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PRIVATE KEY

Crypto’s next victims might be Tether traders

Tether and Bitfinex
Reuters/Dado Ruvic
Bitfinex’s parent is under investigation.
By Matthew De Silva
Published Last updated This article is more than 2 years old.

Duplicitous statements and secretive money transfers by a long-troubled bitcoin exchange could put the broader cryptocurrency markets in serious jeopardy.

Last week, New York Attorney General Letitia James announced that iFinex—the parent company of Bitfinex, an exchange, and Tether, a dollar-backed digital token—is under investigation for fraud. At issue is $850 million that disappeared from Bitfinex’s coffers in mid-2018. The funds may have been stolen while in the possession of Crypto Capital, a payments processing company based in Panama. Crypto Capital has also been tied to Quadriga, a Canadian exchange which lost $140 million a few months ago.

To continue processing customer withdrawals after its funds vanished last fall, Bitfinex allegedly dipped into cash reserves that are meant to back Tether, a move made possible because Bitfinex and Tether share a management team. According to court filings, Bitfinex quietly moved $700 million from Tether’s reserves to the exchange’s own bank accounts. The New York attorney general has ordered iFinex to cease further transfers. iFinex did not reply to a request for a comment.

As customers complained that the exchange wasn’t fulfilling withdrawal orders and questioned the company’s financial strength in October,  Bitfinex insisted it was not at risk of insolvency, calling such rumors a “targeted campaign based on nothing but fiction.” But even as Bitfinex dismissed it had a solvency crisis, the exchange may have created another. If the $850 million is never recovered, then Tether—the dollar-pegged tokens—could be worthless. Today, there is a circulating supply of 2.8 billion Tether tokens, but since the company has never released audited financial statements it’s unclear how much money iFinex has in reserve to cover the outstanding tokens. There could be a shortfall of  $700 million—or more. Because of these concerns, the price of Tether has sometimes slipped below the $1.00 mark.

After the New York attorney general’s office announced its investigation, Tether publicly proclaimed the missing $850 million has been “seized and safeguarded,” possibly by authorities in Poland, Portugal, and the US. This puzzle may seem complicated, but it’s not. For one reason or another, a lot of money—in real dollars—disappeared. They may have been stolen, and to address it, Bitfinex appears to have tried to cover one debt with another, a maneuver that could come back to bite customers.

But the bigger issue is that Bitfinex and Tether are critical components of the bitcoin ecosystem. Indeed, Tether enables cryptocurrency trading on dozens of other exchanges. Because of its dollar peg, the token is widely regarded as a stable—and essentially unregulated—crypto unit. These features make Tether especially useful on international exchanges, where crypto enthusiasts can buy and sell tokens in smaller projects.

As Tether’s price and market cap have fluctuated over the last few years, crypto analysts and academics have accused the project of manipulating bitcoin’s price. In fact, Tether may have been partly responsible for the 2017 crypto boom—though price manipulation is not clearly prohibited in cryptocurrency markets (legally, bitcoin is treated as a commodity, not a security).

For cryptocurrency buyers, Tether—and Bitfinex—are dark clouds that hang over the entire market. James, the New York attorney general, noted that neither has a BitLicense, which would permit operations in New York, although she suspects New York residents have continued to use both the exchange and the token. As the state asserts its authority, it promises to expose bitcoin’s dark underbelly. And almost perversely, as Tether traders rush to the exits, that could (briefly) push bitcoin’s price higher. On Bitfinex, bitcoin currently trades at a $200 premium over the global markets—$5,450 on Bitfinex versus $5,250 globally—possibly reflecting a higher volume of Tether outflows.

Tether’s future rests on whether the $850 million can be recovered. If the company—or the token’s dollar peg—collapses, that could hurt liquidity in the cryptocurrency markets. One consequence could be altcoin trading migrating from Tether trading pairs to bitcoin and ether trading pairs. This may increase altcoin price volatility, but be healthier for the overall crypto market.

For individual bitcoin buyers who have access to regulated exchanges, there’s little reason to mess with Tether. At best, it’s supposed to be worth $1.00—at worst, it could be a digital dump.

🔑🔑🔑

What you need to know—and why

E*trade may launch cryptocurrency trading

E-trade, an electronic brokerage platform, may add bitcoin and ether trading to its offerings, reports Bloomberg. With nearly 5 million customers, the company would have instant access to a large base of potential buyers.

Takeaway: E-trade is in search of a crypto custodian, a company to hold the digital tokens. If the brokerage company manages to list cryptocurrencies alongside securities, it will join Robinhood, a mobile-first stock trading company that added cryptocurrency trading in Feb. 2018. Wider access to the crypto markets could help stabilize the price of bitcoin. ↗️

Please send news, tips, and dark clouds to privatekey@qz.com. Today’s Private Key was written by Matthew De Silva, and edited by Oliver Staley. Excellence is to do a common thing in an uncommon way.

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