Bitfinex, Tether again face market manipulation accusations

It seems the New York Attorney General is not the only person accusing sister companies Bitfinex and Tether of breaking the law.

According to statements posted on the websites of both cryptocurrency exchange Bitfinex and stablecoin issuer Tether, a paper accusing the companies of market manipulation designed to boost the price of Bitcoin will be published soon. Both firms are owned by British Virgin Islands-based iFinex.

Each firm said on Saturday, October 5 that it “anticipates [a] meritless and mercenary lawsuit based on a bogus study.”

This study, both statements insisted, “falsely posit[s] that Tether issuances are responsible for manipulating the cryptocurrency market.”

The truth, Bitfinex claimed, is that it “and its affiliates have never used Tether tokens or issuances to manipulate the cryptocurrency market or token pricing. All Tether tokens are fully backed by reserves and are issued and traded on Bitfinex pursuant to market demand, and not for the purpose of controlling the pricing of crypto assets.”

Tether added that, “[t]hese baseless accusations are an attempt to undermine the growth and success of the entire digital token community, of which Tether is a key part.” 

More than 70% of Bitcoin (BTC) sales were made using Tether (USDt) in August 2019, according to CryptoCompare. It is likely the most-used cryptocurrency, not Bitcoin.

Bitfinex, Tether, and iFinex are currently battling civil charges of fraud and violating state securities law brought by New York State Attorney General Letitia James. In this case, the companies claim that James’ office has no standing to sue them as they have no New York clients. The Attorney General disputes that claim.

James’ suit said that the laws were broken when Tether secretly loaned Bitfinex as much as $700 million out of a $900 million line of credit after the cryptocurrency exchange lost $850 million to a con man.

Market manipulation accusations

The market manipulation charges have been made before.

For one thing, as reported in November 2018, the Department of Justice has investigated Bitcoin price manipulation by Bitfinex and Tether.

The most publicly detailed accusation was made in a paper published on June 13, 2018, by a pair of finance professors at the University of Texas at Austin and Ohio State University.

In their paper, “Is Bitcoin Really Un-Tethered?” UT Austin professor John Griffin and Ohio State instructor Amin Shams made two claims.

The first is that when Bitcoin prices fell below psychologically important levels—increments of $500—Tether minted USDt coins and pushed them to sister company Bitfinex. These were used to buy bitcoin, causing prices to rise.

The purchases were made primarily from two large exchanges, Poloniex and Bittrex, they said.

The second is that Tether’s USDt coins were not always backed one-to-one by a reserve of U.S. dollars, as the company originally maintained. Instead, bitcoins were sold for U.S. dollars before the end of the month. While this pushed bitcoin prices down a little, it allowed Tether to show bank statements “proving” the one-to-one reserve existed.

To stave off suspicions that its dollar reserve did not match the supply of USDt coins, Tether released end-of-month bank statements from December 2016 through March 2017, Griffin and Shims said.

Their regression-heavy, 65-page analysis of USDt transactions and BTC price increases claimed that these price changes “cannot be explained by investor demand.”

Instead, Griffin and Shims argued, their analysis found “that purchases [of Bitcoin] with Tether are timed following market downturns and result in sizable increases in Bitcoin prices.”

The 1% hypothesis

In order to show “that entities associated with the Bitfinex exchange use Tether to purchase Bitcoin when prices are falling,” Griffin and Shams mapped the Bitcoin and Tether blockchains.

The professors said that between March 1, 2017, through March 31, 2018, they found 87 one-hour periods in which large amounts of tether were minted and exchanged for bitcoin. These transactions coincided with large bitcoin price increases.

These 87 events accounted for less than 1% of the large Tether transactions over that 13-month period, they said.

Yet they “are associated with 50% of the meteoric rise in Bitcoin,” Griffin and Shams claimed.

Specifically, Bitcoin rose from about $1,190 to $7,000—a 488% return—in the time period studied, they said. Without those 87 hours, the price would have ended at $4,100—a return of 245%.

These 87 events all occurred just after large price drops that took BTC below those $500 “round-number price thresholds where the price support might be most effective,” Griffin and Shims noted.

They ended their paper by calling for more regulation of the cryptocurrency market, saying “external capital market surveillance and monitoring may be necessary to obtain a market that is truly free.”

The Tether Report

Six months earlier, on January 24, 2018, an author identifying him or herself only by a public hash also made the accusation that about half of Bitcoin’s price increase is the result of Tether and Bitfinex manipulating the market.

The much shorter Tether Report paper, “Quantifying the Effect of Tether,” is also a lot more legally cautious, expressing its findings as opinion and questions to be answered.

That said, citing “a questionable pattern of transactions,” the author comes to much the same conclusion as Griffin and Shams.

“The price data suggests that Tether may not be minted independently of Bitcoin price and may be created when Bitcoin is falling,” the author said. “[I]t also rejects the notion that Tether is not having a great influence on the Bitcoin price.”

One interpretation, the author added, is “that Tether could account for nearly half of Bitcoin’s price rise.”

It ends in much the same way as Griffin and Shams’ report, with a call for further investigation.

What is needed, the anonymous author said, is “an audit by a reputable auditor… of the highest reputation, such as one of the Big Four [accounting firms].”