New York Attorney General orders Bitfinex and Tether to shut down operation

New York Attorney General Letitia James has doubled down in its rhetoric against fraudulent and deceptive cryptocurrency trading platforms and has ordered Bitfinex and Tether to shut down their operation in New York.

Bitfinex’s Tether, one of the world’s most popular stablecoins, has finally gave in to regulatory pressure. Tether is supposed to always have the same real-dollar value, backed one-to-one by U.S. dollars in reserve, but iFinex — the operator of Bitfinex — and Tether have allegedly made false statements about the backing of the “tether” stablecoin.

The firms have also allegedly lied about the movement of hundreds of millions of dollars between the two companies to cover up the truth about massive losses by Bitfinex. The companies will have to disburse $18.5 million in penalties, in addition to requiring a number of steps to increase transparency. In the meantime, they will cease any further trading activity with New Yorkers.

“Bitfinex and Tether recklessly and unlawfully covered-up massive financial losses to keep their scheme going and protect their bottom lines. Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie”, said Attorney General James.

“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. Last week, we sued to shut down Coinseed for its fraudulent conduct. This week, we’re taking action to end Bitfinex and Tether’s illegal activities in New York. These legal actions send a clear message that we will stand up to corporate greed whether it comes out of a traditional bank, a virtual currency trading platform, or any other type of financial institution”, Ms. James added.

The Attorney General’s argument is that by mid-2017, Tether had no access to banking, which would make it impossible to hold reserves to back tethers in circulation at the rate of one dollar for every tether. The firm’s self-proclaimed ‘verification’ of its cash reserves in 2017 was a misrepresentation of the reality, the OAG said, as the cash backing tethers had only been placed as of the very morning of the company’s verification.

The AOG also points to another self-proclaimed ‘verification’ of its cash reserve in November 2018, but the very next day, on November 2, 2018, Tether began to transfer funds out of its account. Hundreds of millions of dollars were moved from Tether’s bank accounts to Bitfinex’s accounts.

The more than 2.5 million documents handed over to the New York Attorney General’s office led to the conclusion that Bitfinex lost an undisclosed amount to a shady Panama firm “Crypto Capital Corp.” and misled the public by only stating they had liquidity problems. For months, the exchange pled with Crypto Capital to return almost a billion dollars in assets.

The OAG states that iFinex and Tether falsely claimed that they did not allow trading activity by New Yorkers, but the investigation determined that to be untrue and that the companies have operated for years as unlicensed and unregulated entities, illegally trading virtual currencies in the state of New York.

“Today’s agreement requires Bitfinex and Tether to discontinue any trading activity with New Yorkers. In addition, these companies must submit regular reports to the OAG to ensure compliance with this prohibition”, said the official announcement.

“Further, the companies must submit to mandatory reporting on core business functions. Specifically, both Bitfinex and Tether will need to report, on a quarterly basis, that they are properly segregating corporate and client accounts, including segregation of government-issued and virtual currency trading accounts by company executives, as well as submit to mandatory reporting regarding transfers of assets between and among Bitfinex and Tether entities.”

“Additionally, Tether must offer public disclosures, by category, of the assets backing tethers, including disclosure of any loans or receivables to or from affiliated entities. The companies will also provide greater transparency and mandatory reporting regarding the use of non-bank “payment processors” or other entities used to transmit client funds”, it added.

Bitfinex and Tether will be required to pay $18.5 million in penalties to the state of New York.