USDT trust collapses again, expert: long-term may lead to complete collapse

But this is not a failure to stabilize the currency, but the Tether stable currency model has gone wrong. There is no saint in the world, opaque and unsupervised printing rights will lead to fraud, time is sooner or later.

On April 26th, a press release by New York State Attorney General Letitia James once again pushed Bitfinex and Tether, which has seen the crisis of confidence, to the forefront.

A brief summary of the ins and outs of the whole thing, Bitfinex, the head digital currency exchange, previously “appropriated” $850 million in customer and corporate funds, and then filled the loss through the USDT dollar reserve fund issued by Tether. So the New York Attorney General’s Office believes that Bitfinex and Tether’s manipulation of cryptographic assets should be punished.

After the incident, there were a lot of voices on the market. Is the practice of Bitfinex and Tether non-compliant? Does the Office of the Attorney General have the right to freeze this $850 million? What impact does this have on USDT's market share and liquidity? Some people also took the opportunity to sing empty stable coins. They believe that Bitcoin is the cornerstone of the digital currency world. The “man-made” of stable currency seems to have begun to collapse. How should the stable currency market develop next?

Bitfinex's $850 million event,

How do the parties respond?

According to Bloomberg News, on April 25, New York State Attorney General Letitia James said in a press release that the crypto exchange Bitfinex lost $850 million and then "misappropriated" Tether's reserve funds for secret compensation.

According to James, Bitfinex has helped with Crypto Capital, a Panama-based third-party payment processing company (Odaily Planet Daily Note: Online public information shows that it has participated in many projects such as Cybermiles, Abra, chain-only, and original chain Bytom) It handled the $850 million and made the “provisioning” of Bitfinex and Tether funds legal and reasonable without any written contract or guarantee.

James said that Bitfinex's $850 million fund loss investigation began in 2018, when the company handed over $850 million in customer and corporate funds to Crypto Capital to process customer withdrawal requests. But in the next few months, Crypto Capital failed to successfully dispose of Bitfinex's requests because the funds were frozen in several different banks in Portugal, Poland, and the United States. The reason for the current freeze is not yet clear.

According to the Wall Street Journal, the New York State Attorney General’s Office said it has now obtained a court order requiring Bitfinex to stop transferring funds from Tether’s reserves to Bitfinex’s bank account, prohibiting Bitfinex from borrowing from Tether and ending any dividends or Other dividends and hand over documents and information.

James claims that “Bitfinex has received at least $700 million from Tether's reserves. These transactions have not been disclosed to investors, and Tether's cash reserves are considered Bitfinex's corporate finance funds and are used to hide Bitfinex's huge, not Public losses and inability to process customer withdrawals."

The court also ordered Bitfinex and Tether to provide documents that the James office requested to investigate potential fraud and to work with it by May 3.

If it is related to criminal misconduct, it will become the biggest criminal case in the US cryptocurrency field, similar to the 2014 Mentougou stolen money case in Japan.

After the news of the New York State Attorney General's Office was released, the USDT showed a downward trend. According to the latest data from AICoin, it fell from the 1.005 USD to the lowest point of 0.957 USD, a 24-hour drop of 3.58%, and the USDT latest offer was 0.97 USD.

Image source: AICoin

The USDT is a US dollar-based stable currency from Tether, with 1 USDT = $1, and Tether promises to have a $1 deposit in its bank account for each USDT issue. However, the market has always had a voice of doubts about Tether and USDT. The stable currency is “unstable”, the amount of funds in the Tether account is insufficient, the Tether bank account information is not disclosed, and Tether has never published a credible audit report to prove that it owns The corresponding dollar reserve, which makes many people doubt whether these US dollar reserve funds exist.

Shortly after the New York Attorney General’s remarks were issued, Bitfinex quickly responded to the matter. Bitfinex officially announced that it denied the New York Attorney General's statement that the $850 million loss was entirely a rumor that the New York Attorney General had maliciously written and fabricated. "We have been told that the amount of these encrypted capital has not been lost, but it has actually been sealed up and protected. He also said that he has been actively working to exercise his rights and remedies, and to release these funds, there is no loss. As for how the funds will be released, it is not mentioned in the announcement.

At around 17:17 pm on April 26, Bitfinex shareholder Zhao Dong published a message in the telegraph group that he has communicated with Bitfinex officials and confirmed several things from Bitfinex officially, responding to investors' various Suspicion:

  1. First, the Justice Department froze Crypto Capital's $850 million, and then the New York State Attorney General said that Bitfinex was unable to pay, and Bitfinex said it was a typical American underworld act. (Odaily Planet Daily Note: It can be seen on the official website of Hong Kong that Bitfinex was registered in Hong Kong on March 8, 2013 with the registered address of “1308 Bank of American Tower” in the British Virgin Islands and not in the United States. On April 29, 2014, Bitfinex changed its name to Renrenbee. However, the United States has always had the so-called “long arm jurisdiction”, which means that when the defendant’s residence is not in the court state, as long as the accused and the court of the case have some kind of “ The minimum contact (MinimumContacts), and the plaintiff's claim is related to this connection, the court has personal jurisdiction over the defendant, can issue a subpoena to the defendant, even if the defendant is outside the state or even abroad. Popularly speaking: "Even if you are not here, but as long as your behavior has the lowest connection with me, I can also control you." So the New York prosecutor can rely on "believing that Bitfinex has a user who is a New York citizen, so he has jurisdiction over" the chain law team. Lawyer Guo Yatao told the Odaily Planet Daily that "the essence of the long arm jurisdiction of the United States is to exercise extraterritorial jurisdiction, in the principle of long arm jurisdiction. The jurisdiction is quite flexible, and most of its application is to consider the national interest. But even if the principle of “long arm jurisdiction” is not considered, I believe most people also want the supervision department to supervise Bitfinex. Generally speaking, this is beneficial to the majority. Investor.")
  2. Bitfinex denies that there is any loss of assets and acknowledges the fact that the funds are frozen, and Bitfinex believes that it can handle it completely.
  3. The amount of $850 million that was frozen was unmistakable and was frozen in several different banks in Portugal, Poland, and the United States. Bitfinex’s profit in 2018 was about $400 million, and the expenditure was only $12 million. They used a portion of their profit reserves. Used to withdraw cash from customers.
  4. Zhao Dong and Deltec (Odaily Planet Daily Note: Deltec Bank is Tether's bank partner, based in Panama) executives chatted, Deltec executives agreed that Bitfinex did not lose money, and said the New York State Attorney General did not enforce the law on Bitfinex Right, and no right to further freeze the funds of Bitfinex and Tether.
  5. Zhao Dong asked Bitfinex executive Giancarlo Devasini that 100% of the frozen funds could be thawed, just waiting a few weeks. Zhao Dong believes that these funds are users, not Bitfinex, and the US government has no right to freeze.

Tether officials have not responded to this before the press release.

Does the New York State Court have jurisdiction over the case?

Does the prosecution have the right to freeze funds?

And for the New York State Court to have jurisdiction over the case, the prosecution (NYSGA) is based on what law-initiated lawsuit, whether the prosecution has the right to freeze the $ 850 million in Bitfinex funds, I believe many readers have answers to these questions It is still very vague now. Odaily Planet Daily interviewed Jiang Huijie, a partner of Legal Consensus. He is also a lawyer in New York State, USA. He has extensive legal research in overseas financing and blockchain, and has served as a legal and compliance consultant for dozens of blockchain companies. He made a detailed interpretation and analysis of the above issues.

1. Does the New York State Court have jurisdiction over the case?

a) New York State Long Arm Jurisdiction law provides that New York State Courts have jurisdiction if one of the following conditions is met: 1 engage in any commercial activity within the state; 2 enforce infringements other than defamation within the state 3) Infringement outside the state other than defamation, but causing damage to the person or property within the state, and the non-state resident or legal person has consistently engaged in commercial activities or any other continuing activity in the state, or from Substantial gains in property or services within the state; 4 possession, use or possession of immovable property in the state.

b) Based on the facts or evidence mentioned in the prosecution (NYSGA) indictment, Bitfinex and Tether have previously provided unlimited services to New York State users, and there are still some New York State users participating in the transaction, and it is in New York State. Have continuous business activities. Therefore, the New York State Court has a very strong jurisdiction over the disputes in this case.

2. What lawsuit initiated by the prosecution (NYSGA) is based on law?

a) The Martin Act, New York General Business Law article 23-A, sections 352–353 gives the New York Attorney General a wide range of enforcement powers that can be used for securities offerings, sales, and purchases. Fraud investigations were launched. The Martin Act is more stringent than most state and federal securities laws, and can impose both civil and criminal penalties on fraudsters. Even the US SEC can only impose civil penalties on fraudsters, which is lower than the Martin Act's mandate to the New York Attorney General.

3. Does the prosecution (NYSGA) have the right to freeze funds?

a) The prosecution has no right to freeze the funds, but the prosecution can apply to the court for a preliminary injunctive relief and a permanent injunctive relief to freeze the funds or property of the defendant through normal judicial procedures. New York is the world's financial center. The headquarters of many financial institutions are located here. Once the court thinks that the prohibition is necessary, the New York State Court can ask many financial institutions to implement it.

Tether quietly modifies collateral segments.

Suspected to match Bitfinex "filling the pit"

According to The Block, on March 14, Tether quietly revised its collateral breakdown on its official website, announcing that each USDT now corresponds to a corresponding asset reserve, which can now include: cryptocurrency , cash equivalents, and Third-party accounts receivable, that is, third-party loans . Previously, Tether also claimed that 100% of their asset reserve components were derived from US dollar reserves.

Zheng Li, a senior financial analyst, said that he saw it here. " I understand that Tether’s accounts receivable were originally lent to Bitfinex. No wonder I have to modify the source of asset reserves. I still don’t understand Tether. There is an account receivable. ” Zheng Li believes that if Bitfinex can pay off the money later, this becomes a bridge loan (also known as a bridge loan, which means that after financial institution A gets the loan project, it is temporarily Lack of funds and inability to describe, so I asked financial institution B to discuss and let it help to distribute funds. When A financial institution funds are in place, B withdraws. This loan is called “bridge loan for B”. But the core of this matter depends on whether New York State will ask Bitfinex for sky-high compensation.

Zheng Li also said, “If the USDT market capitalization is still in the range of US$2 billion to US$3 billion, the US$800 million receivables will mean a reserve ratio of around 70%, which is roughly equivalent to the Bank of England’s reserve in 1790. Rate, here Zheng Li treats Tether as a bank, and he thinks Tether has become a bank. He said that this is also the default thing for the insiders, so Zheng Li thinks Tether is ready to set up. The gold system is also sooner or later. But Tether is not yet a bank, and there is no clear legal and regulatory authority to define Tether as a bank attribute.

After the $850 million incident was exploding,

Bitfinex wallet address continues to show large transfers

After the news was exploded, there was constant data showing that Bitfinex hot and cold wallets had large BTC and USDT withdrawals and transfers. As of press time, the Odaily Planet Daily reported five more compelling Bitfinex wallet transfer records:

  • According to TokenAnalyst, approximately 17,250 bitcoins (approximately $89 million) were taken from Bitfinex's BTC cold wallet at 6:35 am (GMT) on April 26.
  • According to the chain financial report, around 11 am on April 26, a large household transferred 3999 BTC from Bitfinex to an unknown wallet.
  • Tokenview data shows that on April 26th, around 15:03, BTC showed a large amount of money transfer. From the beginning of 3KQLSHE and 3JZq4at to the beginning of 3AiX9oDh and the beginning of 1Kr6QSy, a total of 17,377 BTCs were transferred, worth about $92 million, of which 1Kr6QSy The opening address is marked by Tokenview as a Bitfinex hot wallet.
  • At 21:40 on April 26th, the Bitfinex wallet address was transferred to the Tether Treasury wallet address for about 24.43 million USDTs at a time.
  • At 22:19 on April 26, the Bitfinex wallet address was transferred to the Tether Treasury wallet address to approximately 5 million USDT.

In the short term, it will not have much impact on the USDT.

May cause it to collapse completely in the long run

In this incident, Tether suspected that “borrowing” money to help Bitfinex fill the vacancy, did not inform its customers in advance, and used the US dollar reserve. There are some opinions in the market that Tether is deeply mired in the US dollar reserve funds, bank accounts. The information crisis is not open to the public. In this incident, Tether pushes itself into the whirlpool of public opinion, and the crisis of trust is further escalated. There are also some people who are not optimistic about the concept of stable currency. So how much impact will this event have on Tether and USDT? Will it affect the market share and liquidity of USDT, and is it worthwhile to stabilize the currency market? On these issues, the Odaily Planet Daily interviewed and collected views from several opinion leaders, analysts and lawyers in the blockchain industry, enjoy:

Liu Chang, director of the Blockchain Economic Research Center of Chongqing Technology and Business University, told the Odaily Planet Daily reporter, “It is not known whether Tether will use the USDT reserve fund to fill the pits with Bitfenix. Bitfenix only acknowledges that funds have been frozen. Tether currently has a market capitalization of 2.8 billion. If the US dollar misappropriates 850 million and the remaining reserve assets are liquid and can guarantee redemption, that is not fatal. What they need to worry about is that this will lead to further investigation and freezing of their reserve assets."

In addition, after Liu Chang’s renewed trust in Tether, he explained the impact of the entire stable currency market and how the stable currency should move forward. “The collapse of a country’s currency does not mean the whole world. The legal currency will collapse. Similarly, if there is a problem with a stable currency, it does not mean that the stable currency is not established. The stable currency has the same instability and risk as any other currency. Unless a currency is used as a belief, we must be at ease. Weighing against various currencies between stability, value preservation, and risk."

Liu Chang believes that the stable currency is a transitional form of legal currency to cryptocurrency, with the stability of the legal currency and the freedom of the cryptocurrency. However, the corresponding risk is greater than the legal currency, which is more dependent on personal credit than the password currency, and also brings risks. Even if it is a compliance currency, it only accepts sovereign supervision and cannot guarantee its solvency equal to that of the legal currency. Just like Lehman's compliance, there is no guarantee that it will not go out of business. Stabilizing coins are the products of the market in the development of cryptocurrency. With its stability and the advantages of circulation in the cryptonet system, there are a wide range of market demands. In the market depth of the cryptocurrency, so that stability is enough to replace the stable currency, the stable currency will exist, we also need it.

“It is not necessary to stand on a moral standpoint to discriminate or exclude it. What we need to do is to fully understand the advantages and disadvantages of the stable currency, and choose the way to use and hold the stable currency according to its own preference for risks and benefits. ” Liu Chang used the final analysis.

Xiao Lei, a well-known financial columnist and senior researcher in the gold market, also released his own opinion on his personal public account. After this incident, he is not very optimistic about the virtual currency economy. He seems to be more indifferent to the cryptocurrency market. It is. Xiao Lei believes that one of the reasons why Bitfinex dares to use $850 million in customer and corporate funds is that Bitfinex can be filled with Tether funds at any time, and Tether can raise funds from the public by issuing additional USDTs.

“Most investors are involved in the decentralized asset trading, but they are under a huge centralized credit risk. In Bitfinex's response, we can confirm that the actual controllers of Bitfinex and Tether should be Consistently, the two funds are not subject to any third party constraints. In addition, Bitfinex does not deny that they are free to use Bitfinex customers and corporate funds, which means that users can put money on Bitfinex, Bitfinex is free to use, without the need to publish There is no need to explain it." Xiao Lei analyzed. Therefore, Xiao Lei believes that as long as the investor holds the USDT in his hand, or puts the coin on the exchange, the investor's assets may disappear all at once. Before that, the investor can hardly do anything, and can only choose to believe. The platform controls people's abilities and ethics.

Meng Yan, vice president of CSDN, told Odaily Planet Daily that "this time it is indeed possible to bring a big blow to USDT because they did make it out of the box. But this is not a failure to stabilize the currency, but the Tether stable currency model is out. There is no saint in the world, opaque and unsupervised printing rights will lead to fraud, time is sooner or later. " But Meng Yan finally showed that he is still very optimistic about stable currency, does not recognize that bitcoin is the cornerstone of the digital currency world. From the point of view, he believes that Bitcoin has been largely placed under the manipulation of the USDT, which in turn proves the power of the stable currency.

Xu Kun, vice president of strategy, analyzed the Odaily Planet Daily. "The key to the stable currency model is 'trust'. Stabilizing coins as an important part of the market infrastructure, if it can not maintain price stability, will increase the systemic risk of the market. Without external supervision, it is very easy to have various internal operational actions, and it is difficult to ensure the safety of funds and sufficient collateral. The act of misappropriating the reserve fund hurts the interests of users and brings shock to the market, which will shake Tether. Trust foundation. Compliance must be the direction of stable currency development. Only by adhering to the rules of compliance, auditability, and transparency, can we maximize the credibility and value stability and truly build a complete and trustworthy Trading closed loop."

Jiang Huijie believes that this is almost the biggest challenge for Bitfinex/Tether under the existing regulatory system, except for hacking. Due to its location particularity, the State of New York has always been the front line of the US fight against financial crimes, which can represent the current US regulatory position on Bitfinex/Tether. However, the process of litigation may last for a long time, and it is difficult for USDT to be completely replaced in a short period of time, but the impact on its market share is continuous and far-reaching, and may even lead to a complete collapse.

“The stable currency market needs to connect with legal currency and virtual currency because of its particularity. It is difficult to completely separate from legal supervision like many virtual currencies, because leaving the supervision means the lack of legal protection. It is similar to the stability of virtual currency like Dai . The currency, the threshold of popularization and the limitations of the design of the mechanism have all led to its inability to become a mainstream stable currency in the short term. " Jiang Huijie said to the Odaily Planet Daily.

Babel founder and CEO Yang Zhou believes that this incident will not have much impact on Tether in the short term, because the core of the incident is that Tether did not inform customers in advance that their reserves were misappropriated, instead of Tether. In the crisis, if Tether has a redemption crisis, the consequences of this matter will be serious. Yang Zhou said that the biggest value of Tether is still its liquidity. The liquidity of USDT is the best stable currency on the market, and investors all recognize it. The status of USDT “Boss” is incapable of being shaken. .

Yang Zhou also has a point of view. He believes that this incident will not have much impact on Tether. It is also because USDT has “kidnapped” too many institutions and exchanges. In terms of currency, Ann’s customers have about 2 If the USDT price plunges, the USDT of the currency will be run, and they will not allow such a thing to happen.

In Yang Zhou’s view, when the outside world evaluates a stable currency, the following factors are mainly considered:

  1. Value attribute, what currency or asset behind it is anchored
  2. fluidity
  3. Is the passage of legal currency entry and exit safe and reliable?
  4. Wallet support
  5. scenes to be used

Yang Zhou analyzed that Tether was not transparent enough in terms of value attributes. The other four aspects were very good, the market share was very high, and the liquidity was very good. He also believed that the stable currency was still achieved by consensus, because of its The value attribute is still very vague.

Standard Consensus Senior Analyst Li Zipeng analyzed the following views from the Odaily Planet Daily:

  1. It depends first on whether the fact that Bitfinex really misappropriated Tether's margin for its own use.
  2. If not, then the impact will be small. If it is, the short-term impact will be small, and the long-term impact cannot be judged;
  3. Because USDT currently has more than 98% of the daily trading volume of all stable currency projects, it is a fatal injury only when there is a risk of redemption; now this is just a misappropriation of the reserve, the user has no physical damage, and the short-term impact is not great ; It is the long-term use of the reserve fund at will, and when it affects its solvency, it submits the risk of redemption.

Xiong Yue, vice president of the credit letter, made a public comment on Bitfinex's $850 million incident. He said: " 1. Bitcoin is the cornerstone of the real digital currency world . 2. Most people who entered the market after 16 years are hard to understand. Situation. BFX (Bitfinex) and Tether are definitely not doing the right thing, but at that time, it is not too much wrong."

Block VC founding partner Xu Yingkai also publicly stated that in the case of Tether reserves with solvency, if the credit crisis occurs in USDT, the biggest beneficiary is not BTC, but other stable coins such as GUSD and USDC . It is possible to speculate that the parties behind these, in conjunction with US regulators, freeze Tether assets in the name of seizure protection and spread the bad news of the loss of USDT, which is a tactic that has been used since October 15, 2018. It also explains why BTC performance is still weak.

The Odaily Planet Daily also observed the views of the following investors in the currency circle and found that Bitfinex and Tether's $850 million incident did not generate much market panic. Investor Pan Jun (pseudonym) said disdainfully, "Don't worry. Although the USDT has dropped a bit now, it will still rise back soon. It has once fallen below 6 RMB, and it has not risen back. The USDT is still very strong."

It can be seen that most people in the industry still feel that this will not have much impact on Tether and USDT in the short term, but Odaily Planet Daily believes that if Tether has been caught in a crisis of trust, from the perspective of philosophical dialectical materialism, The change of any thing also has a process from quantitative change to qualitative change. The number of times has changed, the quantity change has changed qualitatively, and the position of USDT "Boss" has to be let out.

Text | Tea Cool Operation | Gai Yao Edit | Lu Xiaoming

Produced | Odaily Planet Daily (ID: o-daily)

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