On Thursday (April 25), New York Attorney General (“NYAG”) Letitia James announced that she had obtained a court order against iFinex (the operator of crypto exchange Bitfinex) and Tether (the issuer of the stablecoin of the same name) to stop these two companies from any “further violations of New York law.” This article summarizes the main highlights of the facts as presented by the NYAG, how the crypto markets have reacted, and early responses from some prominent members of the crypto community on Twitter.

The “Facts” As Presented by Assistant Attorney General Whitehurst’s Affirmation

According to the affirmation filed (at the New York Supreme Court) on Thursday by Brian M. Whitehurst, who is an Assistant Attorney General (“AAG”) in the office of NYAG James, here are the main “facts” of the case against Bitfinex and Tether, as beautifully summarized by highly-respected New York-based crypto trader/analyst Alex Krüger (@krugermacro on Twitter):

“Bitfinex has a $850M ‘hole” since late 2018″

“The $850M are ‘stuck’ with Crypto Capital, a third party payments processor used by Bitfinex”

“Crypto Capital argues the $850M have been seized by govt authorities of various countries”

“Bitfinex mgmt believes Crypto Capital’s principals may be engaged in fraud”

“USDT were seemingly fully backed by USD until Nov/2018”

“Between Nov/2018 and Mar/2019, Tether transferred $625M to Bitfinex => Tether ceased to be fully backed by USD”

“In Mar/2019 Bitfinex ‘returned’ the $625M to Bitfinex”

“Since Mar/2019 Bitfinex is covering the hole with a $900M line of credit from Tether”

“The line of credit (which pays 6.5% p.a.) is secured by iFinex shares”

“Bitfinex has accessed $700M from the line of credit”

“Per the NY AG, Bitfinex and Tether are engaged in fraud”

And here are some other interesting observations from Alex:

5/ New York AG objectives: – determine extent to which New York investors are exposed to ongoing fraud – obtain documentation from Bitfinex (including a weekly report) It does not seek to interfere with Bitfinex's or Tether's operations. pic.twitter.com/1NwOrdQe3J — Alex Krüger (@krugermacro) April 26, 2019

6/ Corollary: Tethers are now backed by – 75% USD (currency and cash equivalents) – 25% a loan secured by iFinex shares (other assets and receivables) That represents considerable credit risk. pic.twitter.com/Q3mXWJvuwj — Alex Krüger (@krugermacro) April 26, 2019

Even though NY AG states Bitfinex & Tether engaged in fraud, the key accusation hurled at them in 2018 (ie. printing unbacked tethers) was seemingly false. The issue is not printing tethers to manipulate bitcoin, but Bitfinex having funds “stolen” and then using Tether's funds. — Alex Krüger (@krugermacro) April 26, 2019

Bitfinex’s Response

A few hours after the NYAG’s press release came out, Bitfinex issued its response in the form of an announcement posted to its website:

“Earlier today, the New York Attorney General’s office released an order it obtained – without notice or a hearing – in an attempt to compel Bitfinex and Tether to provide certain documents and seeking certain injunctive relief.

The New York Attorney General’s court filings were written in bad faith and are riddled with false assertions, including as to a purported $850 million “loss” at Crypto Capital. On the contrary, we have been informed that these Crypto Capital amounts are not lost but have been, in fact, seized and safeguarded. We are and have been actively working to exercise our rights and remedies and get those funds released. Sadly, the New York Attorney General’s office seems to be intent on undermining those efforts to the detriment of our customers.

Bitfinex and Tether have been fully cooperative with the New York Attorney General’s office, as both companies are with all regulators. The New York Attorney General’s office should focus its efforts on trying to aid and support our recovery efforts.

Both Bitfinex and Tether are financially strong – full stop. And both Bitfinex and Tether are committed to fighting this gross overreach by the New York Attorney General’s office against companies that are good corporate citizens and strong supporters of law enforcement. Bitfinex and Tether will vigorously challenge this, and any and all other actions, by the New York Attorney General’s office.”

Crypto Markets’ Response

Naturally, this news has hurt the price of pretty much all cryptoassets with the main exception being stablecoins that are Tether’s main competition, such as USD Coin (USDC) and TrueUSD (TUSD), which have gone up between 1 and 2 percent against USD.

What is most interesting about the crypto markets’ reaction is that Tether’s price has barely been affected this time, unlike in October, when the USDT price reached a low of $0.86. The fair value of Tether is $0.75 at a minimum since Tether seems to be backed 75% by “currency and cash equivalents” and 25% by a loan collateralized by iFinex shares, which used to be worth around $10, but worth around $2 a few hours ago:

Bitfinex shares on BnkToTheFuture now trading under $2 (albeit in thin volumes), down from over $10 at beginning of this yr. pic.twitter.com/3sx5bVyAIR — Su Zhu (@zhusu) April 26, 2019

This means that the collateral of 60,000,000 iFinex shares might only be worth around $120 million at the moment, whereas the line of credit is for $900 million.

This tweet sums up nicely what one can say about Tether’s current fair value:

So fair value on Tether is somewhere between 0.75 minimum if you thought the LOC was worthless up to 1.00 maximum if you thought the LOC was worth par. If you said the LOC was worth 50-75 cents on the dollar, tether/USD fair value is 0.88-0.94. — Cryptopotle (@cryptopotle) April 26, 2019

Crypto Community’s Reaction

Here are some of the more interesting early reactions from the crypto community on Twitter:

Bitfinex announces that the $850M has been seized. Who knows when funds will be released (years?) Obviously this wasn’t announced earlier bc of the effects it will have on Bitfinex & the mkt. This is not going to play out well. Don’t be fooled that this won’t affect prices. pic.twitter.com/ock3GxKdAO — James Todaro (@JamesTodaroMD) April 26, 2019

1/2 @bitfinex responds to NYAG.

+ #Bitfinex & #Tether are financially strong.

+ The capital in question is seized & safeguarded, not lost.

+ They continue to co-operate with global regulators.

+ They stand up for the truth & against accusations.

Source: https://t.co/SSjq9CnFt4 — Gabor Gurbacs (@gaborgurbacs) April 26, 2019

2/2 I believe Bitfinex is trying to eliminate accusations and media FUD. The market is likely overreacting the NYAG publication. I’d love to see more strong companies and individuals stand up for their rights. It’s the best interest of everyone to learn the truth. — Gabor Gurbacs (@gaborgurbacs) April 26, 2019

TL:DR the Tether/Bitfinex news:

Bitfinex have borrowed ~700mil from Tether

Bitfinex pay a 'fair' interest rate on this loan

60million shares in Bitfinex were pledged as collateral

If CryptoCapital release the USD, no problem

If Bitfinex trades profitably, no problem — Alistair Milne (@alistairmilne) April 25, 2019

No-one has mentioned how the NY AG is seeking an injunction to *force* Bitfinex and Tether to continue trading so as to avoid causing harm to customers pic.twitter.com/cFwIkGkch8 — Alistair Milne (@alistairmilne) April 25, 2019

We’re at a point now where neither Bitfinex nor Tether are integral to Crypto. I’m buying this dip! — Ran NeuNer (@cryptomanran) April 25, 2019

Unfortunately, fiat banking is a black box. We don't know if there's a problem at CC or at the bank. No doubt BFX still carries the USD on the balance sheet but if it's frozen/seized, who knows how many years it could take to become recoverable. Gox still going 5+ years. — Jesse Powell (@jespow) April 25, 2019

1/ STUNNED but not surprised by #Bitfinex #Tether news out of #NewYork. I'll let other cryptolawyers analyze it but here are two macro thoughts: (1) There's a big double standard here. (2) Exchanges, clean up your act–cryptographically prove your solvency https://t.co/u4vpjh7Kjw — Caitlin Long 🔑 (@CaitlinLong_) April 26, 2019

2/ First, the double-standard. Why didn't the NY AG throw the Martin Act at Merrill Lynch for doing something actually quite similar from 2009-12? Seriously, why the double standard??? Quoting the SEC's press release here: https://t.co/FJqG7K30nw — Caitlin Long 🔑 (@CaitlinLong_) April 26, 2019

8/ Second point–#crypto exchanges, clean up your act! You really need to voluntarily disclose #ProofofSolvency (h/t @nic__carter), #ProofofReserves & audited financial statements (h/t @wtogami). If you don't, regulators, investors & litigation will force it on unfavorable terms! — Caitlin Long 🔑 (@CaitlinLong_) April 26, 2019

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