The New York Attorney General's office said in an announcement published April 25 that crypto exchange, Bitfinex, lost $850 million and subsequently borrowed money from its controversial stablecoin subsidiary, Tether Ltd, to hide the deficiency.
As per the announcement, the Attorney's office has obtained a court order showing that iFinex, the firm behind the Bitfinex exchange and Tether Ltd, the company issuing stablecoin, Tether, violated New York laws.
Those violations also likely resulted in the defrauding of New York investors according to the court order.
Nature of the Alleged Crime
The Attorney’s office claims that Bitfinex, which also controls the supply of the Tether (USDT) stablecoin engaged in a cover-up to hide losses of up to $850 million, comprising corporate and investor funds.
Specifically, the court order shows that Bitfinex and Tether executives collaborated to allow Bitfinex access to $900 million of cash reserves dedicated to back the stablecoin’s circulating supply. The funds were allegedly transmitted through a Panamanian entity called Crypto Capital Corp.
Bitfinex then used at least $700 million from the borrowed reserve funds to hide its losses inability to fund customer withdrawals without announcing the loss to the company’s investors.
The court order instructs Bitfinex and Tether to desist from dissipating (wasting) funds from the cash reserves and also produce documents showing an investigation into the alleged misleading operation. They will also not tamper with records that may lead to further discoveries into the matter.
For the time being, the court order does not affect the operations of the company with the Attorney reportedly seeking an injunction to allow them to continue trading and avoid creating an inconvenience to customers.
Bitfinex Response to Attorney's Allegation
Less than 24 hours after the Attorney's office obtained the court order, Bitfinex said that the allegations are false with the regulator composing it in "bad faith." Bitfinex noted that it was putting in efforts to recover the funds with Crypto Capital Corp. and expected support, not undermining from the State's regulators.
As Stmarket.co has reported in the past, this is not the first time that issues regarding whether Tether has enough cash reserve to back its stablecoins has come to limelight. In December, Bloomberg claimed to have found evidence that Tether had enough cash reserve to support its stablecoin circulation.