Opinion: Bitfinex and Tether evade accountability in $850 million loss case

On Tuesday, February 23, the cryptocurrency exchange Bitfinex and Tether settled the dispute with the New York State Attorney General (NYAG) over the loss of $850 million. The assessment of this settlement for ForkLog was provided by Sergey Ostrovsky, a partner at the law firm AURUM.

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In his view, the Tether and Bitfinex case is telling in that they essentially managed to elude accountability despite \”for years misleading users and exposing their funds to risk.\” At some point the structure of relationships around the companies resembled a multi-level marketing scheme that survived solely thanks to luck and the fact that \”this is crypto,\” noted Ostrovsky.

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He pointed to a number of facts from the history of Bitfinex and Tether established by the more-than-two-year NYAG investigation. For example, the exchange lost access to nearly $1 billion of user funds due to the blocking of accounts by the Panamanian processor Crypto Capital.

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Ostrovsky drew attention to the approach and level of communication between the trading platform and the service. The expert cited excerpts from their communications, as included in the prosecutors’ documents:

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“Bitfinex told Oz [the founder of Crypto Capital Oz Yusef] that ‘we have $860 million with us. I do not believe that we could not obtain $20 or $30 million… Where is all the money, it doesn’t add up… 350 in Poland, 150 — in Portugal’. On November 28, 2018, Bitfinex sent another message to Oz, stating that ‘by the end of the month you had not made a single transfer, not even $1 for the entire period’.”

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In November 2018, the exchange took a loan of $850 million from a Tether-affiliated issuer of the stablecoin USDT to cover the loss of funds in Crypto Capital. According to Ostrovsky, information about this loan was concealed by the companies until February 2019.

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The law-firm partner noted that Tether’s claims of fully backing USDT with one U.S. dollar stopped reflecting reality after the Bitfinex loan was provided. In his view, the stablecoin issuer misled customers.

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For this, the company meant that it no longer had sufficient funds to satisfy all USDT in circulation, Ostrovsky concluded. He noted that in early 2019 Tether updated information on its site, stating that USDT are backed by \”reserves that include fiat currencies and cash, as well as from time to time other assets and liabilities from loans extended by Tether to third parties, including related parties.\”

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Ostrovsky also added that the prosecutor’s office found that from June to September 2017 USDT was not backed 1:1 by the dollar.

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In 2021, Bitfinex paid off the loan to Tether. According to the expert, the NYAG pursued a settlement to obtain $18.5 million for the state budget and statements that they had \”crushed\” the fraudsters. Tether and Bitfinex agreed to a peaceful resolution to avoid court findings of numerous violations and abuses, Ostrovsky says. In his view, both sides sought to extract as much as possible from the situation.

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Under the settlement terms, Bitfinex and Tether also agreed to cease serving clients in New York, including over-the-counter trades, to publicly disclose information about their reserves for two years, and undertook a number of other obligations.

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In January 2021, Tether’s chief technology officer Paolo Ardoino said that the company, together with Bitfinex, prepared more than 2.5 million pages in response to NYAG requests.

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