New York Department of Justice: Bitfinex used Tether reserves to cover $850 million loss

New York Attorney General Letitia James claimed on Wednesday that she had obtained a court order ordering cryptocurrency exchange Bitfinex and its sister company Tether to stop violating New York law and defrauding New York residents, after the exchange lost an estimated $850 million and concealed the fact.

James claims that Bitfinex worked with a Panamanian company called Crypto Capital Corp. to make the transfer of funds appear legal without any written contract or guarantee.

James' office issued an order signed by a judge Thursday night that prohibits Bitfinex from borrowing from Tether, the cryptocurrency USDT created by Tether and pegged to the U.S. dollar. James claims Bitfinex used Tether's reserves to fill its own funding gaps and that further transactions between the companies were necessary to protect its customers' ability to withdraw funds.

The judge also ordered Bitfinex and Tether to provide documents requested by James’ office in connection with the investigation into potential fraud, with a court date set for May 3.

In announcing the action, James claimed that “Bitfinex has taken at least $700 million from Tether’s reserves. These transactions were also not disclosed to investors, treating Tether’s cash reserves as Bitfinex’s corporate financing fund and being used to hide Bitfinex’s large, undisclosed losses and inability to process customer withdrawals.”

If it is related to criminal malfeasance, it will become the largest criminal case in the field of cryptocurrency in the United States, comparable to the Mt. Gox coin theft case in Japan in 2014.