Fake Tethers under fake bitcoins.

Bitfinex tells court Tether invested part of dollar reserves in Bitcoin

The revelation came in an attempt to dismiss a fraud and securities law violation suit brought by New York State Attorney General Letitia James

The Tether stablecoin is backed in some part by bitcoins. David Miller, an attorney for Tether’s sister firm, cryptocurrency exchange Bitfinex, revealed in court last week that Tether has invested “a small amount” of the reserve dollars backing the tethers (USDt) in bitcoins (BTC). He added that the company had also invested in other undescribed assets.

Tether Watch

This means the tether stablecoin used to protect against volatility in 80% of all bitcoin trades is in part backed by volatile bitcoin.

The disclosure was made during a May 16 hearing pitting Tether, Bitfinex and their Hong Kong-based parent company iFinex against New York State Attorney General Letitia James, according to a transcript obtained by The Block.

James’ office and iFinex are battling over the terms of an injunction preventing Tether from moving more of the dollar reserves backing its stablecoin into non-fiat investments. On April 24, James office revealed that Tether had loaned sister company Bitfinex $625 million out of a $900 million line of credit extended after Bitfinex lost access to $850 million it had entrusted to payment processor Crypto Capital.

James’ office has called the loan a conflict of interest, fraud, and in violation of New York securities law. After the May 16 hearing, Judge Cohen continued a ban on Tether loaning any more dollars to Bitfinex. Nor can either company distribute those reserves to corporate leaders or owners.

The revelation of the investment in very unstable bitcoin seemed to shock New York State Supreme Court Judge Joel Cohen, who said, “Tether sounded to me like sort of the calm in the storm of cryptocurrency trading. And so if Tether is backed by bitcoin, how is that consistent? If some of your assets are in a volatile currency that Tether is supposed to somehow modulate, that seems like it’s playing into what [the Attorney General’s office is] saying.”

The ruling Judge Cohen issued on May 16 said that the charge that the loan may have violated New York’s Martin Act securities law had “a likelihood of success on the merits.”

Tether coins were backed 1-to-1 with U.S. dollars until earlier this year, when Tether quietly noted that it might invest in non-dollar assets including loans. Details of the Bitfinex loan were only revealed by the Attorney General’s injunction.

Bitfinex CTO Paolo Ardoino said on Twitter Wednesday that on May 16, Tether owned 0.076 BTC (worth about $560 at the time) that it uses to pay mining fees, which are paid in bitcoin. He gave the wallet address, and added, “Tether has [more than $35 million] in shareholder equity, so could even buy a horse without having to communicate it.”

That wallet—1NTMakcgVwQpMdGxRQnFKyb3G1FAJysSfz—has had 543 transactions since November 26, 2017, with a total received of slightly more than 0.2 bitcoin, according to Bitcoin Who’s Who.

Of course, quite a few people replied to Ardoino’s tweet by noting that saying Tether had that much bitcoin in one wallet on one day was hardly the same thing as revealing the size and scope of its entire bitcoin holdings over time.

None of your business

Beyond the revelations of Tether’s bitcoin investments, lawyers for both Tether and Bitfinex asked Cohen to dismiss the case, arguing that the New York Attorney General has no jurisdiction over a company that bans clients from New York, and indeed from the entire United States, as well as having no business interests in New York.

In a May 21 filing, iFinex attorney Stuart Hoegner noted that Tether banned U.S. customers on November 23, 2017. Bitfinex banned New Yorkers on January 30, 2017 and all Americans in August 2018. To exchange USDt for fiat currency requires a verified Tether account that New Yorkers cannot open.

“To the extent that tether may be traded on platforms in the United States, any such trading is part of a secondary tether market over which Bitfinex and Tether have no control and which is independent of the business of Bitfinex or Tether,” Hoegner said.

Making up for a fortune lost

The heart of the case James’ office has brought against iFinex, Bitfinex, and Tether revolves around that missing $850 million, which Bitfinex says was seized by governments of the U.S., Portugal, and Poland. New York Attorney General James’ office believes it is lost.

Bitfinex lost access to the $850 million after entrusting it to payment processor Crypto Capital. The U.S. Justice Department has seized at least $50 million, and alleges Arizona businessman Reginald Fowler has another $295 million spread out in banks around the world. It adds that Fowler stole at least $60 million.

Bitfinex turned to Crypto Capital to process dollar payments to clients withdrawing money from their accounts after losing access to mainstream banks. Crypto Capital in turn ran the money through bank accounts opened fraudulently by Fowler, the Arizona U.S. Attorney’s office alleges.

Earlier this month, iFinex raised $1 billion in a private sale of a new exchange token called the LEO. Each LEO will be worth 1 USDt, and the proceeds would allow Tether to replenish its dollar reserves, which currently only cover 74% of the outstanding tether coins.

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Leo Jakobson, Modern Consensus editor-in-chief, is a New York-based journalist who has traveled the world writing about incentive travel. He has also covered consumer and employee engagement, small business, the East Coast side of the Internet boom and bust, and New York City crime, nightlife, and politics. Disclosure: Jakobson has put some 401k money into Grayscale Bitcoin Trust.