Featured: The Full Story of Bitfinex & Tether

News of the Bitfinex and Tether scandal has been dominating crypto news in 2019, but what is the full story? If you’re struggling to answer this question, it probably has something to do with what Bitfinex is being accused of in court: lack of transparency.

We’ll attempt to clear some of the confusion here and tell you who the companies are, and the timeline of events leading to the latest updates.

iFinex, Bitfinex, and Tether

Bitfinex is a centralized cryptocurrency exchange founded in 2012 and headquartered in Hong Kong but registered in the British Virgin Islands. Bitfinex has had it’s fair share of scandals over the years, mainly relating to high profile hacking into the exchange.

In 2015, around $400,000 was stolen from customers’ account as part of a hack, and only one year later in 2016 $73 million more was stolen from customers’ accounts. This 2016 hack came only months after Bitfinex was ordered to pay a $75,000 fine to the US Commodity Futures Trading Commission for “offering illegal off-exchange financed retail commodity transactions in bitcoin and other cryptocurrencies, and for failing to register as a Futures Commission Merchant”.

iFinex is the parent company for both Bitfinex and the stablecoin Tether (USDT). It runs the Bitfinex exchange, as well as the cryptocurrency Tether.

Tether is a controversial ‘stablecoin.’ A stablecoin is a form of cryptocurrency that is supposed to offer a solution to the volatile nature of traditional cryptocurrencies. They achieve this by being backed by fiat currency, or exchange-traded commodities such as precious metals (although it is much more rare).

Tether was considered a stablecoin because it was allegedly backed by the US dollar at a 1:1 ratio. While this sounds like a great idea, many people doubted whether this was true since they iFinex failed to provide evidence that Tether was actually backed 1:1 with the USD. Tether began trading in February 2015 and has remained a popular cryptocurrency since its inception. Tether coins are distributed by Tether Limited.

Timeline of Scandals

July 2014 – Bitcoin entrepreneur and former child actor Brock Pierce announced the launch of ‘RealCoin,’ an emerging cryptocurrency backed by the US dollar. He claims that the digital coin is backed on a 1:1 basis with the company’s dollar reserves in an attempt to minimize the volatility of crypto. A spokesperson for the company said:

“Realcoin will be completely transparent, safe, secure and insured. Every dollar that is held in our reserve will be represented by one coin in circulation and can be redeemed at any time.”

September 2014 - Tether Limited is set up by Bitfinex operators.

November 2014 - In a move to distance itself from altcoins, RealCoin rebrands to “Tether” and announces Bitfinex as a partner, although there is speculation that Bitfinex purchased RealCoin.

February 2015 - Tether begins trading.

May 2015 - Customers on Bitfinex exchange lose $400,000 from being hacked.

June 2016 - Bitfinex is fined $75,000 by the US Commodity Futures Trading Commission.

August 2016 - Bitfinex is hacked again, resulting in $73 million in losses. Bitfinex announces they have hired a blockchain forensic firm, Ledger Labs, to investigate the cryptocurrency theft. When the public begins to question why nothing has been found, Bitfinex admits they didn’t hire Ledger Labs.

March 2017 - Wells Fargo cuts off Bitfinex, leaving Bitfinex struggling to find a bank to complete wire transfers after many banks turn their back on them.

April 2017 - Bitfinex files a lawsuit against Wells Fargo after the bank limited Bitfinex’s ability to wire funds internationally. They withdrew this suit a week later stating:

“We voluntarily dismissed our case, accepting the court’s decision, and find that we’re best served focusing our efforts on existing and developing relationships.“

November 2017 - The Paradise Papers were leaked, the second largest data leak at the time, second to the Panama papers of 2016. The leaked data proved that Bitfinex founders Philip Potter and Giancarlo Devasini established Tether in 2014. This confirmed the link between the companies since previously it had been insisted that they were separate.

Tether is also hacked and 31 million Tether coins (USDT) are stolen.

December 2017 - This was a busy month for Bitfinex. They hired a law firm called Steptoe & Johnson and threatened their critics with legal action, but were vague about who these critics were. The CFTC issues Bitfinex and Tether with Subpoenas (court summons) but any further information has not been made public. New users signing up to Bitfinex experience a strange situation where they can’t create an account and are sent around in circles, Bitfinex did not respond to this to say why they were barring new accounts.

January 2018 - Bitfinex reopens registrations for new customers, stating:

“To that end, and to allow us to maintain focus on our core customer base, all accounts created after January 1st, 2018, will have a new activation equity requirement. New accounts will need to deposit fiat or crypto to achieve minimum account equity of 10,000 USD equivalent before they can trade or offer funding. After reaching this minimum, an account becomes fully activated.”

Also in January Bitfinex parts with the auditing company after promising an audit to prove Tether’s authenticity.

May 2018 - Bitfinex and Tether are banking with Noble Bank, Puerto Rico, according to sources close to the matter.

June 2018 - Phil Potter leaves Bitfinex and Tether. Law firm Freeh Sporkin & Sullivan attests that Tether has backed USD 1:1 as of June 1st.

October 2018 - Bitfinex responds to allegations that they are near Bankruptcy saying: “Bitfinex is not insolvent, and a constant stream of Medium articles claiming otherwise is not going to change this.” Tether is also traded at a 10% discount and there are calls for Tether to publicly share their banking details after their relationship with Noble Bank falls through.

November 2018 - The US Department of Justice begins investigating whether Bitcoin was manipulated by using Tether.

March 2019 - Tether quietly updated their statement about how the crypto-coin is backed, now claiming that the coins are backed by “reserves, other assets, and loans”. This confirmed something people had been speculating for a long time but had no proof of.

April 2019 - The New York Attorney General (NYAG) files a lawsuit alleging that Bitfinex and Tether have been engaging in fraud to cover $850 million in missing funds.

Bitfinex assures shareholders that the missing funds that it is a temporary situation, and funds will be released in a few weeks. Bitfinex also reveals that Tether is backed 74% by cash, the first real transparency we have seen on the subject.

May 2019 - Bitfinex announces plans to raise $1 billion through IEO. $1 in capital was successfully raised and Bitfinex’s new utility token, LEO, is launched.

Bitfinex claim victory in the legal battle with the NYAG because a New York Supreme Court judge granted a stay of document demand, agreeing that the NTAG actions lacked legal validity.

Bitfinex is one of the most popular cryptocurrency exchanges and Tether is one of the most well-known and traded stablecoins. The lack of transparency by the companies has caused investors and regulators to keep a closer eye on their actions and will likely lead to calls for more transparency in the industry, no matter what the outcome of the court case is.

Relating to the matter, the spokesperson of the crypto intelligence company CipherTrace said: