In the past few years, investors have been waiting for the arrival of bitcoin exchange-traded funds (ETFs) regulated by US regulators. However, news of the unstable financial situation of iFinex, the operator of the two cryptocurrency markets, Bitfinex and Tether Limited, may temporarily smash these unrealistic hopes.
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The Attorney General of New York investigates the financial situation of iFinex
The outbreak of the Bitfinex event may put the Bitcoin ETF application in jeopardy. An ETF is a purchasable security that tracks an index and is supported by stocks or units of the underlying asset. Due to the highly regulated nature of ETFs, it may make it easier for risk-averse investors to enter the bitcoin market. Therefore, some people believe that the introduction of Bitcoin ETF may be a positive catalyst for bitcoin price increases.
On Thursday, the New York State Attorney General's Office (NYAG) issued a press release stating that iFinex may be involved in “in-progress activities” that “may deceive” cryptocurrency investors. A 23-page document signed by Assistant Attorney General Brian Whitehurst reveals more about the situation.
According to the agency's investigation, Bitfinex currently has $850 million in vulnerabilities on the books, as the funds were handed over to Crypto Capital, a Panama-based payment processing company, which now receives the funds. It is believed that assets under the administration of Crypto Capital are frozen by the governments of Poland, Portugal and the United States. As a result, Bitfinex was in a mess and began looking for funds to meet customers' cash withdrawal requirements and business expenses. In the end, the management of the exchange decided that the best way to do this would be to obtain credit lines from the associated company Tether Limited behind USDT Stabilizer. Whitehurst subsequently revealed that Bitfinex still has a $700 million line of credit, which they support in iFinex's stock, indicating that the USDT is not entirely supported by the French currency reserve. The press release further explains:
"The documents show that Bitfinex has extracted at least $700 million from Tether's reserves. These transactions – and did not disclose to investors – use Tether's cash reserves as Bitfinex's corporate funds and are used to cover up Bitfinex's huge amount. Undisclosed losses and inability to process customer withdrawals."
Bitfinex Chief Financial Officer Giancarlo Devasini then told Chinese stakeholder Zhao Dong that the exchange would need a few weeks to thaw the funds. However, if the iFinex or NYAG office continues to stalemate, it could cause long-term damage to the cryptocurrency market.
What does this mean for the Bitcoin ETF?
In the past 24 months, the US Securities and Exchange Commission (SEC) has been cracking down on Bitcoin ETF applications on the grounds that it is concerned about the manipulation of bitcoin ETFs, lack of investor safety, and inadequate market regulation. In the context of iFinex's legal problems, these two things seem to have nothing to do with it, but this is not the case. As stated in the SEC's statement of responsibility:
"The SEC's mission is to protect investors, maintain a fair, orderly, and efficient market, and promote capital formation."
In other words, the core mission of this regulator is to protect investors and ensure that fraud is kept to a minimum by promoting “appropriate disclosure of market-related information” and to help businesses and investors. In this case, the key term is “appropriate disclosure” of “market related information”. As NYAG pointed out, Bitfinex and Tether conducted these backdoor transactions without notifying investors. Tether did not issue a public statement, but quietly revised the terms of service, Bitfinex remained silent, and then got into trouble due to serious withdrawal delays and instability with the bank.
According to data provided by Bitcoin's BitcoinTradeVolume.com, bitcoin trading platform Bitfinex is currently the second largest spot exchange for bitcoin transactions. At a closed-door seminar at the US Securities and Exchange Commission (SEC), a deal that Bitwise called "trusted/bonafide" did not properly update their funds to customers. It's easy to annoy the SEC's committee members and give them reason to suspect the bitcoin market.
The SEC has not commented on the Bitfinex event and is probably not going to. In any case, this outcast may give the SEC reason to believe that these nascent markets are not conducive to the safety of US investors.
However, the Bitcoin ETF is not completely out of action.
Although the Bitfinex event may cause the Bitcoin ETF to be further postponed, there is still hope in the long run. Currently, the SEC is considering two bitcoin ETFs. In a recent interview with CNBC, Bitwise's Hunter Horsley believes that Bitcoin as an asset is in the "most viable" state ever. Horsley added that bitcoin funds may therefore become the next logical stage in the encryption industry's move to finance – which is important for speculators.
When the CNBC host asked the savvy CEO about the SEC's concerns about the current state of cryptocurrency transactions, Horsley's answer was full of confidence. He pointed out that the SEC now has a "more understanding" of the nuances of Bitcoin, especially "the numbers you see on various encryption-related websites are not accurate." Finally, he explained that what really matters is a solid understanding of the context of the ecosystem, rather than confirming that all bitcoin exchanges, investors and other participants are absolutely reliable.
However, the interview that Horsley accepted occurred before the outbreak of the Bitfinex incident. The fact remains that as one of the largest trading platforms in the cryptocurrency ecosystem, Bitfinex's financial transactions may infringe on the rights of its users and shareholders, not to mention the global cryptocurrency holders. The SEC will definitely notice this.
What will happen in the market after 2019? What impact will the Bitfinex and Tether events have on the future of the cryptocurrency market? This May, welcome to Hangzhou to discuss with industry practitioners.
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