Bitfinex-Tether Lawsuit

VeradiVerdict - Issue #59

During several meetings last week, folks brought up the topic of the Bitfinex-Tether lawsuit so I wanted to shed some light on what’s out there:

  • Roche Freedman, a NY-based law firm, launched a lawsuit against cryptocurrency exchange Bitfinex and token Tether for driving the Bitcoin bubble of 2017-2018, contributing to over $1.4 trillion in aggregate damages and a $450 million loss to the market when the bubble burst.

  • The lawsuit claims that Tether did not follow its premise of only issuing its token (USDT) for every USD in one of its company’s bank accounts, but rather issued USDT to illicitly manipulate the market. Specifically, Tether would flood Bitfinex with USDT in response to falling BTC prices in order to enable users to buy BTC and drive demand and price increases for BTC.

  • Tether and Bitfinex have had prior allegations of collusion and malpractice (namely, the April 2019 incident where it is alleged that Bitfinex used Tether to cover $850 million in losses), but still deny the claims of the lawsuit. They argue that the lawsuit is a money grab attempt and its research relies on cherry-picked data. 

  • It’s unlikely by many accounts that this collusion drove the entirety of the Bitcoin bubble, and there were a lot of other confounding factors like Tether’s business incentives and Chinese use of Tether, that may account for the USDT issuances on Tether’s end. Still, Tether’s and Bitfinex’s controversial past indicates that they may have indeed been manipulating the market to some extent.

  • Ultimately, the lawsuit may confirm criticisms that cryptocurrency is artificially governed and managed, delegitimizing it as an asset. However, by exposing this malpractice, the suit also prompts better regulation and oversight over cryptocurrency tokens and exchanges –– contributing to a more sustainable, secure, democratic crypto ecosystem.

What’s the hubbub about Tether and Bitfinex and some lawsuit?

If you’ve been reading any of the news in the crypto sphere recently, you’ve probably heard of a massive lawsuit against the cryptocurrency exchange Bitfinex and the cryptocurrency Tether. The suit accuses Bitfinex and Tether of colluding to drive boom-and-bust cycles (and resulting, profit) in the cryptocurrency market; accusations go as far to say that the collusion and manipulation was the primary driver of the Bitcoin bubble of the past couple years that saw a spike in the price of BTC up to nearly $20,000 in late 2017. Bitfinex and Tether vehemently deny the claims of the suit and argue that its logic and research is based on biased, cherry-picked data. 

What even is Tether?

Tether (USDT) is a cryptocurrency operated by Tether Limited. Originally, Tether was designed to be a stablecoin with one token equaling the value of one US dollar. The premise of Tether, as a stablecoin, was to keep the value of cryptocurrencies stable, particularly with respect to the US dollar, whereas other currencies like BTC and ETH might experience higher degrees of volatility. 

Part of the value of Tether as a USD-backed cryptocurrency is that it’s often a pulse for the financial market for the US dollar, which affects the markets for other assets, including cryptocurrency. Tether bridges changes from the USD money market to the cryptocurrency market, and resulting, Tether plays a huge role in influencing the price of various cryptocurrencies.

What is Bitfinex?

Bitfinex is a popular cryptocurrency exchange based in Hong Kong and the British Virgin Islands. Bitfinex has a bit of a troubling history, with several incidents of customer assets being lost or stolen due to poor or corrupt management of the firm. Tether and Bitfinex share certain stakeholders and management, and resultingly, there’s a lot of high-level collaboration between the firms.

Prior to this specific lawsuit, Bitfinex faced another lawsuit in April 2019 from the NY Attorney General of using Tether to hide and cover $850 million in losses. The suit claimed that Bitfinex deposited $1 billion in a Panamanian corporation called Crypto Capital Corporation, without a formalized contract or business relationship in place. Crypto Capital Corp. eventually left with the money, covering Bitfinex’s losses. Tether’s and Bitfinex’s history of collusion and malpractice sets a suspicious precedent for the way the public perceives the most recent lawsuit.

What exactly is the claim of the lawsuit?

The suit, filed by NY-based law firm Roche Freedman, claims that several groups deeply affiliated with Tether and Bitfinex colluded to defraud investors and manipulate the broader cryptocurrency market. Tether claims to investors that the number of USDT in circulation is one-to-one proportional with the total quantity of US dollars in their company’s bank accounts. The suit argues that Tether broke this practice and issued more units of USDT to buy cryptocurrencies they were interested in, driving pricing spikes and falls in those markets.

Specifically, the suit argues that Tether issued $2.8 billion worth of USDT and injected it into the popular Bitfinex exchange, which gave them the unique power to spike prices and demand for certain cryptocurrencies. Research suggests that roughly half the shift in demand for cryptocurrencies between 2017-2018 resulted from this scandal. The malpractice supposedly created the largest financial bubble in human history, which caused the market to lose $450 billion of value when it burst in just a month. In aggregate, the damages from these claims sum to $1.4 trillion.

Is it really true?

Bitfinex and Tether both strongly deny that their business practices contributed at all to these boom-and-bust cycles, and certainly not to the extent posited by the lawsuit. A public statement dually issued by the firms claims “It is irresponsible to suggest that Tether or Bitfinex enable illicit activity due to the efficiency, liquidity and wide-scale applicability of Tether’s products within the cryptocurrency ecosystem.” They characterize the lawsuit as a money grab attempt, a way for the firm and associated companies to take a cut of Bitfinex’s and Tether’s recent profit.

The lawsuit cites a research paper that claims that most of this illegal manipulation stems from one deposit account on the Tether blockchain. The lawsuit also cites the timing of Tether issuance and transactions, arguing that the issuances were always preceded by a falling price in BTC; in theory, Tether issued more Tether to enable more users to purchase BTC, driving the price up. 

Still, many economists and blockchain enthusiasts note that Tether has incentives to issue more of its currency when it experiences high user demand. A falling BTC price means that more users want to buy BTC, increasing the demand for Tether and thus, preceding its issuance. These arguments would mean that Tether may be complicit in the boom-and-bust cycles, but rather because of its business model and response to market supply and demand as opposed to intentional manipulation of the Bitcoin market. Some also bring up how China banned cryptocurrency exchanges in 2017, and many Chinese cryptocurrency users purchased Tether to trade crypto back to the Yuan. This may have also contributed to the Tether issuance timings and the resulting effects on the market.

While it may be possible that Tether and Bitfinex’s illicit collusion led to some boom-and-bust cycles, it’s likely untrue per many reports that half of the Bitcoin bubble in 2017-2018 was solely driven by this malpractice. There are many other factors mentioned by blockchain enthusiasts and leaders that characterize Tether as a cog in the Bitcoin bubble, but not necessarily its driver.

What does this mean for the broader cryptocurrency ecosystem?

Superficially, the lawsuit signals a lot of doubt about cryptocurrency. The claims of the suit exemplify how easy it might be to manipulate the value of cryptocurrency via various arbitrary, unregulated mechanisms –– these confirm biases and thoughts of many crypto critics that cryptocurrency has no real value and oversight. 

That said, an incident like this also naturally prompts more oversight into the operations of cryptocurrencies. Financial bubbles of this extent represent real, tangible threats to the broader financial ecosystem; at minimum, this case will prompt more barriers against collusion between exchanges and tokens in order to preserve the free, unmanipulated cryptocurrency market. Though a temporary slip-up in the cryptocurrency world, this incident ultimately highlights a critical area for improvement within cryptocurrency technologies and management.


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Hi, I’m Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing in blockchain companies and cryptocurrencies. The firm invests in equity, pre-sales/IEO rounds, and cryptocurrencies on the secondary markets. I focus on early-stage investments and share my thoughts on what’s going on in the industry in this weekly newsletter.

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