Analysis of the Tether/Bitfinex NYAG Settlement

Bitfinex and Tether have settled with the New York Attorney General. The settlement document can be found here. (My copy) Many seem to find the document exculpatory, but I find it damning. 

As I have discussed previously, Bitfinex and Tether are dishonest and we are now getting a better view into just how dishonest they are. 

I do not feel that having the lion’s share of your backing in a commingled account of another company counts as traditional currency held in reserve, and specifically Tether did not see it as that either, treating it as a ‘receivable’ on their books. 

When Tether hired Friedman LLP to audit their book, Tether chose the day that the verification would be performed and chose September 15th, the day they finally opened an account at Noble Bank (again cofounded by their cofounder). On that day Tether and Bitfinex transferred the money out of Bitfinex’s account and into Tether’s and the verification was done at 8 pm. No verification would be completed again until one of the executive directors at the same IFE would later help attest to their reserves. 

Further into 2017 and 2018 Bitfinex started to depend more and more on Crypto Capital Corp. This third party payments processor who is implicated in money laundering for the Colombian Cartels eventually held over $1 billion worth of commingled client and corporate funds for Bitfinex and an unknown amount for Tether as well. In July of 2018 this totaled over 80% of Bitfinex’s customer funds. The Crypto Capital principals have been arrested or are currently fugitives, and Bitfinex likely still lacks access to Crypto Capital funds.

I have previously discussed the conflicted transactions between Bitfinex and Tether that I believed to have started in November of 2018. These transactions actually began much earlier in the summer of 2018, and means that Tether was effectively insolvent again starting in the summer of 2018. This means optimistically their period of solvency lasted from September 15th 2017 until the summer of 2018. 

I have previously discussed the Deltec letter on November 1st purporting again to show Tether solvency. The day after that on November 2nd Bitfinex began raiding that account. This again left Tether effectively insolvent. Optimistically they were solvent from October of 2018 when Bitfinex redeemed the Tethers until November 2nd 2018.

Bitfinex famously tried to claim that their Crypto Capital funds were not lost, but were instead ‘seized and safeguarded’. They had no reason to believe these funds would ever be under their control again.

So what do we do with this information? First let’s summarize what we know about their solvency and insolvency:

The first Tethers are issued on October 6th 2014. The first verification of reserves we get is on December of 2016. There is no verification before that. We get monthly attestations then on January, February, and March of 2017. In March of 2017 they lost banking and as we discussed above are known to be insolvent until September 15th of 2017. Then we have no verification until June of 2018 when we get a report from FSS. In August of 2018 Bitfinex began raiding the Tether accounts and they were again insolvent. This was true until November 1st where they appeared to again be solvent for a single day until Bitfinex raided the account again. Since then there have been no verifications of reserves.

To summarize:

  1. From October 2014 till December 2016 there is zero verification.

  2. From December 2016 until March 2017 there is monthly attestations that suggest Tether is solvent.

  3. From March 2017 until September 2017 Tether is effectively insolvent.

  4. On September 15th funds are transferred out of Bitfinex’s account and it appears Tether is solvent.

  5. The next verification of Tether funds comes in June of 2018 when one of the executive directors of Noble Bank seems to confirm they have the assets needed to reserve Tether.

  6. In August of 2018 Bitfinex begins raiding the Tether accounts and they are again insolvent.

  7. On November 1st 2018 Tether appears to be solvent for a single day.

  8. On November 2nd 2018 Bitfinex again raids Tether accounts.

  9. There is no evidence of solvency beyond that point.

So what does this settlement actually require from Bitfinex and Tether? The following:

  1. Tether and Bitfinex will pay an $18.5 million fine.

  2. They will need to show they are taking steps to prevent NY traders.

  3. Each quarter Tether will need to show the NYAG their reserves.

  4. Tether and Bitfinex cannot share bank accounts, and client and corporate funds need to be appropriately segregated (they have continually struggled with this)

  5. Bitfinex and Tether must provide a list of all payment processors they have used to the NYAG

  6. Bitfinex and Tether must notify users when their deposits or withdrawals will be handled by a payment processor

If Bitfinex and Tether violate any part of the settlement then the NYAG is free to pursue them again.

This document revealed to me shocking inadequacies in corporate controls, management of reserves, and seems to show a pattern of corporate malfeasance.

To see the original post please go here: https://bennettftomlin.com/2021/02/23/analysis-of-the-tether-bitfinex-nyag-settlement/