Tether, Bitfinex to pay $41 million fine to end CFTC probe into USDT reserves

abdelaziz Fathi

The US Commodity Futures Trading Commission (CFTC) settled Friday a nearly two-year investigation into the finances and corporate practices of Tether and Bitfinex.

Tether

The stablecoin issuer and its associated crypto exchange agreed to pay a $42 million fine to resolve a closely-watched legal dispute about Tether’s fiat reserves.

The derivatives regulator said the USDT stablecoin was not fully backed at all times by fiat currencies as its issuer had been advertising since its launch in 2014. In fact, Tether conflated its cash holdings with unsecured debts and non-fiat assets. The reported reserves also included funds held by third-parties, as well as the loan it had given to Bitfinex when the exchange needed help responding to a “liquidity crisis.”

US authorities have investigated the firms over allegations that they moved Tether’s commingled client and corporate funds to cover up Bitfinex’s apparent loss of $850 million.

The order finds that from June 2016 to February 2019, Tether falsely claimed it had maintained sufficient US dollars “safely deposited” in bank accounts to back every USDT in circulation.

The agency probe found that Tether had owned $1 in reserve to back every token in only 7 months of a 26-month sample period it audited – from 2016 through 2018.

“Instead of holding all USDT token reserves in U.S. dollars as represented, Tether relied upon unregulated entities and certain third-parties to hold funds comprising the reserves; comingled reserve funds with Bitfinex’s operational and customer funds; and held reserves in non-fiat financial products,” the CFTC explains.

Additionally, although Tether agreed to publicly release quarterly statements detailing its reserves, the order recognizes that it has not completed any of such audits.

For its part, Bitfinex was fined $1.5 million for offering cryptocurrency trading to US investors without having authorization to do so. The CFTC said Tether’s sister platform “executed illegal, off-exchange financed retail commodity transactions with U.S. persons” during a period of two years between 2016 and 2018.

Tether and Bitfinex will be required to cease trading activity in the US and apply procedures to bar American retail investors from accessing their platforms .

This major development in the crypto industry, however, doesn’t conclude the long-running legal battle that started two years ago. Tether has been embroiled in a new criminal probe that accuses its operators of committing serious bank fraud. Prosecutors have been building a case to sue the stablecoin issuer and a decision on the probe could be made soon.

The DOJ’s investigation is focused on whether the company behind the third largest cryptocurrency by market cap misled banks by hiding the fact that transactions were linked to cryptocurrency.

Bloomberg reported that federal prosecutors sent letters to unnamed executives at Tether alerting them that they are the targets of the investigation.

Tether officials denied “the years-old allegations,” and said Bloomberg article follows a pattern of repackaging stale claims as “news,” patently designed to generate clicks.

Also last week, Bloomberg ran an article titled “Anyone Seen Tether’s Billions?” claiming that Tether invested billions of dollars in short-term loans to large Chinese companies – including Evergrande, which is facing one of the world’s largest-ever defaults.

Tether issued a response to the recently surfaced report on the company’s website. It denied the findings of Bloomberg’s paper, even accusing the author and its sources of unethical motivations.

Tether — which claims to back its tokens 1-to-1 with the US dollar to ensure stability in value — said the reporter relied on John Betts, the former head of Noble Bank, whom Tether fired as its banker. The company added that it’s already suing Betts for engaging in “egregious and wasteful self-dealing and seeking to enrich himself at Noble’s expense.”

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