Crypto market hit by allegations against Tether, Bitfinex

Bloomberg

One of the world’s most widely traded virtual currencies faces renewed doubts about its stability, after New York’s top cop accused the coin’s issuer of participating in a cover-up
to hide the loss of about $850 million in client and corporate funds.
The allegations against Tether and the operator of cryptocurrency exchange Bitfinex, announced by the New York attorney general, have revived doubts about Tether’s claim that each of
its so-called stablecoins is backed by $1 of assets —a feature that gives the coins a central role in crypto markets around the world.
A loss of faith in Tether would be a major blow to traders who rely on it as a substitute for dollars. Virtual currencies tracked by CoinMarketCap.com lost $10 billion of value within an hour of the attorney general’s statement and Tether slid 1.4 percent.
This isn’t the first time that Tether and Bitfinex have faced scrutiny from US authorities. The US Justice Department is investigating whether traders used the stablecoin to manipulate the price of Bitcoin, Bloomberg reported in November, while the US Commodity Futures Trading Commission sent subpoenas to Bitfinex and Tether in late 2017. Heightened regulatory scrutiny is one reason why institutional investors have mostly steered clear of the industry.
Bitfinex, unable to find a bank that would work with it, entrusted more than $1 billion in co-mingled client and corporate deposits last year to a Panamanian firm, Crypto Capital Corp., according to the civil case brought by New York Attorney General Letitia James, a Democrat who took office in January. Bitfinex was allegedly using that firm as an intermediary to wire dollars to traders.
“Despite the sheer amount of money it handed over, Bitfinex never signed a contract or other agreement with Crypto Capital,” the attorney general wrote to the court. By mid-
to late-2018, executives at Bitfinex and Tether suspected Crypto Capital had lost, stolen or absconded with the money, and they haven’t be able to find or recover roughly $850 million, she said. “None of that has been disclosed to investors.”
The attorney general’s court filings “were written in bad faith and riddled with false assertions,” Bitfinex said in a statement on its website. There was no loss of funds, Bitfinex and Tether are financially strong, and the firms are cooperating with the attorney general’s office, the company said.
Justice Debra James in Manhattan issued an order barring iFinex and Tether from any further violations of state law while the case proceeds. They must also retain all documents tied to the probe, court records show.
After the $850 million loss, executives at Bitfinex and Tether cooked up a series of “conflicted corporate transactions” in which Bitfinex gave itself access to up to $900 million of Tether’s cash reserves, which Tether repeatedly told investors fully backed its coin one-to-one, the attorney general said in a statement.
Correspondence between a senior Bitfinex executive and Crypto Capital included in the attorney general’s complaint suggests the exchange was under immense pressure in October to gain access to funds amid a spike in client withdrawal requests. “Please understand all this could be extremely dangerous for everybody, the entire crypto community,” the executive wrote, according to the attorney general. “BTC could tank to below 1k if we don’t act quickly.”