Deng Jianpeng: Doubt and legal risks of Bitfinex and Tether

First, Tether's stable currency USDT and its questioning

The USDT is said to be a stable currency linked to the US dollar, with an additional USDT for the equivalent US dollar. Tether, which issued USDT, claims that USDT can be exchanged for one-to-one against the US dollar. Due to its "stable" performance, it has been welcomed by the majority of virtual currency trading customers around the world. In various stable currencies, the share of USDT has been around 80%. The USDT is currently online on many well-known virtual currency exchanges for trading clients to facilitate trading with other virtual currencies.

However, there have been many people who have not believed that Tether has so much dollar reserves. According to the USDT1:1 exchanged on the market, Tether issued a total of USD 2.8 billion USDT (for related data, please refer to https://www.feixiaohao.com/#USD, visit time September 11, 2018). Then the company's account should have a corresponding bank deposit certificate of about $2.8 billion in assets. Tether disclosed its deposit bank bills before September 2017, but did not disclose the bank name and later did not disclose it. Therefore, the public cannot know the accounts of Tether. Although in June 2018 Tether hired a new law firm to prove that its account had the corresponding assets. The lawyer's announcement proves that there is really so much money in Tether's bank account, but it is not responsible for whether there is so much money before and after Tether. At the same time, the announcement did not say which bank the money exists (see http://www.sohu.com/a/237709385_100189989, visit time: September 11, 2018). When we completed the book "International Regulation and Compliance of Blockchain" (Mechanical Industry Press, February 2019), we interviewed some currency experts for this survey. Some individuals told the author that he was at a certain In some cases, I personally saw the bank bills presented by Tether executives, proving that the company has saved so much money. However, this kind of financial display that lacks third-party auditing is hard to win the trust of the public.

Tether's reserves have been the focus of public attention, and it is related to the long-term review of the company and the USDT stable currency. Some people have questioned that the USDT with a market value of more than 2 billion US dollars does not actually have sufficient funds to support its operators. And Tether failed to publish the audit as promised at first, and this behavior is further questionable. In March 2019, Tether official website revealed that the reserve fund supporting USDT is no longer composed of a single legal currency, which has triggered public doubts about the USDT dollar reserve.

2. Investigations and allegations by the prosecution in New York, USA

In April 2019, at 4:15 pm local time on April 25, the New York State prosecutor brought Tether and its parent company iFinex Inc. and Bitfinex to court. After the news was released, the stable currency USDT issued by Tether showed a downward trend. After this news broke, USDT responded with a downward trend. According to AIcoin's data for the day, it fell from the 1.004USD to the lowest point of 0.966USD, with a 24-hour drop of 3.58%.

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After the allegation was issued, it was suggested (or accused) that this was a conspiracy theory in the United States intended to crack the price of the currency. For example, some people have suggested: "The New York side has thrown this question when the USDT circulation has just reached a new high. Does anyone feel embarrassed?" The author believes that this statement may be unfounded. In fact, the findings of the New York State Attorney's Office came from a survey of cryptocurrency exchanges launched in 2018, and the investigation is still continuing. A report issued by the New York State Department of Justice in September 2018 stated that many virtual currency exchanges lack basic security measures that make investors vulnerable to exploitation by market operators.

As early as April 2018, the Office of the Attorney General of the State of New York (OAG) believed that as the share of the virtual currency market increased, New York and consumers throughout the United States had the right to gain insight into transparency and accountability when investing in virtual currency. However, consumers often cannot assess the fairness, integrity and security of these trading platforms because of the lack of basic information. On September 18, 2018, OAG released the "Virtual Market Integrity Survey Report" (hereinafter referred to as "Virtual Market Report", the original text is available at https://ag.ny.gov/sites/default/files/vmii_report.pdf? Mod=article_inline). This virtual market research initiative is meant to change this and promote accountability and transparency that investors and consumers deserve in the virtual currency market. The latest indictment by the New York State prosecutors is clearly the result of a long-term investigation in the previous year. It is by no means a temporary whim of some people (so-called to suppress the price of the currency).

In the 23-page indictment of the New York State prosecutor, not only did Tether and Bitfinex have a vaguely concealed relationship, but more importantly, the prosecution accused the two of being suspected of multiple major violations. According to the relevant details disclosed in the indictment, Bitfinex and Tether may be suspected of unlicensed operations, major issues are not disclosed, mismanagement of funds, related transactions, etc. The core focus is that Tether may be suspected of misappropriating $900 million in USDT reserves to help Bitfinex Make up for the deficit. The prosecution also believes that Bitfinex and Tether are using their market position to perpetuate fraud.

Bitfinex issued a notice on the misappropriation of funds and other matters, the announcement said, "The New York Attorney General's court documents were maliciously written and full of false assertions, including the $850 million 'loss' allegedly occurring at Crypto Capital. Instead, we have It was told that the amount of these encrypted capital was not lost, but it was actually sealed up and protected.” The announcement also stated that Bitfinex is trying to release these funds, and Bitfinex and Tether are in good financial condition. However, as to how the funds will be released, it is not mentioned in the Bitfinex announcement. Although the company responded to the prosecution in the first time, it failed to provide a targeted explanation for the multiple key issues mentioned in the indictment. The wording only stayed at the claim that it was adequately funded and accused the prosecution of prosecuting The book is full of malicious stages. The company did not come up with strong and pertinent evidence to refute the prosecution. It simply blamed the other party morally, and even hinted at the conspiracy theory. Is this a normal practice of a company that is innocent, responsible and emboldened?

Bitfinex and Tether issued a tough statement – to fight this serious ultra vires of the Office of the Attorney General of New York, to fight for good corporate citizenship and staunch supporters of law enforcement, Bitfinex and Tether will challenge the New York Attorney General's Office A practice, and all its other actions. Rather than saying that the two companies really want to challenge the serious judicial department, it is better to say that this is a gesture to the trading customers to stabilize the current USDT price, so that the stable coins issued by their company will return to stability!

Third, Bitfinex and Tether involved in several major legal troubles

If the results of further investigations by the New York State prosecutors are true, Bitfinex and Tether may not only face high fines, but may even be sentenced to cease operations. Company executives may touch extremely serious criminal offences, while exchange investors and holders The investors of USDT will suffer huge losses. If the USDT cannot withstand the prosecution's in-depth investigation, once the price collapses, it will have an impact on the cryptocurrency field as much as the 2013 Mentougou Incident (MT.GOX).

Currently, the legal risks that Bitfinex and Tether may involve are as follows: (1) In the case of unlicensed operations, Bitfinex and Tether are both subsidiaries of iFinex Inc., which are offshore companies registered outside the United States. According to the New York “Virtual Currency Trading Rules”, if you are engaged in virtual currency related business in New York State, you need to obtain a license issued by the State Financial Services Department and comply with relevant regulations. But Bitfinex and Tether have no licenses, and there is evidence that Bitfinex allows New York State investors to engage in virtual currency deposits, withdrawals, transactions, etc. on their platforms.

(2) Major events were not disclosed. In the indictment, the New York State prosecutor mentioned at least four major issues that Bitfinex should not disclose, including: information about the cooperating payment processor, information on $850 million in financial losses, and 9 reached with Tether. The $100 million revolving credit loan may involve information on conflicts of interest and information on $625 million in transfers of funds.

(3) Poor management of funds. At present, the New York State prosecutors have evidence that the company has convened Bitfinex's own funds and client funds, and did not dispose of them separately. In addition, the prosecution’s indictment stated that Bitfinex and Tether have a large number of cooperating payment processors to respond to customer needs, but many of the processors are the executives of their companies. One of the biggest risks in this regard is that company executives may be suspected of misappropriating client funds, which can hit major criminal offences in most countries!

(4) Manipulate market prices. Although this legal risk is not clearly stated in the prosecution documents, some information can deduce that the company may have this problem. As early as June 2018, a professor at the University of Texas in the United States published a paper saying that in the bull market in 2017, 50% of the increase in bitcoin prices was related to the entry of Tether into the exchange. Tether is used to support and even manipulate cryptocurrency prices. According to statistics, in the 2018 cryptocurrency price surge, at least half of the increase may be driven by price manipulation, which is done through the USDT. At the end of 2017, Tether was summoned by the US Commodity Futures Trading Commission (CFTC) for alleged manipulation of bitcoin prices and lack of transparency, but both Tether and Bitfinex firmly determined that the allegations were unfounded. If the prosecution is seated, the company’s executives may not be able to escape criminal responsibility.

Combined with the information disclosed by the Office of the Attorney General in New York and the response from Bitfinex, Bitfinex is willing to use client and corporate funds at will, indicating that Bitfinex can be filled with Tether funds at any time, and Tether is ready to use the additional USDT to finance the public. In this regard, some people correctly pointed out that "this once again proves that there are huge system minefields in the virtual currency trading market, the risks to investors are fatal, and most of the participants may still be ignorant or unconscious. The Office of the Attorney General of New York On the one hand, through this way of releasing facts, it sends a signal to the market to reduce the asymmetry of information, because neither Bitfinex's loss nor Tether's capital goes, Bitfinex has not released to the market; on the other hand, the regulator should not Recognizing such an operation, the Office of the Attorney General of New York is preparing to punish Bitfinex and Tether for illegally participating in the cryptocurrency industry."

Fourth, my several conclusions

First, Bitfinex's huge losses (by the judicial freeze) exist, whether it can be thawed, it is worth questioning. As for a certain person in the domestic currency circle who thinks that the possibility of thawing is very high, we cannot see that it has a solid basis. In addition, it is certain that Tether is likely to never be able to produce evidence of real bank reserves in US dollars equivalent to its issued USDT. Therefore, the author suggests that major exchanges and investors will reduce their share of USDT, while expanding the proportion of other stable currency holdings (especially regulated currencies) to reduce risk.

Second, Tether and Bitfinex and its affiliates arbitrarily use the huge assets of customers. The customer's rights and interests are not effectively protected and the risks are huge. If a financial institution or a quasi-financial institution relies solely on high-discipline self-discipline and no third-party supervision, it is simply unreliable from the perspective of a hundred years of financial history. Xuan Zheng is like a cat guarding a fish tank, and a drunkard is watching a wine cellar. At the same time, the practice of privately using customers' huge assets is suspected of serious criminal offences in most countries. For example, in South Korea, four established exchanges have been frequently inspected by prosecutors, some of whom have been convicted of misappropriation of funds (to misappropriate client funds), and one exchange owner has been detained.

Third, in order to protect the rights and interests of their citizens, the risk cases of Tether and Bitfinex stimulate the investigation of the US judicial department will spread to other relevant institutions in the currency circle. In fact, in addition to the allegations against Tether and Bitfinex, the Office of the Attorney General of the State of New York (OAG) has issued virtual market integrity initiatives and questionnaires to 13 major trading platforms in 2018. The 13 trading platforms include Bitfinex, bitFlyer USA, Bitstamp, Bittrex, Coinbase, Gemini, itBit, Poloniex, Tidex, Binance, Gate.io, Huobi Global and Kraken. Four of the trading platforms (Coin An, Gate.io, Firecoin Global Station and Kraken) claimed that they were not doing business in New York State and refused to respond to the OAG questionnaire. OAG surveyed whether the four platforms were accepting operations in the state of New York and reported to the New York State Financial Services Authority three exchanges that may be suspected of violating New York State's virtual currency management regulations, namely, Coin, Kraken and Gate. Io . We have pointed out in the "Intermediary Chain Management and Compliance Response" (Machinery Industry Press, February 2019): "It is not at all discretion that the United States has a long-armed jurisdiction in the administration of justice. If the rights and interests of the three exchanges in the above-mentioned three exchanges are damaged, the exchange may not be able to stay out of the way . Therefore, it is no accident that Tether and Bitfinex were investigated.

4. The investigations and allegations of the US judiciary are well worth learning by Chinese regulators. OAG is responsible for protecting New York State users from fraud and commercial abuse practices, and is no exception to the emerging virtual currency market. An important way for OAG to guard against financial risks is to learn from people who have seen fraud or abuse, or who have suffered. If consumers have experienced problems with virtual asset trading platforms, or want to report other suspected violations, I hope they can contact OAG. The US local judiciary has been actively investigating possible risks in the field of cryptocurrency from the perspective of consumer rights protection (and of course from the perspective of national financial security). In some countries, the regulators are simply and rudely issuing shutdown orders. This is likely to be a blind obstacle. It is not seen in Taishan and cannot effectively protect the rights of consumers in the country.

Fourth, China is almost the second largest virtual currency participating country after the United States. Investors (consumers) have huge interests in encrypting assets. Regardless of the negative attitude of the current national policy, this is an indisputable fact. The accusation of the two companies by the Office of the Attorney General of New York is a concrete action by the United States to actively explore and continue to engage in the field of crypto-equity transactions. The normal and benign regulatory logic is not simply to attempt to eliminate the virtual currency market, but to lay the foundation for future countries to better utilize and develop this market. If a blind obstacle, the self-deception of the brokerage exchange has no effective measures to protect the interests of its citizens, in such incidents, the violation of Chinese consumer rights must be the first to bear the brunt, but the rights and interests can not be defended by the state power, it is a pity! In addition, if there is only a simple and rude policy, it will be a pity to explore the leading position of effective supervision of encrypted assets and let others give it to others!

Author: Deng Jianpeng, Central University of Finance and Law Professor

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