's account to Deltec's Bitfinex account. Bitfinex transferred $625 million from Crypto Capital's Bitfinex account to Crypto Capital's Tether account. Through Crypto Capital's edge tool, Tether's account was staked at $6.25 million for $625 million and the Bitfinex account was credited with the corresponding amount. The purpose of this transfer was to allow Bitfinex to solve liquidity problems.

Around December 2, 2018, the company and its lawyers began to inquire about the actual amount of money transferred to Crypto Capital, which totaled more than $850 million. Although the head of Crypto Capital stated that the Polish, Portuguese, and US government authorities had seized or otherwise frozen the funds, the company was very concerned that the head of Crypto Capital might be committing fraud.

Bitfinex immediately entered into a series of negotiations with Tether to reach an agreement pursuant to which Tether extended a line of credit in the amount of up to $900 million on commercially viable terms (three-year term and 6.5% loan interest rate), secured by iFinex Inc. and approved by DigFinex in a corporate transaction, negotiated at the corporate level with independent legal counsel and approved as required by each company’s corporate governance processes. Pursuant to this agreement, the transaction was completed on or about March 19, 2019.

On March 27, 2019, Bitfinex and Tether initiated a transaction with a prepayment of $625 million that was credited to Tether’s account at Crypto Capital. The funds were then transferred to Bitfinex’s account at Crypto Capital. This was done because the previous assets that were transferred were all secured by DigFinex.

Compiled by: LornaQ

Source: Caijing.com Chain Finance