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.