New York’s Attorney General alleged the operator of the Bitfinex cryptocurrency trading platform and the issuer of the Tether "stablecoin" lost $850 million which it subsequently covered up using funds from affiliated stablecoin operator Tether - i.e., engaged in co-mingling of client and corporate funds - to secretly cover the shortfall; the news sparked a sharp selloff in the cryptocurrency space where Bitfinex has long been rumored to be a mechanism to prop up various virtual currencies.

A judge in Manhattan issued an order barring iFinex Inc., which operates the infamous Bitfinex cryptocurrency exchange and owns Tether Ltd. from money money from Tether’s reserves to Bitfinex’s bank accounts, halt any dividends or other distributions to executives and turn over documents and information, New York Attorney General Letitia James said Thursday in a statement. Tether is one of the world’s most valuable cryptocurrencies and is used in a significant share of trades involving Bitcoin. The NY AG said iFinex had been commingling client and corporate funds to cover up the missing funds, which occurred in mid-2018 and hadn’t been disclosed publicly.

“New York state has led the way in requiring virtual currency businesses to operate according to the law," James said. "We will continue to stand-up for investors and seek justice on their behalf when misled or cheated by any of these companies.”

According to the WSJ, the AG's findings emerged from an investigation into cryptocurrency exchanges that it launched in 2018 and is continuing. A report in September warned that many exchanges lacked basic safeguards and left consumers vulnerable to exploitation by market manipulators.

The attorney general said Bitfinex’s problems began in 2018, when it handed over $850 million to third-party payments processor Crypto Capital Corp. to handle customers-withdrawal requests. Over the months that followed, Panama-based Crypto Capital failed to process the orders, the attorney general said. By November of that year, according to people close to the attorney general’s investigation, Bitfinex determined that it had permanently lost access to the $850 million. To hide the missing funds, Bitfinex and Tether engaged in a series of maneuvers that drained Tether’s reserves, the people said.

Tether has frequently been accused of facilitating cryptocurrency price manipulation; it is allegedly backed one-to-one by U.S. dollars, yet the firm has never released a public audit showing it has the reserves to back the coins in circulation, leading many to question whether the funds even exist.

As the WSJ notes, Tether has marketed the coin as a way to get both the safety of the dollar and the speed and anonymity of a digital currency. Its market value has risen steadily over the past two years, to $2.8 billion from about $10 million at the beginning of 2017. Since then it has become a major source of liquidity in the cryptocurrency market, and about 80% of all bitcoin trading is done via Tether, according to data from research site CryptoCompare. Some have speculated that tether is how various Asian accounts have been quietly laundering money into cryptocurrencies, which they then used to circumvent "firewalls" and deposit funds offshore.

Needless to say, $850 million would represent a major portion of Tether’s reserves. Tether currently claims on its website that the coins it issues are backed by reserves that include currency, cash equivalents and other assets and receivables. According to the WSJ's Paul Vigna, the language was altered in March; it previously claimed the reserves were 100% in currency.

Many bitcoin advocates have repeatedly said that Tether represents a negative overhang over the cryptocurrency space and have been quietly hoping for a crackdown on both the exchange, and stablecoin, which would result in far more stability in the space which as seen in the chart above, tends to be greatly affected by any adverse report involving tether.

The full court NY AG court order can be found below (via CoinDesk):