Accused Crypto Exchange Bitfinex Moves 16% of Bitcoin (BTC) Trading Volume As Analysts Weigh in on Tether (USDT) Debacle

As the cryptocurrency market reacts to a 23-page report released by the New York Attorney General’s Office, alleging that digital asset trading platform Bitfinex has committed egregious fraud, crypto insiders are weighing in on whether or not the manner in which these allegations came to light is good, bad or terrible for the cryptosphere.

The lawsuit accuses crypto exchange Bitfinex of intentionally misleading the public. According to the report, it continued to do business with New York companies and used third-party payment processors to fulfill client requests to cash out into fiat since it had “no reliable bank that could or would work with it.”

“Because Bitfinex and Tether allow clients to deposit and withdraw U.S. dollars in exchange for virtual currency, the companies hold large sums of U.S. dollars. and must maintain relationships with banks that can reliably hold the funds and process client deposits and withdrawals, including banks that can operate in the United States and will service U.S. individuals.”

“According to documents provided to OAG by Respondents, and based on statements made by counsel for Respondents to OAG attorneys. an individual at Crypto Capital told the senior Bitfinex executive the reason that funds totaling $851 million could not be returned to Bitfinex was because the funds were seized by governmental authorities in Portugal. Poland, and the United States. Based on statements made by counsel for Respondents to OAG attorneys, Respondents do not believe Crypto Capital’s representations that the funds have been seized.”

The AG alleges that Bitfinex knew that its third-party partner Crypto Capital, which controlled $850 million in funds, was refusing or unable to process withdrawals or return funds.

The fraud included tweets, blog posts and other communications with investors to cover up serious problems.

“Similarly, on October 15. 2018. Bitfinex published a notice to the market stating that ‘it is important for us to clarify that: All cryptocurrency and fiat withdrawals are. and have been. processing as usual without the slightest interference . . . All fiat (USD. GBP. JPY, EUR) withdrawals are processing, and have been, as usual.”

The same day of the notice, a senior Bitfinex executive made an urgent plea to Crypto Capital to release the funds. He wrote “please help” to no avail.

The exchange, owned and operated by iFinex Inc., headquartered in Hong Kong and registered in the British Virgin Islands, denies any wrongdoing.

Morgan Creek Digital co-founder Anthony Pompliano puts a pin in the entire scandal and any concerns that the actions by the New York Attorney General will have a widespread or lasting impact on Bitcoin or crypto, tweeting that the news doesn’t matter.

Caitlin Long, a Wall Street veteran, crypto enthusiast, and gubernatorial appointee to the Wyoming Blockchain Task Force, emphasizes that she is “stunned” by the allegations and what she calls a double standard.

She tweeted,

“STUNNED but not surprised by news out of . I’ll let other cryptolawyers analyze it but here are two macro thoughts: (1) There’s a big double standard here. (2) Exchanges, clean up your act–cryptographically prove your solvency.

First, the double-standard. Why didn’t the NY AG throw the Martin Act at Merrill Lynch for doing something actually quite similar from 2009-12? Seriously, why the double standard??? Quoting the SEC’s press release here: https://www.sec.gov/news/pressrelease/2016-128.html… 

“The maneuver freed up billions of dollars per week from 2009-12 that Merrill Lynch used to finance its own trading activities. Had Merrill Lynch failed in the midst of these trades, the firm’s customers would have been exposed to a massive shortfall in the reserve account.”

WAIT — PLEASE STOP AND READ THAT AGAIN . It’s really important. So…Merrill Lynch commingled customer funds, used them to cover its own obligations, & had it failed its customers would have been exposed to a “massive shortfall in the reserve account.” Where was the NY AG??

But there’s MORE! Merrill held $58bn/day (!!!) of customer securities in an account subject to its creditor lien. Per the SEC, “Had Merrill Lynch collapsed at any point, customers would have been exposed to significant risk & uncertainty of getting back their own securities.”

Yeah, that Merrill stuff was pretty bad, and it paid a $415mm fine to the SEC in 2016. But the SEC handled it in a manner that didn’t spark sudden panic & customer withdrawals from Merrill. But today, went w/ the “gotcha” approach & pockets of panic seem to be ensuing.

So… did good investigative work here but needs to be called to task on why the double standard, and why the “gotcha” approach? Why not do the same to firms when they play similar shell games???

Second point– exchanges, clean up your act! You really need to voluntarily disclose (h/t ), & audited financial statements (h/t ). If you don’t, regulators, investors & litigation will force it on unfavorable terms!”

Founder and CEO of crypto investment firm Onchain Capital and host of the Crypto Trader show on CNBC Africa, Ran NeuNer says the news is positive because it will wash away bad actors. He asks how Bitfinex approved its relationship with a partner that could withhold its $850 million.

“Pardon my ignorance but how do you give a company $850m to process payments on your behalf without some real due diligence/guarantees in place?”

ShapeShift CEO Erik Voorhees says the missing millions, while bad news for Bitfinex, proves USD backing Tether did exist.

In the wake of the Attorney General’s allegations, trading on Bitfinex shot up by 284%, according to CoinMarketCap. leading to the 7th single largest day of Bitcoin transactions.

At time of writing, the flurry of trading on Bitfinex has subsided, down -71.2%.

Current Crypto Exchanges by Trade Volume
Source: CoinMarketCap
Crypto Exchanges by Trade Volume After Announcement
Source: CoinMarketCap

Trading volume tracker Bitcoinity shows that the exchange now accounts for just over 16% of Bitcoin trading volume, down from 20% immediately after the AG’s announcement.

Current Total 24-Hour Bitcoin Trading Volume
Source: Bitcoinity
Total 24-Hour Bitcoin Trading Volume After Announcement
Source: Bitcoinity

In an official response to the allegations, Bitfinex says it is cooperative and compliant, and urges the AG to assist in its recovery of the $850 million in question.

“Bitfinex and Tether have been fully cooperative with the New York Attorney General’s office, as both companies are with all regulators. The New York Attorney General’s office should focus its efforts on trying to aid and support our recovery efforts.”

According to the AG’s Office,

“Neither Bitfinex nor Tether are registered for service of process in New York.”

Bitcoin is currently down .75% to $5,250, at time of writing.

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