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24 March 2023
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“Holders Are Not at Risk”: Bitfinex Lawyer Responds to NY Attorney General

Bitfinex and Tether’s legal counsel has written a response to the New York Attorney General’s (NYAG) ex parte order, which claims that Bitifinex used Tether’s reserves to cover some $850 million in losses.

In short, the affidavit writes off the NYAG’s concerns, calling them baseless and requesting an Order to Show Cause that would require the NYAG to prove its case in court unless it vacates or modifies the ex parte order. Additionally, it requests that the Supreme Court of the State of New York stay the NYAG’s order, meaning Bitfinex would not have to comply with a May 3, 2019, deadline requiring the exchange to produce documents related to a $900 million line of credit Bitfinex established with Tether to stanch the $850 million loss.

Authored by Stuart Hoegner, who has served as Bitfinex and Tether’s legal counsel since 2016, the affidavit is scathing in its rebuke of the Attorney General’s claims. Hoegner writes that the Office of the New York Attorney General’s (OAG) “preliminary injunction serves no useful purpose” and that it “has succeeded only in spreading misinformation to the markets.”

Marked throughout with a tone of defiance, the letter asserts that “Tether holders are not at risk,” despite the NYAG’s framing of the situation in its own letter. Further, it claims that Bitfinex self-reported its troubles with Crypto Capital to the NYAG, the payment processor that allegedly led to Bitfinex’s $850 million loss of customer funds.

Hoegner admits that Tether is operating under a roughly 74 percent reserve — but also argues that this practice is not a problem.

The AG Doth Protest Too Much?

The affidavit begins in defense of Bitfinex’s relationship to Crypto Capital, whose refusal to wire funds to Bitfinex back in 2018 bottlenecked fiat withdrawals for many customers, the NYAG’s letter states.

Bitfinex had to rely on Crypto Capital’s services because it had been ostracized from proper banking relationships, Hoegner claims, citing how its complications with such banks as Wells Fargo is a perpetual thorn in the industry’s side.

According to the letter, Bitfinex, among other exchanges (like QuadrigaCX in Canada) that used Crypto Capital for makeshift banking, began experiencing withdrawal problems in 2018. This was on account of Crypto Capital having a substantial amount of its funds seized, the document states, affirming that “at least one governmental entity has confirmed that it was involved in the seizure of Crypto Capital funds.”

What’s more, the document alleges that “Bitfinex proactively and voluntarily informed the Office of the New York Attorney General (‘OAG’), as well as various U.S. federal law enforcement agencies of its issues and concomitant concerns with Crypto Capital.”

The letter continues, “On information and belief, those federal agencies have since been investigating Crypto Capital on a non-public basis at the time of OAG’s application and press release regarding this matter.”

Hoegner continues to make the case that Bitfinex orchestrated a “good-faith solution” when it debited $625 million from Tether’s reserves, along with establishing a $900 million line of revolving credit with the stablecoin company, to cover the losses incurred from Crypto Capital.

The counsel argues that this was done “for the protection of the virtual currency market,” and he suggests that the NYAG’s recommendation for the New York Supreme Court to enjoin Bitfinex from drawing on this line of credit would harm the market’s participants.

“OAG purports to wonder what ‘benefit[s] would accrue to Tether, or holders of tethers, from this transaction,’ the obvious answer is that Tether, and holders of tether, have a keen interest in ensuring that one of the dominant trading platforms of tethers has sufficient liquidity for normal operations.”

Biftinex’s upper echelon began orchestrating the deal in December of 2018, and according to the document, Bitfinex alerted the NYAG to the deal “one month before it was closed, providing OAG a general overview of [it].” The NYAG makes mention of this in its own letter, but it qualifies that it wasn’t alerted of the deal’s final structure until after it was finalized and that it had changed from its first draft.

“The description of the transaction differed significantly from what OAG was told just weeks earlier in the February 21. 2019 meeting. and included new information about a previous. undisclosed transfer of $625 million from Tether’s reserves to Bitfinex,” the ex parte order reads.

Hoegner makes no reference to the $625 million Tether transferred to Bitfinex’s Bahama-based Deltec bank account; it only touches on $675 million that was transferred from Bitifinex’s Crypto Capital account to Tether’s Crypto Capital account for “the protection of Tether.”

This transaction, which the document claims took place on an “arms-length basis” was signed for both sides by the same representative counsel, Giancarlo Devasini.

Under the Tether

The letter continues to say that the deal has not interfered with Tether’s usual business dealings as the NYAG’s letter might suggest, adding that “the average daily fiat redemption has been $566,066.00, with the largest being $24.2 million.”

This is drawn from a reserve of “cash or cash equivalents (short term equivalents)” of $2.1 billion. With its market cap at $2.8 billion, that means Tether is running at a 74 percent reserve, Hoegner admits, going further to say that Bitfinex can draw on the line of credit until this percentile drops to 68.

With a deposit-to-reserve ratio of 3 to 4, Bitfinex is doing leagues better than banks that are legally obligated to only hold fractions of reserves at or lower than 10 percent, the document points out. That Tether is operating with fractions in its reserves has also been well covered by industry media, Hoegner argues, when Tether made changes to its website’s policies.

“Market participants appear to understand that tether is not at risk,” Hoegner concludes. Turning the tables, the lawyer argues that the NYAG’s “misleading” letter did more damage as the market shed some $10 billion in capitalization in response, and he argues that “market confidence in U.S. Dollar tether remained strong, as tether continued to trade at $0.99” — this is after USDT dipped to $0.97 following the news.

In a memorandum defending Hoegner’s stance, Zoe Phillips, an attorney for Tether, argues that the NYAG has no business meddling in Bitfinex and Tether’s affairs as long as there is responsible disclosure.

“… the Attorney General has no authority to dictate how Bitfinex and Tether do business with one another, or the amount of reserves that Tether must hold. The Martin Act is an antifraud statute enacted to ensure that there is proper disclosure about the risks associated with the sale of securities and commodities … Tether states plainly on its website that tethers are backed by reserves in various forms, specifically including ‘loans’ to ‘affiliated entities.’”

For its own part, one of the NYAG’s qualms with the line-of-credit arrangement is that Tether holders and Bitfinex users were not informed.

Still, Hoegner’s letter draws the same conclusion that the “OAG’s application contains numerous mischaracterizations and omissions that undercut its request for injunctive relief.” It gives no indication that Bitfinex will comply with the NYAG’s demand to comply with a series of requests by May 3, 2019, arguing that it would “impede the normal operations of Bitfinex’s business.”

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