Bitfinex Covered $850 Million Loss Using Tether Funds, NY Prosecutors Allege

The New York Attorney General's office has alleged that crypto exchange Bitfinex lost $850 million and subsequently used funds from affiliated stablecoin operator Tether to secretly cover the shortfall.

According to the statement, Bitfinex sent $850 million of customer and corporate funds to Crypto Capital Corp., a payment processor that is said to be holding funds from other exchanges as well, such as QuadrigaCX. Funds from Tether's reserve were used to make up the shortfall, but neither the loss nor Tether's fund movements were disclosed to customers.

According to a filing attributed to assistant Attorney General Brian Whitehurst, the probe began sometime in 2018 and appeared to have been driven because, despite claims to the contrary, "OAG has reason to believe that Bitfinex still allows New York-based individual investors to deposit, trade, and withdraw virtual currencies. and engage in other transactions. on the Bitfinex trading platform."

According to the AG's office, the inability to access the $850 million in customer/corporate funds - which was blamed on payment processor Crypto Capital, according to the documents - impaired Bitfinex's ability to process withdrawal requests.

Representatives for Bitfinex and Tether told the AG's office that a Bitfinex official was told the reason the $851 million couldn't be access was because Portuguese, Polish and American government officials had "Seized" the funds.

It was during this situation that Bitfinex and Tether began to discuss a way for Bitfinex to tap funds held in reserve to back the USDT token.

"Counsel's disclosures at the February 21 meeting raised serious questions about the viability of Bitfinex as an ongoing concern, the possibility that Tether's cash reserves would be dissipated and unrecoverable, and whether Bitfinex and Tether have misled their clients regarding the matters described above," Whitehurst said.

The coming weeks would see the AG's office continue to seek information from Bitfinex and Tether, including data on tether issuances and documents supporting their claims regarding the $850 million loss.

Bitfinex, in turn, caused a total [of] $625 million to be transferred from Bitfinex's account at Crypto Capital to Tether·s account at Crypto Capital, through a ledger entry at Crypto Capital crediting Tether·s account in the amount of $625 million and debiting Bitfinex ·s account by a corresponding amount.

"On March 27, 20 19, Bitfinex and Tether initiated a transaction debiting $625 million previously credited to Tether's account at Crypto Capital.