Bitfinex and Tether in Hot Water for Co-Mingling Funds

Bitfinex is getting some of the worst possible press right now, as the New York Attorney General’s office alleges that lost $850 million and covered it using funds from another company.

Both Bitfinex and Tether are operated by iFinex Inc. and any comingling of funds between the two companies would be grounds fraud. Cover-ups like this are generally done to mitigate the perceived losses, but usually end up with even more drastic losses down the line.

The crux of the accusation is that there is $850 million of inaccessible funds being held by Crypto Capital, a Panama-based payment processing firm that works with other exchanges like Quadriga CX. When these funds could not be accessed, Bitfinex opted to borrow $700 million from Tether’s reserves.

Now the New York Attorney General is asking the exchange to preserve and turn over all documentation relevant to the investigation. Any proof showing that Bitfinex borrowed funds from Tether would be damning at this point.

Different stories are being put forward regarding the actual health of Bitfinex. Shareholders like Zhao Dong has heard that the funds are in the process of being unfrozen and that there are no corporate losses. In his words:

“If the U.S. government seized the funds, they should know, the funds doesn’t belong to Bitfinex or Tether, it’s the clients’ money.”

It also needs to be mentioned that all of this comes on the tail of Tether’s March announcement that a portion of their reserves are not held in fiat currency. An investigation into these reserves, which should all be USD in order for Tether to be properly capitalized based on their filings.

No Confirmation of Wrongdoing

In response to these allegations, executives at Bitfinex have clarified that this is the result of issues with Crypto Capital, and no loss has occurred. User withdrawals have been limited by the payment gateway, and that is where the shortfall has emerged. They continued to clarify:

“On the contrary, we have been informed that these Crypto Capital amounts are not lost but have been, in fact, seized and safeguarded. We are and have been actively working to exercise our rights and remedies and get those funds released.”

In the meantime, recent analysis has shown Bitfinex withdrawing approximately $90 million of Bitcoin and Ether from their cold wallets. This is likely because of decreased consumer confidence in the company, and several users withdrawing money as a result.

Implications for Sector

These allegations tend to affect the entire sector, as confidence in cryptocurrency swings quite rapidly based on current sentiments. Friday saw a massive drop in the price of Bitcoin, with about 3% of value disappearing in less than a day.

However, other cryptocurrencies fared worse. Bitcoin Cash, Cardano, and Ethereum all dropped approximately 5%, and this served to maintain Bitcoin’s dominance ratio around 55%.

With several big cryptocurrency trading scandals (Quadriga CX, for example) having occurred thus far this year, it is clear that there is still major room for improvement in the space before it is considered safe for the layperson to invest in it.