New York's Attorney General Letitia James has filed a lawsuit against iFenix inc., the owner and operator of the Bitfenix cryptocurrency exchange and Tether, the company behind the stablecoin of the same name, for allegedly covering up fraudulent activity.
James has accused Bitfinix of covering up the "apparent loss of $850 million" of commingled client and corporate funds in a press release accompanying the filing.
What this means is that the crypto trading platform has failed to inform authorities that it allegedly lost close to a billion dollars of its customers money and then tapped into the reserve cash of Tether, the stablecoin it effectively owns in order to replace it in the hope that the State of New York wouldn't notice.
James alleges that in order to cover up these apparent losses, Bitfinix tapped into the reserve funds of Tether to meet the withdrawal demands of its customers and the coin, according to The Wall Street Journal, is used to conduct "about 80% of all Bitcoin trading".
"Bitfinex gave itself access to up to $900 million of Tether's cash reserves, which Tether for years repeatedly told investors fully backed the tether virtual currency '1-to-1,'" read the release. "According to the filings, Bitfinex has already taken at least $700 million from Tether's reserves."
Bitfinix posted a response on its website today in response to the allegations made by James, who also in the court order told Bitfinix to cease accessing Tether's reserve funds until the investigation was over.
"The New York Attorney General's court filings were written in bad faith and are riddled with false assertions, including as to a purported $850 million 'loss' at Crypto Capital," read Bitfinix's announcement. "On the contrary, we have been informed that these Crypto Capital amounts are not lost but have been, in fact, seized and safeguarded... and have been actively working to exercise our rights and remedies and get those funds released."
Tether has marketed itself on being a stablecoin, that is to say it has a 1:1 value to a real (fiat) currency - one tether coin is equal to one dollar. If James's allegations of the exchange hold true, owners of Tether will be distraught as the valuation of the coin, which traders rely on for market liquidity, would plummet and the long-questioned monetary backing of Tether would be answered.
Despite scepticism surrounding Tether's reserve backing, exchanges and traders have turned a blind eye, treating the coin as they would a dollar. Because of the large uptake in the coin's adoption, Tether has cemented itself in the cryptocurrency ecosystem.
If the allegations are true and that Bitfinix has been covering up Tether's reserve backing, it would be treated as business fraud in the UK which, depending on the scale of the case, could warrant criminal prosecution.
The court filing has also had a knock-on effect on all cryptocurrencies in existence; according to CoinMarketCap.com, the cryptos it tracks dropped $10 billion in combined valuation. Bitcoin dropped 6.4% to $5,143 and Tether dropped 1.9% to $0.99 - the coin usually trades in a tight range around $1.
