Can Bitfinex and Tether escape the clutches of New York Attorney General?

The allegations against Bitfinex and Tether are overwhelming and it wouldn’t be wrong to say, insurmountable. However, the rumors surrounding them are being put to test with the lawsuit that was brought together by the New York Attorney, Letitia James, and Assistant Attorney General, Brian M. Whitehurst.

This article speculates and comments on the implications of the lawsuit.

Let’s assume that Bitfinex and Tether are not at fault and what they’ve said and are saying is/are true. Let’s assume that all of the USDT in circulation is backed by traditional currency which is held in Tether’s reserve. Let’s assume that the NYAG’s court filings were written in bad faith and was riddled with false assertions. Let’s also assume that they provide all the necessary documents that the AG has subpoenaed them for.

Will they be exonerated from everything? Will Bitfinex, Tether, and the involved parties walk free?

Most likely no.

The Martin Act

The court filings by AG revolve around Martin Law, which according to Wikipedia is ” a New York anti-fraud law… it grants the Attorney General of New York expansive law enforcement powers to conduct investigations of securities fraud and bring civil or criminal actions against alleged violators of the Act”.

Let’s take a look at how Bitfinex and Tether have violated this law on multiple occasions.

  • Although Bitfinex and Tether are technically registered in the British Virgin Islands, they are not licensed by the New York Department of Financial Services to engage in virtual currency business activity in New York. Considering how Bitfinex allowed users to buy, sell, trade and profit off of cryptocurrencies, Bitfinex and Tether would be in the wrong.
  • Bitfinex and Tether had a third party payment processor, Crypto Capital [based in Panama], that would hold funds for them; the filings mention that there was no written agreement/contract or a similar agreement, between the entities. In addition, there was one instance where Bitfinex had stored $23 million of a single New York user’s funds at Crypto Capital.
  • The respondents mention that since Bitfinex and Tether had problems retaining banks for their business, they had to resort to Crypto Capital as a payment processor. However, there was a report which alleged that Bitfinex was involved with Columbian Cocaine and that Polish media had seized millions, which caused Bitfinex problems in withdrawing funds from Crypto Capital. This also caused Bitfinex to cover up losses of $851 million, which wasn’t disclosed to investors/users.
  • Since there were altercations between Bitfinex and Crypto Capital, Bitfinex was forced to take loan[s] from Tether to honor customer requests. Bitfinex was granted a loan of $900 million from Tether’s reserves, according to a previous understanding between the two, and the Tether would receive 60 million shares of iFinex Inc, a company owned by Digfinex, as collateral for the loan.
    The problem here is that, according to Tether’s website at the time, each USDT should have been backed 1-to-1 by traditional currency. If the line of credit provided by Tether was from Tether’s reserve, it would mean that not all USDTs are backed by traditional currency. In addition, this wasn’t made public, according to AG’s court filings.

What does the AG have on Bitfinex and Tether?

Bitfinex and Tether can be sued by the New York AG for:

  1. Not obtaining a license from the New York Department of Financial Services to engage in virtual currency business activity in New York.
  2. Allowing New York-based users and entities trade/transact cryptocurrencies on their [Bitfinex and Tether] platform.
  3. Covering loss of $851 million from users and investors.
  4. Not disclosing their third-party payment processor, Crypto Capital.
  5. For having New York-based banking help in their business between 2017 to 2018.
  6. For permitting New York-based individual and business entities to trade even after their announcement that it wouldn’t permit in August 2017.

What Now?

Even if Bitfinex and Tether come out with necessary documents, both the entities have a high chance of getting indicted for other alleged crimes. Even as the story uncovers, there are many blanks that remain to be filled, even as the NYAG waits for the subpoenaed documents from the respondents to take the next step.

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