Bitfinex and Tether: what to expects on the crypto market after the trial
Litigation of the US Attorney General’s Office with Tether and Bitfinex made nervous the users of Hong Kong crypto exchange and holders of stable coin USDT. However, it is likely that instead of attacks on crypto companies, this precedent will force the authorities to change their attitude towards the crypto industry and formulate adequate regulation of the crypto market.
The crypto community has long been treating stable coin Tether with caution. The same Tether, that allegedly used to be fully secured with a fiat dollar. Since March 2019, when the company announced that, in addition to fiat assets, the coin is also backed up by loans to third parties, there were even more concerns.
Deliberate withholding of information
The incident that added fuel to the fire happened at the end of 2018, when the cross-owners of Bitfinex and stable coin issuer tried to hide the loss of access to $ 850 million of corporate and client money, which allegedly stuck in the processing company Crypto Capital. At the same time, according to the latter, this money was eventually frozen by the authorities of Portugal, Poland and the USA.
US federal prosecutors found that Crypto Capital was charged with fraud, and its bank accounts were frozen. As it is now revealed, Crypto Capital previously served QuadrigaCX, a bankrupt crypto-
exchange, whose clients lost $ 190 million.
To cover the deficit of $ 850 million, Tether decided to secretly issue a loan for Bitfinex. From this point on, the USDT also became secured with loans in addition to fiat. According to cryptanalyst Alex Kruger, Tether issued a loan with a three-year maturity and an interest rate of 6.5%. The loan itself is allegedly secured with shares of iFinex Inc., which belong to DigFinex and is valued at $700 million.
This situation wasn’t left unnoticed, the US Attorney General’s Office accused Bitfinex of hiding a loss of $850 million with the help of Tether’s funds and froze a credit line from the issuer of stable coin. In turn, Bitfinex Chief Financial Officer Giancarlo Devasini said that this “hole” is a temporary situation and the money will be unblocked. As for the court order - it was claimed to be damaging the company's investment activities.
Tether is not 100% secured.
Tether's chief lawyer Stuart Hogner confirmed that only 70% of the stable coin USDT is backed by fiat reserves, and the rest of the funds are at the disposal of the Hong Kong Bitfinex exchange. At the same time, according to him, even banks have a policy of partial reservation of customer deposits, but Tether is not a bank. Therefore, it is inappropriate to bring such claims to it.
As a result, the court supported the requirement of the prosecutor's office, in which Bitfinex and Tether should stop any further lending operations and transfer all the necessary documentation on transactions. However, during the trial a number of inaccuracies arose regarding the definitions of stable coin, as well as the relationships arising from the use of the USDT.
Can USDT users be considered as equity investors?
The prosecutor’s office, in its accusation, stated that the USDT is a security that is subject to the Martin Act on counteracting fraud. In turn, iFinex, the parent company of Bitfinex, denies this fact, because stable coin did not pass several points of Howie’s test and does not pay dividends to its holders.
“The opinion of the US Securities and Exchange Commission regarding cryptocurrencies is not fully worded. Most cryptocurrencies are generally not considered to be securities according to US laws. But the public wasn’t expecting any different position from the American regulator, despite repeated attempts by lawmakers who demanded clarification, ” explains Christina Nemchinova, co-founder of legal fintech consulting Brightman.
According to the expert, the Securities and Exchange Commission is the only authority that can provide proper and correct interpretation, including the decision whether the USDT should be considered as a security.
Among other things, due to the fact that the prosecutor's office calls users Bitfinex and Tether investors, additional disclosure measures may be imposed on companies. At the same time, lawyers of the crypto exchange argue that the platform did not accept such obligations.
“While trying to reflect the situation in America, it is important to remember only one thing: users of the platform and USDT holders will be called the way they are called by the competent authorities. Indeed, if they are not recognised as investors, then the company will not be required to disclose any information. However, whether they are investors or not will depend on whether the Commission recognise USDT as a security,” explains Nemchinova.
According to the lawyer, the judicial practice of the United States has repeatedly demonstrated that the Howe test mentioned can be interpreted differently depending on the situation.
In the meantime, Bitfinex is trying to prove that there were no fraudulent actions on the part of the exchange, and a court order is detrimental to Tether’s investment activities.
According to Christina Nemchinova, in the long run, this situation may not affect the
cryptocurrency market itself, among other reasons because neither Tether nor Bitfinex are monopolists anymore.
“As for the iFinex company itself, the consequences can be very deplorable - if it does not take into account all the recommendations of the law enforcement agencies and does not conduct a proper audit,” the lawyer says.
The situation, however, affected crypto investors’ sentiment - in panic, traders began to exchange USDT for Bitcoin, and due to high demand the value of the latter exceeded $6,000. As a result, the stock exchange experienced a significant outflow of capital.
On the other hand, this legal dispute will be able to clarify the functions, obligations of players on crypto market and their relationships that occur when using different cryptocurrencies.
Author: Annabella Lapshin