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Tether and Bitfinex have been center of attention for more than a week, following the news that New York State Attorney General is suing the parent company iFinex for engaging in a cover-up to hide the apparent loss of $850 million of co-mingled client and corporate funds.
Both Tether and Bitfinex claim they are "financially strong" and that the "court filings were written in bad faith and are riddled with false assertions." Moreover, Tether said that the amounts "are not lost but have been, in fact, seized and safeguarded."
Bitfinex has since revealed that Tether is only 74% backed by cash and that it is simultaneously addressing requests from NYAG, DOJ and CFTC. A related SDNY indictment charged two individuals with multiple felonies including bank fraud, one of whom is now described as a “serious flight risk.”
Tether has had a long and complicated history. It was co-founded as 'Realcoin' by Brock Pierce, Reeve Collins and Craig Sellars in early 2014 and the company was allegedly based in Isle of Man and Hong Kong. Tether's connection to Bitfinex was undisclosed and not known until early 2017 when Bitfinex's international wires got cut off by Wells Fargo and Tether joined the lawsuit against Wells Fargo.
In August 2017, Bitfinex spokesperson said that "Bitfinex does not own Tether" and that it is a sister company with a minority percentage (about 30%) of overlap in shareholders. The Paradise Papers leaks in November 2017 named Bitfinex officials Philip Potter and Giancarlo Devasini as responsible for setting up Tether Holdings Limited in the British Virgin Islands in 2014. It is now known that the parent company iFinex controls both Bitfinex and Tether.
Tether grew because it provided a a much-needed option for exchanges that struggled with establishing banking partnerships but needed fiat on/off ramps. In order to stay ahead of the curve, Tether used 'cat and mouse' tricks with banks by setting up shell companies and working with crypto-native payments processors. Whenever a bank account got closed, they simply opened a new one under a new shell company.
Even though Tether promised frequent audits to verify its reserves, it never provided one claiming that getting an audit was unattainable. Cameron Winklevoss confirmed that it's currently impossible to perform a stablecoin audit because "there is no financial report framework with regard to audit conformity." In its five-year history, Tether released three third-party attestations - one done by an auditing firm, one by a law firm and one by one of Tether's banks - confirming Tether did have corresponding reserves at one time.
The Tether saga is hard to keep up with, so The Block has compiled a chronological summary of the most important events in its five-year history.
The precursor to Tether, Realcoin, is announced by co-founders Brock Pierce, Reeve Collins and Craig Sellars. The company is based in Isle of Man and Hong Kong (July 2014)
"Realcoin will be completely transparent, safe, secure and insured. Every dollar that is held in our reserve will be represented by one coin in circulation and can be redeemed at any time. The one-to-one reserve will be fully auditable."
Realcoin rebrands as Tether to avoid altcoin association and opens private beta. Tether also announced an agreement with Bitfinex for the first time. (November 2014)
"Reeve Collins, CEO of Tether, indicated that the number of Tether tokens in circulation will always equate to the dollars in its bank account, adding that there are no pegs or formulas that complicate the process for its partners."
Bitfinex enables trading of Tether for its customers (January 2015)
"Each Tether is backed 1-to-1 by its corresponding currency, which can be viewed and verified in real-time via the Tether.to website and on the Blockchain. Tether will be fully transparent and audited to demonstrate 100% reserves at all times."
Bitcoin worth $400,000 stolen from Bitfinex (May 2015)
"Bitfinex’s hot wallet has been compromised. The hack may have resulted in the loss of only 0.5% of the total funds, however, according to the exchange."
Bitcoin worth $72 million stolen from Bitfinex. Bitfinex creates BFX tokens to represent the socialized losses and promises to redeem BFX tokens at face value ($1 each) as soon as they can. (August 2016)
"It is our full intention to redeem all BFX tokens for their face value of $1. In order to redeem these tokens, we are exploring several options: (1) the recovery of the stolen coins; (2) outside investment in Bitfinex; (3) operating our trading platform with periodic redemption of the tokens issued and outstanding; (4) exchanging BFX for equity in Bitfinex."
Tether says in its Terms of Service that there is no contractual right to redeem or exchange tethers for money. Spokesperson said that this is because “there may be circumstances out of Tether’s control where the funds can be frozen.” (2017)
"There is no contractual right or other right or legal claim against us to redeem or exchange your Tethers for money. We do not guarantee any right of redemption or exchange of Tethers by us for money. There is no guarantee against losses when you buy, trade, sell, or redeem Tethers."
Bitfinex redeems 100% of all outstanding BFX tokens, which were issued after $72 million was stolen from Bitfinex (April 3, 2017)
"A combination of factors has led to this seminal moment for Bitfinex, including a dramatic uptick in equity conversions; record operating results in March; and, the decision to reduce our reserves in favor of this opportunity."
All incoming international wires are blocked and refused by Taiwanese banks and Wells Fargo (April, 2017)
"All incoming international wires to Tether have been blocked and refused by our Taiwanese banks. As such, we do not expect the supply of tethers to increase substantially until these constraints have been lifted."
Bitfinex sues Wells Fargo for blocking its international wires but then dismisses the lawsuit a week later, presumably to buy time (April 12, 2017)
"We voluntarily dismissed our case, accepting the court’s decision, and find that we’re best served focusing our efforts on existing and developing relationships. We’re preparing an announcement that should be out in the near term and will be delving into the matter in greater detail in a later post."
Tether breaks peg for the first time, trading at a 10% discount amid losing international wires (April 24, 2017)
"Users that are in a hurry to receive their USD holdings may prefer to sell USDT at a loss than wait. Not only that, but the cryptocurrency community has also “learned its lesson” from the Mt. Gox disaster."
Tether grows from $7 million in circulation to $320 million in seven months (January - July 2017)
Tether releases the first attestation (done by Friedman LLP), which confirmed that Tether had corresponding USD reserves of $443 million on Sept. 15, 2017 (September 2017)
"Friedman LLP has been engaged to perform historical balance sheet audit procedures for Tether Limited. However, as the amount of Tethers in circulation has increased substantially in recent months, we have also asked Friedman to analyze our bank balances and our issued and outstanding token balance on an interim basis."
$30 million of USDT has been stolen but the funds were later recovered via an emergency fork and the address was blacklisted (November 2017)
"Tether and Bitfinex have insisted that the two operations are separate. But leaked documents known as the Paradise Papers, which were made public this month, show that Appleby, an offshore law firm, helped Mr. Potter and Mr. Devasini, the Bitfinex operators, set up Tether in the British Virgin Islands in late 2014."
Tether grows from $440 million in circulation to $2.3 billion in three months (November 2017 — January 2018)
Tether confirms its relationship with auditor (Friedman LLP) has dissolved (January 2018)
"Given the excruciatingly detailed procedures Friedman was undertaking for the relatively simple balance sheet of Tether, it became clear that an audit would be unattainable in a reasonable time frame."
CFTC subpoenaed both Tether and Bitfinex in order to investigate whether USDT actually had the reserves they claimed to have (January 2018)
"We routinely receive legal process from law enforcement agents and regulators conducting investigations. It is our policy not to comment on any such requests."
Bitfinex and Tether are banking with Noble Bank of Puerto Rico (May 2018)
"According to three people with knowledge of the matter, Noble Bank International, based in San Juan, Puerto Rico, took over banking duties for Bitfinex last year."
Phil Potter, CSO of Bitfinex and Tether leaves both companies (June 2018)
"As Bitfinex pivots away from the U.S., I felt that, as a U.S. person, it was time for me to rethink my position as a member of the executive team."
Tether releases the second attestation (done by a law firm Freeh, Sporkin & Sullivan), which confirmed that Tether had corresponding USD reserves of $2.5 billion on June 1st, 2018 (June 2018)
"In the face of some recent coverage, we have stood by the fact that all circulating USD Tethers are backed by USD reserves, and we are pleased to be able to present independent verification of this. We are by no means finished with our transparency efforts at Tether."
Bitfinex separates from its previous banking partner Noble Bank (October 2018)
"Noble’s troubles appear to be tied to the firm losing Tether as a client, according to people familiar with the situation. Tether, the entity behind the stable coin of the same name, was one of a number of big clients the bank has lost."
Bitfinex and Tether appear to be banking with HSBC through a private account of Global Trading Solutions (October 2018)
"The news that Bitfinex has secured a major banking partner in HSBC, if they are aware of and supportive of the private account, would calm nerves in the cryptocurrency ecosystem."
Bitfinex loses bank account with HSBC, suspends all fiat deposits but claims that it is not insolvent (October 2018)
"Bitfinex has paused all USD deposits and “expects the situation to normalize within a week”. In response to broad speculation around the company’s banking relationships and financial stability last weekend, the company had issued a press release stating: “Bitfinex is not insolvent.”"
Tether trades at a 10% discount as concerns over banking relationships increase (October 2018)
"Market observers are speculating about a run on Tether as its price is nearing $0.92 on Kraken after trading for less than $0.99 for a week."
Bitfinex says that publicly sharing its banking details "could damage not just yourself and Bitfinex, but the entire digital token ecosystem" (October 2018)
"Divulging this information could damage not just yourself and Bitfinex, but the entire digital token ecosystem. Accordingly, you are cautioned that there may be serious negative effects associated with this information becoming public."
Bitfinex and Tether are banking with Deltec Bank in the Bahamas (October 2018)
"Tether is holding reserves at Bahamas-based Deltec Bank, several people familiar with the situation told The Block. The banking relationship between Tether, the company behind the stable coin of the same name, and Deltec Bank was struck in recent weeks."
Tether releases the third attestation (done by Deltec Bank), which confirmed that Tether had corresponding USD reserves of $1.8 billion on Nov. 1, 2018 (November 2018)
"The letter, which Tether published Nov. 1, stated — albeit with a prominent disclaimer — that the company held an account at the bank, and that the account’s balance as of Oct. 31 was over $1.8 billion, enough to back all the USDT tokens in circulation 1-for-1."
Bitfinex starts using payment processor Crypto Capital and increases minimum wire fee (November 2018)
"Increasing the minimum fee, therefore, seems to relate to the recent difficulties Bitfinex and its payment processor, Crypto Capital, have had with processing both U.S. dollar and euro withdrawals. In the last two months, Bitfinex customers reportedly experienced long delays before receiving withdrawals, some more than a month."
The U.S. Department of Justice (DoJ) is investigating whether Bitcoin rally in 2017 was driven by manipulation involving Tether (November 2018)
"Some traders — as well as academics — have alleged that these Tethers are used to buy Bitcoin at crucial moments when the value of the more ubiquitous digital token dips. JL van der Velde, the chief executive officer of Tether Ltd. and Bitfinex, has previously rejected such claims."
Bloomberg confirms that Tether essentially had a dollar for every USDT on the market (December 2018)
"As Tether grew into a multibillion-dollar engine of the cryptocurrency market, skeptics kept warning that the digital coin, whose main selling point is that it’s pegged to the dollar, wasn’t actually backed by an enormous pile of cash. Bank statements reviewed by Bloomberg News suggest those fears may be unfounded."
Tether quietly updates its collateral breakdown, which includes ‘cash equivalents’ and third-party loans (March 2019)
"The company now claims that each coin is backed by “reserves, which include traditional currency and cash equivalents and, from time to time,…other assets and receivables from loans made by Tether to third parties."
NY Attorney General sues Bitfinex and Tether to unearth “fraud being carried out” by the firms (April 2019)
"The 23-page document, dated April 24, states that the NYAG’s office has reason to believe several New York-based traders transact on the firm’s platform, despite Bitfinex saying it would no longer cater to clients there in 2018. It said the AG has an investigation underway to expose “ongoing fraud being carried out by Bitfinex and Tether,” and has issued a request for any documentation tied to Bitfinex users in the state of New York."
Bitfinex CEO tells customers the NYAG lawsuit is “filled with inaccuracies and false assertions” (April 2019)
"He claims that Bitfinex and Tether were “co-operating fully with New York authorities” in the inquiry and that the lawsuit and related materials were “filed without notice to [Bitfinex and Tether] or a chance to respond to them.” van der Velde continues with an assurance to traders that the allegation of a loss of $850 million is “categorically false.”"
Bitfinex CFO assures shareholders the $851 million in missing funds will be released in a “few weeks” (April 2019)
"Giancarlo Devasini, Bitfinex’s chief financial officer, personally assured Zhao that this is a temporary situation, Zhao said. Indeed, Devasini told him that the exchange “need[s] a few weeks and the funds will be unfrozen.”"
Bitfinex reveals Tether is only 74% backed by cash, says it’s ‘simultaneously addressing’ requests from NYAG, DOJ and CFTC (April 2019)
"Hoegner wrote that Tether currently has cash or cash equivalent of around $2.1 billion, representing around 74% of its current outstanding stablecoins. The remaining 26% is held by Bitfinex, the crypto exchange that was charged by the New York Attorney General’s office for draining $700 million from Tether to cover its alleged $850 million loss."
SDNY indictment charged two individuals connected to Crypto Capital with multiple felonies including bank fraud (May 2019)
"The links to Fowler also go beyond the U.S. border. Fowler co-owns the two Portuguese companies through which, as reported earlier by The Block, Crypto Capital processed fiat withdrawals for Bitfinex."
Bitfinex plans to raise as much as $1 billion through an IEO, shareholder says (May 2019)
"There will be a minimum buy-in of $1 million, and a total supply of 1 billion tokens, available for $1 each, Zhao wrote. He further claimed that $500 million has already been subscribed. “Only qualified foreign investors will be allowed to invest,” he wrote, and they must make a “soft” commitment to the sale by Sunday."
Reginald Fowler, the man charged by SDNY with multiple felonies including bank fraud is described as a “serious flight risk” (May 2019)
“Defendant has access to millions of dollars in bank accounts around the world. The government, through email search warrants, has obtained a document entitled “Master US Workbook,” which details the financial operations of the scheme as of January 2019. This workbook indicates that the scheme had received over $740 million in 2018 alone. It lists approximately sixty different bank accounts, held at both domestic and international banks, with a combined account balance of over $345 million as of January 2019.”