Bad News For Bitfinex & Tether

Coming on the heels of two men pleading guilty in New York for using cryptocurrency to launder millions of dollars in their illegal steroid enterprise, another big apple AG is in the news for a much larger potential crypto-catastrophe that sent the entire crypto market into a plummet.

Attorney General Letitia James announced yesterday that her office obtained a court order enjoining iFinex Inc., the operator of Bitfinex, and Tether Limited from “further violations of New York law in connection with an ongoing activities that may have defrauded New York investors that trade in virtual or “crypto” currency.”

Attorney General James was quoted on the official state site as saying, “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.”

While the Office’s investigation continues, the court order stipulates that the two companies and their related entities must cease further dissipation of the assets which back the tether tokens. Additionally, they must produce related documents and information and are barred from destroying or deleting potentially relevant documents and communications, including any stored on self-deleting or transitory applications.

According to the AG’s court filings, Bitfinex handed over $850 million dollars of co-mingled client and corporate funds to a Panamanian company known as “Crypto Capital Corp.,” a move that wasn’t approved by nor ever disclosed to investors. The filings go on to state that in order to cover this shortfall on the books, Bitfinex treated Tether’s cash reserves as its own corporate slush fund by giving itself access to up to $900 million of Tether’s cash reserves, of which at least $700 million has already been taken. Of course it’s important to note that this was cash that investors have been repeatedly assured was backing the tether virtual currency “1-to-1.”

The Office’s filings detail how the funds were used to hide Bitfinex’s inability to handle customer withdrawals and massive, undisclosed losses, as well as how the companies obfuscated the extent and timing of these corporate transactions during the investigation.

After the news was released yesterday, cryptocurrencies shed billions of dollars in value in just a single hour. Bitcoin fell 4%, Ether 6% and XRP lost 3%, while the entire market shed about $10 billion in value according to CoinMarketCap data. All 3 have regained some of that ground as of today and after briefly dipping below $.98, USDT, which is at the center of the AG’s investigation, is trading around $0.99.

With Tether being the most widely used stablecoin, if its price drops below $1 it will very likely lead to increased instability in the crypto market.