Bitfinex and Tether In the Spotlight as the NYAG Alleges Them of Fraud

Crypto exchange Bitfinex has allegedly lost $850 million, and in order to cover the shortfall the exchange used funds from affiliated stablecoin operator Tether, according to court files published on April 26th.

NYAG Starts Court Proceedings

The New York Attorney General, Letitia James, has revealed that the court had received court filing alleging that that iFinex Inc. — the operator of Bitfinex — Tether Limited, and their affiliates were in violation of New York law in connection with fraudulent activities, executed without the knowledge New York-based crypto investors.

According to court filings, the exchange hadn’t revealed the loss to investors, with executives of the exchange and Tether engaged in a series of conflicting corporate transactions where Bitfinex got access to up to $900 million of Tether’s cash reserves. Allegedly, Bitfinex took hundreds of millions of dollars Tether’s reserves and subsequently used them to cover up losses as well as its inability to process clients’ withdrawals.

Attorney General James has released a statement that said:

“Our investigation has determined that the operators of the ‘Bitfinex’ trading platform, who also control the ‘tether’ virtual currency, have engaged in a cover-up to hide the apparent loss of $850 million dollars of co-mingled client and corporate funds. New York state has led the way in requiring virtual currency businesses to operate according to the law. And we will continue to stand-up for investors and seek justice on their behalf when misled or cheated by any of these companies.”

Following this statement, the court has ordered that both affiliates immediately cease the dissipation of the US dollars that back tether tokens and to hand over documents for the investigation process. It further adds that both companies are prohibited from destroying potentially related documents.

Bitfinex and Tether Riposte

Meanwhile, Tether’s statement, which was a joint statement with Bitfinex, asserts that the court filings “were written in bad faith and are riddled with false assertions”, claiming that the $850 million were in fact not lost, but seized and safeguarded. It further states that both companies are currently working on getting those funds released.

Respectively, both Tether and Bitfinex insisted on having fully cooperated with prosecutors and called on the Attorney General’s Office to “focus its efforts on trying to aid and support our recovery efforts.”

Tether had previously faced a controversy in January of 2018, when critics of Tether alleged that the crypto, which had claimed to have $1 in reserve for every unit of stablecoin issued, was in reality operating a fractional reserve and issuing more tokens than it had backing for, which were then sent to the Bitfinex exchange. Subsequently, both exchanges faced a subpoena from U.S. regulators and after being ordered to undergo an unofficial audit, it was found that stablecoin had the appropriate amount of backing dollars.

At present, the Attorney General is seeking an injunction to compel Bitfinex and Tether to continue trading, in order not to harm the customers of both entities.

Lawsuit Between Winklevoss and Shrem Has Been Settled

Cameron and Tyler Winklevoss‘s lawsuit against fellow early Bitcoin entrepreneur Charlie Shrem has been privately settled. The news was revealed via court files on April 16th.

Judge Jed Rakoff of the U.S. District Court for the Southern District of New York dismissed the case on April 5th, explaining that both parties notified the court they had reached a settlement. However, at that time both parties had been given 30 days to fully effectuate their agreement with the option of continuing to trial in case it was not fulfilled.

On April 16th, attorneys of both parties have signed a legal document, which states that the civil lawsuit is being voluntarily dismissed with prejudice, concluding that the case will not be reopened. It further states that both parties will pay their own legal fees

However, the terms of the settlement remain confidential.

The twins, who founded crypto exchange Gemini, had previously claimed the entrepreneur had stolen 5,000 bitcoins – worth about $26 million at press time – and using the crypto to buy Maseratis, powerboats and other luxury goods, which Shrem had denied.

Following the case’s dismissal, Charlie Shrem has given out a statement regarding the lawsuit:

“From day one, I’ve maintained the allegations are bogus, and they are of course. After their attorney was sanctioned and they were ordered to pay my legal fees twice, we recently reached a confidential resolution, and I’m dismissed from the case. I’m thankful for Brian Klein and my legal team and pleased to have this behind me.”

As one of the earliest adopters of Bitcoin, Shrem established one of the first prominent Bitcoin businesses within the U.S., called Bitinstant.

As previously reported, a judge had ordered the Winklevoss brothers to pay Shrem $45,000 after the District Court of the Southern District of New York reduced the scope of the twins’ claims.

Attorney Stephen Palley, a partner at Anderson Kill has stated that given the big noise with which the lawsuit has started off “this sure ended with a whimper. “

Respectively, Palley strongly believes that „this was a case that began with the plaintiffs trying to freeze and seize Shrem’s assets before he even knew that he had been sued.”

He further commented on how the case began to get worse for the plaintiff’s lawyers as they had seen the ruling overturned as well as having been sanctioned for deposition misconduct. In his opinion, he believes this to be a huge win for Charlie Shrem.

Bitstamp Receives its BitLicense from the New York State Department

Cryptocurrency exchange Bitstamp – one of Europe’s largest exchanges – has announced Tuesday that it has just been issued a BitLicense from the New York State Department of Financial Services (NYDFS).

It’s been a long time coming for Bitstamp as the exchange first applied for the license in June 2015, when NYDFS created the state’s landmark law. CEO Nejc Kodrič has disclosed that the exchange was amongst the first set of 22 applicants for the license.

This is the 19th BitLicense given out to date, with the previous license being issued to crypto brokerage startup Tagomi Trading LLC. Other companies to have been granted a coveted license this year include stock trading app Robinhood, Bitcoin ATM operators Cottonwood Vending and LibertyX.

Kodrič has mentioned that the exchange went through a thorough approval process, with both parties having tackled various aspects of the exchange’s operation:

“There were questions all around how the matching engine works, how we store crypto, how we [conduct] audits. The license is a set of rules and procedures you have to follow on a daily basis, so once you do that you can [receive a BitLicense].”

He further mentioned that the approval process is rather similar to Europe’s standards. For instance, the exchange already has a payment institution license in the EU, allowing it to operate across all 28 member countries.

NYDFS’ statement outlines that its licensing regime is designed to supervise and foster virtual currency exchanges under New York’s financial services law.

According to the announcement, the exchange platform believes that the BitLicense is a vital element that will further drive the exchange’s expansion into the United States.

We were providing services in the U.S., including New York before there were any licenses out there,” Kodrič said. “We have many customers from the States, but we plan on going more active.”

With the acquisition of the BitLicense, the exchange will now be allowed to offer Bitcoin (BTC), Litecoin (LTC), Bitcoin Cash (BCH), Ether and XRP trading pairs to NY residents. More cryptocurrencies may be added at a later time.

The exchange is primarily a crypto-to-fiat platform, though it does offer crypto-to-crypto services. However, currently the majority of its volume comes from its fiat on and off ramps.

Throughout last year, Bitstamp has been mainly focused on improving the security and compliance of its platform. Last November, the exchange partnered with Irisium, a provider of market monitoring and analytics software, to “enhance customer protection and market integrity.”

According to asset manager Bitwise’s list of exchanges with legitimate volume, Bitstamp ranks within the top four, though according to CoinMarketCap’s list of exchanges by reported volume, it weighs in at number 56.

Pakistan to Enforce Regulations on Companies Dealing with Digital Currencies

Pakistan is in the process of enforcing stricter regulations for digital currencies.

According to The Tribune, the nation’s federal government has decided to bring in Electronic Money Institutions (EMIs) regulations following recommendations from the Financial Action Task Force (FATF).

Pakistan Targets Digital Currencies

Pakistan is looking to reduce perceived criminal use of digital currencies in money laundering and terrorist financing. As a result the financial authorities will now introduce a licensing scheme for electronic money institutions, which includes any entity dealing with cryptocurrencies.

“These regulations will help combating money laundering and terrorism financing while it will also help regulation of digital currency throughout the country,” The Tribune quoted unnamed sources.

Companies would have to meet capital requirements, implement measures to protect users’ funds and conduct strict customer due diligence. This would include storing users’ personal details such as name, ID card number, address and phone number.

Effectively, digital currencies will be regulated similarly to traditional financial institutions. Firms that will fail to comply with the regulations in place will face suspension or cancellation of licenses. The government will be authorized to issue, suspend and cancel licenses.

FATF Warnings

FATF has previously voiced concerns over cryptocurrencies being used for money laundering and terrorist financing. The task force said last October that global jurisdictions will have to bring into force licensing frameworks for crypto exchanges. Digital wallet providers and companies offering services for initial coin offerings (ICOs) should also fall under the regulation framework.

“There is an urgent need for all countries to take coordinated action to prevent the use of virtual assets for crime and terrorism,” FATF said at the time.

In February, FATF reportedly stated that Pakistan has had modest success in combating money laundering and terrorism financing, insisting that it would continue to collaborate with the country to fight such illegal activities.

According to previous reports, cryptocurrency trading has been banned in Pakistan since April 2018. With the new regulations in place, trading might resume, however strict requirements will severely hamper any traction digital currencies could achieve within the country.

 

Japan Targeting Cryptocurrency Margin Trading for Regulation

Japanese financial regulators are introducing new regulations for cryptocurrency margin trading from next year.

According to local news Nikkei Asian Review, the Cabinet of Japan – the executive branch of the government – has already authorized draft amendments to Japan’s financial instruments and payment services laws, limiting leverage in cryptocurrency margin trading at two to four times the initial deposit.

What is margin trading?

Buying on margin is borrowing money from a broker to purchase/trade stock. You can think of it as a loan from your brokerage. Margin trading allows you to buy more stock than you’d be able to normally.

In addition to that, when you sell the stock in a margin account, the proceeds go to your broker against the repayment of the loan until it is fully paid.

Following the new change to margin trading, the government has amended that now all cryptocurrency exchanges in the country that offer margin trading will be requested to register with the government within 18 months of the date the rules come into effect, which is expected to be some time in April 2020. Non-compliant platforms will face closure.

The new registration scheme will exist over and above the existing licensing requirements, in which cryptocurrency exchanges are required to obtain a license according to the payment services law which went into effect in April 2017.

According to the news, speculation has exceeded cryptocurrency’s use as a payment method. Citing figures from self-regulatory group – the  Japan Virtual Currency Exchange Association – it  showed that crypto margin trading in Japan rose to about 8.42 trillion yen ($75.6 billion) in December 2018 – a figure around 11 times higher than crypto/cash conversions (777.4 billion yen or $6.9 billion).

More Investor Protection

In the wake of the new regulations, companies and individuals dealing cryptocurrency will apparently be monitored similarly to securities traders in an effort to protect investors. Furthermore, cryptocurrency operators will be divided into groups in order to identify those engaged in margin trading and those issuing tokens through Initial Coin Offerings (ICOs). Thus, the regulators aim to protect investors from Ponzi schemes and encourage approved companies to practice offerings as fundraising tools.

The nation’s Financial Services Agency (FSA) disclosed back in January that it was contemplating the regulation of unregistered firms that solicit investments in cryptocurrencies. Apparently, it was aimed to close a loophole in the country’s existing regulatory framework, in which unregistered firms that collect funds in crypto rather than fiat currencies remain in a legal gray zone.

Back in August 2018, the commissioner of the FSA stated that the agency had no intention to hinder the cryptocurrency industry, rather it wants the industry to grow under the appropriate regulation in order to find the “balance” between consumer protection and technological innovation.