(Bloomberg) -- Cryptocurrencies tumbled after New York’s attorney general cast fresh doubt on the stability of Tether, a virtual currency that plays a central role in trading on crypto exchanges around the world.
Bitcoin sank 6.4 percent to $5,145.33 at 9:55 a.m. in Hong Kong, while the value of cryptocurrencies tracked by CoinMarketCap.com dropped by about $10 billion. Tether, the so-called stablecoin at the center of an investigation by New York’s top cop, declined 1.9 percent to $0.99. It typically trades in a tight range around $1.
The companies behind Tether and Bitfinex, one of the world’s largest crypto exchanges, engaged in a cover-up to hide the “apparent loss” of $850 million of co-mingled client and corporate funds, New York Attorney General Letitia James alleged in a statement on Thursday. Executives allegedly cooked up a series of “conflicted corporate transactions” in which Bitfinex gave itself access to up to $900 million of Tether’s cash reserves, which Tether repeatedly told investors fully backed its coin one-to-one, the attorney general said.
Kasper Rasmussen, a spokesman for Bitfinex, didn’t respond to a message seeking comment. There was also no response to messages left with a Bitfinex email address for the media and an outside public-relations agency.
While skeptics have long doubted whether Tether was fully backed by reserves, markets have mostly shrugged off those concerns and treated the coin as if it were worth $1. Tether’s stability has helped it become a major part of the global cryptocurrency ecosystem, with traders using it for about 28 percent of all virtual currency transactions tracked by CoinMarketCap.com over the past 24 hours -- second only to Bitcoin.
Read more: Why Crypto Traders Are So Worried About Tether
A loss of faith in the stablecoin would be a major blow to traders who rely on it for liquidity on many of the world’s lightly regulated crypto exchanges. It would also undermine efforts by market bulls to attract institutional investment. While some large money managers and Wall Street banks have dipped their toes into the crypto world, many have steered clear because of worries about lax regulation, market manipulation and fraud.
Slower-than-expected mainstream adoption contributed to last year’s 74 percent tumble in Bitcoin, though its price has recovered somewhat in 2019. The New York investigation could put a stop to the recent rally, according to Stephen Innes, head of trading at SPI Asset Management.
“These latest allegations not only bring Tether’s credibility into question, they cast a dark cloud over the entire industry,” Innes said. “While the market remains tentatively supported above the key psychological $5,000 mark, given the waves of pessimism hitting the market this morning it wouldn’t surprise me if this major support level gives way.”
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--With assistance from Erik Larson and Olga Kharif.
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