As Tether customers pull money out, it wants some of its remaining dollars to be put to use instead of sitting in a bank, according to its attorneys.
The company has asked a judge to give it access to the remaining $2.1 billion U.S. dollars in the reserves backing its stablecoin so it can invest it to make money, its lawyer said in a court filing Sunday.
Tether has already loaned its sister company Bitfinex, the cryptocurrency exchange, more than $700 million from those reserves, according to New York State Attorney General Latitia James, who on April 24 got an emergency injunction preventing it from loaning Bitfinex any more money, or from drawing down its reserves.
The filing also revealed that Bitfinex customers have pulled $355 million out of the troubled exchange since word broke on April 24 that it has lost $850 million, at least in part to government seizures. Some $170 million worth of bitcoin and $165 million worth of ether have been withdrawn in that time, according to iFinex, which owns both companies.
Those were only two of the eyebrow-raising disclosures that iFinex made in its May 5 filing asking a judge to revoke that injunction. At a hearing on May 6, Judge Joel Cohen declined to lift the injunction which he called “vague, open-ended and not sufficiently tailored”, but ordered the two parties to try to come to an agreement limiting its scope, CoinDesk reported.
In another argument in his May 5 filing, iFinex attorney Charles Michael’s, a partner at Steptoe & Johnson, wrote that Bitfinex does not have any legal requirement to tell its customers about facts “they would find material”—like losing $850 million or yanking more than $700 million out of the U.S. dollar funds Tether uses to back its stablecoin.
The latter is one of the three main arguments made in the May 5 filing asking a New York State Supreme Court judge to let it access the $900 million line of credit Tether provided. Bitfinex wants to use that money to fund day-to-day transactions.
As for Tether, the idea that it may not be planning on keeping its fiat billions in the bank is made clear by an argument it made in asking for the freeze on its reserves to be lifted. Specifically, Michael wrote, the injunction, “means that Tether must hold its $2.1 billion cash (and equivalent) reserves as is, without deploying those funds for any investment or other useful purpose, for the indefinite future.”
While the filing makes the point that the new reserves statement released in March made clear that it could loan money to affiliated companies, its wording also gives Tether wide leeway to use its cash hoard as it sees fit.
It reads, in part: “Every tether is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties [our emphasis] which may include affiliated entities (collectively, ‘reserves’).”
Tether said in an earlier filing its remaining $2.1 billion reserves amount to 74% of the value of its outstanding tether stablecoins. At press time, CoinMarketCap put the market capitalization of Tether at $2.77 billion, making it the eighth-largest cryptocurrency by that metric. CoinMarketCap has excluded Bitfinex from its average price calculation for Bitcoin, according to a very subtle asterix on the exchange’s page.
In its court filing, Michael argued that Bitfinex had no duty to tell customers it lost control of $850 million. He said the same about Tether telling them it had loaned out up to $900 million of the reserve of U.S. dollars backing USDT stablecoin.
“[T]he Attorney General faults Bitfinex and Tether for (1) having ‘failed to disclose the loss of over $850 million’ in connection with the Crypto Capital deposits, and of (2) engaging in an ‘undisclosed, conflicted’ transaction that their customers ‘would find material.’ Neither of these amounts to fraud,” Michael wrote in the filing. “[C]ustomers of Bitfinex and Tether, who are not investors, [are] not entitled to disclosure as if they were.”
Second, no USDT holder has been harmed, he argued, adding that “[t]his is particularly so because the details of the line of credit transaction are now fully public. Holders of tether are doing so with eyes wide open.”
Third, the emergency preliminary injunction harms Bitfinex and Tether customers instead of protecting them, he wrote. James’ argument that the injunction “does not prevent Bitfinex from engaging in the regular course of its business” is misleading, Michael argued. “Bitfinex negotiated for the line of credit because it needs the ‘liquidity for normal operations.’ For its part, Tether has a keen interest making sure that Bitfinex, as a dominant platform for Tether’s products and known affiliate, can operate as normal.”
The filing goes on to claim that the Attorney General is also wrong to argue that fiat-backed stablecoins are securities under the Martin Act, which gave her the jurisdiction to act. While neither the Securities and Exchange Commission (SEC) nor Commodity Futures Trading Commission (CFTC) have yet to make that determination, there is reason to believe they may, attorneys Benjamin Sauter and Jake Chervinsky of Kobre & Kim LLP wrote in a column for CoinDesk a few days ago.
It also makes some rather dense legal arguments about whether precedent and the conditions of the case supported the court’s original decision to grant an Ex Parte Order, which is basically a preliminary injunction issued when there is not time for a hearing.
In the May 6 hearing, Judge Cohen pointed out that iFinex argues in its filing that banks don’t have all of their money instantly available in reserve accounts, according to CoinDesk. He added, “I also recognize that you’re not banks, you’re not heavily regulated.”