Once the world’s largest crypto exchange, Bitfinex stirs controversy

Image: Reuters/Dado Ruvic
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This week, economics researchers updated a 2018 paper in which they argue bitcoin’s price was artificially inflated during 2017. John Griffin, a professor of finance at the University of Texas, and Amin Shams, an assistant professor at The Ohio State University, suggest a single massive trader influenced bitcoin’s ascent to $20,000, buying up the cryptocurrency at regular intervals using another digital unit called US Dollar Tether (USDT).

For mom-and-pop bitcoin investors, the assertion holds importance because it speaks to the close relationship between USDT and Bitfinex, at one time the world’s largest crypto exchange. USDT tokens are meant to represent dollars held in a bank account and they are issued by a company called Tether, a Bitfinex affiliate. Thus, if USDT were used to pump bitcoin’s price on Bitfinex, it might appear the exchange engaged in self-dealing. At least, that’s what Griffin suggests:

“If it’s not Bitfinex, it’s somebody they do business with very frequently,” he told the Wall Street Journal (paywall).

After the researchers published their latest findings, Bitfinex’s general counsel Stuart Hoegner called their work “flawed.”

“Tether is profoundly successful simply because it is liquid, stable and redeemable,” he said in a statement provided to Quartz. “Macroeconomic experts and stakeholders in the cryptocurrency ecosystem understand that it is the global rise of digital currency that has driven the markets and demand for Tether.”

It would be great to take comfort in Hoegner’s assurances that everything is kosher, but it seems there’s still some trouble afoot.

Today, Bitfinex is nowhere near the top of its game—its 24-hour trading volume is just about $66 million according to LiveCoinWatch. By comparison, over the same period, the Binance exchange has processed $1 billion worth of trades, OKEx’s volume is $824 million, and Huobi’s $746 million. (Note: It’s difficult to ascertain how much is this is human versus bot trading.)

But even while Bitfinex has a much lower profile than in years past, Tether still boasts a $4 billion market capitalization, making it the fifth-largest cryptocurrency worldwide. And while the Bitfinex/Tether’s management team claims each USDT is backed by equivalent reserves, the group has yet to release a reliable audit of its cash holdings.

If USDT circulates without backing that would mean the digital tokens aren’t actually worth their $1 peg. Such a revelation could have a calamitous effect on crypto trade worldwide as USDT remains an extremely popular currency to trade on many exchanges. Bitfinex and Tether did not answer Quartz’s inquiry about whether they ever issued USDT without equivalent reserves in a bank account. For the average bitcoin investor, USDT’s importance is difficult to overstate. It is the grease on the wheel of crypto trade. Without it (or if people lose faith in the token’s reserve backing), liquidity could quickly dry up, sending cryptocurrencies into a downward spiral once again. As such, legal cases related to Bitfinex and Tether are of the utmost concern.

At present, at least four people with loose ties to Bitfinex are under the gun. All were allegedly involved in some capacity with Crypto Capital, a payment-processing company that provided service to the exchange.

Late last month, Polish authorities reportedly detained Ivan Manuel Molina Lee (link in Polish), Crypto Capital’s president, whom they suspect of laundering as much as 1.5 billion złoty ($390 million), including funds for Colombian drug cartels. Additionally, a filing was unsealed in a federal court in Manhattan on Oct. 23, revealing that Oz Joseph (aka “Oz Yosef”), another Crypto Capital executive, was indicted on a series of charges including bank fraud.

In April, a grand jury indicted a third man, Reginald Fowler, on charges of bank fraud and operating an unlicensed money transmitting business, as well as conspiracy to commit both. Citing unnamed sources, Bloomberg reported in May that Fowler had direct ties to Crypto Capital. Fowler ran another company (Global Trading Solutions LLC) that provided services to Crypto Capital’s parent company, according to Amy Castor, a longtime crypto reporter. Ravid Yosef, an Israeli woman, faced accusations alongside Fowler. (It appears Ravid and Oz Yosef are siblings, Castor also has reported.)

Amid the legal wrangling—which entails Bitfinex accusing Crypto Capital of defrauding it of at least $800 million—the exchange and Tether are under investigation by the New York Attorney General’s office for a potential cover-up. The office declined to comment on the arrest of Molina Lee, the indictment of Oz Yosef, the charges against Reggie Fowler (who’s out on bail), or the research indicating price manipulation between USDT and bitcoin.

Satoshi Nakamoto could not be reached for comment.

Bits & Pieces

  • Facebook comparing Libra to the open internet rings hollow (VentureBeat)
  • Lawyer made millions laundering money in crypto scam, US says (Bloomberg)
  • China’s leaders have embraced blockchains—er, minus the decentralized bit (MIT Tech Review)
  • Calibra’s David Marcus speaks at NYT Dealbook Conference (CNBC)
  • Hong Kong regulator sets out rules for crypto exchanges to get licenses (Reuters)
  • European Union to regulate stablecoins, not issue its own (CoinDesk)

Please send news, tips, and animal spirits to Today’s Private Key was written by Matthew De Silva and edited by Mike Murphy. To contemplate is to look at the shadows.