The 23-page prosecutor's charge document shows that since 2018, Bitfinex has caused a huge loss of US$850 million in the process of fund custody. After the incident, the company did not disclose it to investors, tried to conceal the loss, and reached out to Tether's reserve for cashing USDT, and secretly embezzled at least US$700 million to make up for the financial shortfall. The New York Attorney General's Office also obtained a preliminary injunction to freeze Tether's assets and requested documents from the two companies on credit lines of approximately $625 million and $900 million.

The Martin Act, New York State's "Blue Sky Act", aims to prevent fraud and protect the interests of investors. Before 1933, there was no federal management law for the securities management industry in the United States, and each state formulated its own related management laws. In 1921, the New York State Legislature passed the Martin Act, which prohibited fraud related to securities transactions and, after the 1955 Amendment, empowered the Attorney General to institute criminal and civil procedures. The Martin Act has been called one of the toughest anti-fraud laws because it doesn't require prosecutors to prove that the defendant "willedly" or show the defendant's criminal "motivation" but only that they made false or misleading investment advice There is a causal relationship with the losses suffered by investors. In the United States, engaging in securities and financial activities must not only comply with the requirements formulated by the Securities and Exchange Commission, but also comply with a series of laws and regulations formulated by the governments of the other states at the same time.

After the incident fermented, Bitfinex issued a counterattack, insisting that "Bitfinex and Tether are both in good financial condition", and that the $850 million was not a "loss", but an "accident" when it cooperated with the third-party payment company Crypto Capital Corp. And this huge amount of crypto capital was not lost, it was just seized and secured. Bitfinex took a tough attitude in its rhetoric, pointing out that the New York Attorney General's Office has seriously exceeded its authority and is full of malicious intent, and the accusation documents are full of false conclusions, and insisted on fighting against the New York Attorney General's Office.

But on April 30, Stuart Hoegner, the general counsel of Tether and Bitfinex, admitted in written testimony that only about 74% of USDT was backed by cash and equivalents. Each USDT holds USD 1 as support.

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New York prosecutors strike again

After Bitfinex responded strongly to the questioning, the New York prosecutors did not stop. According to coindesk, the New York State Attorney General's Office (OAG) stated on May 5 that Bitfinex must disclose Tether transaction documents so that the public can obtain greater transparency. The ban does not limit the ability of Bitfinex or Tether to operate their business normally, as they have continued to operate since the ban. The core issue is that Bitfinex and Tether have misled their customers and investors, which only heightens the need for OAG to obtain documents and information in a timely and organized manner so that OAG can understand what happened at these companies, and what will continue to happen matter.

At the same time, iFinex, the parent company of Bitfinex and Tether, submitted a document in response to the New York Attorney General’s Office (NYAG), stating that “(the ban) was issued based on incomplete or incorrect facts and wrong legal standards”. Bitfinex and Tether believe there is "no ongoing fraud and no 'victims' requiring mandatory remedies to protect them." The document also says the NYAG first needs to lay the groundwork for its authority to "regulate this area." iFinex noted that the NYAG misused the term “investors” when referring to customers of Bitfinex and Tether, who are not investors and “who do not have the right to disclose information as investors do.” Bitfinex also stated, “Tether is still trading today.”

At a hearing on May 6, New York Supreme Court Judge Joel M. Cohen said in handling the case that the scope of the preliminary injunction proposed by the New York Attorney General’s Office against Bitfinex at the end of April was questionable. The judge pointed out at the meeting, "The current preliminary injunction is vague and open-ended, and it is not tailor-made enough, which may lead to imminent and imminent harm. Therefore, lawyers for NYAG, Bitfinex and Tether need a week to seriously Negotiate, finalize the scope of the ban, and propose reasonable amendments."

While companies such as NYAG and iFinex have a week to negotiate the scope of the ban, at the same time, the exchange Bitfinex appears to be facing difficulties in withdrawing funds. Some users reported that they could not withdraw fiat currency from the exchange. Some users said that the application for withdrawing USD had been submitted for a month and had been delayed. Some users had their accounts frozen due to the withdrawal of fiat currency. According to cryptoslate, the Tether and Bitfinex incidents led to a total transfer of more than $430 million in cryptocurrency (including BTC, ETH, stablecoins and other cryptocurrencies) from Bitfinex's cold wallet, and the wallet activity shows that it seems to be processing withdrawals.

On the one hand, it confronted NYAG head-on. On the other hand, Bitfinex began to solve the problem of users’ difficulty in withdrawing fiat currency. After all, in February 2019, Bitfinex’s withdrawal business was blocked layer by layer. According to Zhao Dong, the founder of Dgroup, Bitfinex will carry out IEO fundraising to solve this problem. The full name of IEO is Initial Exchange Offerings, that is, the first trading offering, which refers to a way for exchanges to directly help projects raise funds and sell their tokens online.

On May 8, Bitfinex announced the white paper of the fundraising project LEO today, stating that its tokens will not be listed or sold to Americans and other prohibited persons in the United States. On May 13, Bitfinex Chief Technology Officer Paolo Ardoino announced on Twitter that he had completed a $1 billion private sale of LEO tokens within 10 days. Theoretically speaking, the withdrawal problem of Bitfinex can be completely solved after raising 1 billion US dollars in a short period of time, because the frozen funds are only 850 million US dollars.

The fundraising was completed in such a short period of time. People in the industry were amazed at the influence and appeal of Bitfinex, but the New York prosecutors did not think so. Unexpectedly, the $1 billion raised by LEO did not dispel the concerns of the New York prosecutors, but instead became a handle for Bitfinex, which was hit hard in July.

A week of negotiations passed quickly, but lawyers for the New York Attorney General's Office (NYAG) and Tether failed to reach an agreement on the ban, according to new court documents filed on May 13. The NYAG wanted to prevent "any affiliated Entity” draws on Tether’s reserves and enforces a 90-day injunction, but lawyers for Tether and Bitfinex parent company iFinex want only a 45-day injunction, and hope that iFinex’s affiliated entity Tether will also reduce the injunction time. Lawyers for iFinex wrote in a letter to the court on Monday that they would agree to certain modifications to the preliminary injunction, but would not abandon a previously filed motion to reverse the NYAG's ex parte injunction entirely. Judge Joel M. Cohen, who is in charge of the case, will likely schedule a hearing to resolve the matter.

At the hearing on May 16, Judge Joel M. Cohen approved Bitfinex's application to amend the NYAG office's injunction against Bitfinex, and stated that the original injunction was vague, too broad, and had no time limit. The New York Supreme Court allowed Bitfinex and Tether to continue their normal business activities, but still stipulated that the ban would expire in 90 days. According to Cohen, New York State's Martin Act "does not provide a mandate to regulate commerce." The judge's opinion also states that Bitfinex and Tether executives and employees are ordered to stop lending Tether's reserves to Bitfinex and any other party, except in normal business.

On May 21, Bitfinex and Tether filed new court documents asking a judge to dismiss the NYAG’s lawsuit against them, saying they have no customers in New York state. In addition, professional lawyers also believe that there is a scope definition loophole in the NYAG's allegations, "and even in a general sense, no 'victims' in New York have been identified, but the Department of Justice is using New York law, which governs securities and securities. The Martin Act for commodities, and the stablecoin USDT is neither a security nor a commodity.”

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New York prosecutors attack three times

The seemingly calm period from the end of May to the beginning of July was a critical time for both parties to collect evidence. During this period, the price of bitcoin rose all the way from $8,000 to a maximum of $14,000, an increase of nearly 75%.

The high-profile USDT has undergone several additional issuances before this period, and its total market value has risen from $29,3076,5020 to $37,2456,5868, an increase of 27.08%.

On July 2, Bitfinex issued an announcement saying that based on its financial situation at the end of the second quarter of 2019, it decided to repay an outstanding loan of US$100 million to Tether on July 1, which has not yet been paid to Tether. On July 6, according to data from CoinGecko, Tether’s trading volume in June exceeded $1 trillion. For USDT, whose market capitalization was only $3.6 billion at the end of June, a high-speed turnover rate of at least 277 times was required to The volume of transactions reached has fueled market speculation that "Bitfinex and Tether have been manipulating the price of the cryptocurrency market."

On July 8, new documents filed by New York prosecutors with the New York State Supreme Court show that Bitfinex and Tether have been providing cryptocurrency transactions to New York State users for longer than they claim. On July 9, Frank Chaparro, news director of the blockchain media The Block, tweeted that the New York State Department of Financial Services (NYDFS) provided evidence that the exchange Bitfinex served users in New York State.

At the same time, New York prosecutors accused Bitfinex and Tether of allegedly issuing illegal trading securities (USDT, LEO) in New York State and being unregistered securities operators. “Issuing Tokens in an IEO (LEO) shall be subject to the Martin Act and there is reason to believe that its offering activities are related to the matter under investigation,” the prosecution’s memo reads.

As the prosecution's accusations intensified, the fighting between the two sides became more intense. Before the final response on July 22, two small incidents occurred between Bitfinex and Tether.

At around 20:00 on July 11, Bitfinex tweeted that the exchange was undergoing temporary maintenance, and trading was temporarily suspended. All wallets will not be affected, and the recovery time is unknown. At 23 o'clock on the same day, the problem was fixed but the reason was not announced, and the transaction resumed.

On July 14, Tether Treasury issued two additional issuances totaling 5.05 billion USDT on the TRON chain, and destroyed two total USDT totaling 5 billion USDT. The operation took place within one hour. Later, Paolo Ardoino, CTO of Bitfinex, tweeted that this was an oolong event, because there was a problem with the data marking when USDT was preparing to transfer from Omni to Tron.

There is also a rather strange thing. Bitfinex’s bitcoin long-short position ratio has always been a classic indicator in the industry, but since May this year, several short positions have been liquidated in large amounts.

On June 30, short positions were liquidated for more than 20,000 bitcoins in an instant. On July 11, short positions were closed again for nearly 10,000 bitcoins. This sudden operation has caused many people to question whether Bitfinex’s long-short position data is true. In the case of a clear lack of depth in digital currency exchanges, such a large position can be quickly liquidated, which has to be doubted.

On July 22, Bitfinex filed its latest legal filing against the NYAG’s allegations, claiming that the claims that the two companies provided services to New York residents before 2018 were misleading. Its general counsel, Stuart Hoegner, said the two trading platforms only do business with foreign entities that do not have a New York entity, including former partner Mike Novogratz’s encrypted asset investment bank Galaxy Digital, whose address is listed in New York. city.

Bitfinex ceased serving New York residents in January 2017 and all U.S. residents in August of the same year, and a year later, physical and corporate clients in the U.S. were banned from the platform. Hoegner also stated that NYAG did not provide timely documents to Bitfinex, Tether or other affiliated companies in accordance with the law. These companies did not deliberately take advantage of the opportunity to do business in New York. Not applicable, so the petition to the New York Supreme Court should dismiss the case.

Whether Americans participated in the transaction of USDT and LEO has become a hot topic of discussion on the Internet. Seattle, U.S.-based Arrington XRP Capital and Los Angeles-based Arca both said they invested in LEO tokens, despite Bitfinex’s asserted refusal to sell them to U.S. residents or entities, according to Coindesk’s report.

However, the two investment managers said they did not buy the tokens from Bitfinex, but obtained them legally from a third party. Theblockcrypto also made a similar report. Although it is said that transactions in the United States are prohibited, as a user in the United States, it is still quite easy to trade through Bitfinex. After easily creating an account and accessing Bitfinex with an IP in New York State, the user only needs to choose an option, Saying they are not US residents allows them to continue using the exchange.

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The two sides finally went to court

Whether it is the evidence submitted by the New York prosecutors or the documents submitted by Bitfinex and Tether, they all focus on one point: whether the transaction services of the two companies are provided to New York residents. Once the evidence submitted by the prosecution can prove the transactions of New York users, the subsequent charges of securities fraud will be established in New York State, and the "Martin Act" will be applicable. On the contrary, the two companies are registered overseas, and the laws of New York State have no jurisdiction.

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Tracking of Bitfinex and Tether

Why are New York prosecutors targeting these two digital currency companies? We believe there are two broad categories of reasons, split equally.

1. The predecessor of Bitfinex has a bad record. The audit of Tether, known as the "digital central bank", is not transparent, and the company's profits are extremely high.

Looking at this financial data sheet alone, I believe it will surprise many people. In 2017, there were 35-60 Bitfinex team members, with a net profit of 326 million U.S. dollars; in 2018, with 60-90 people, the net profit was as high as 404 million U.S. dollars, and the per capita profit created was more than 36 million yuan.

Under such a lucrative business, it is hard to imagine that Bitfinex has a great security risk, and encrypted assets have been stolen several times. On May 22, 2015, Bitfinex was hacked and $400,000 worth of cryptocurrency was stolen, accounting for 0.06% of the exchange's encrypted assets. On August 2, 2016, Bitfinex was hacked to steal nearly 120,000 cryptocurrencies, worth about $75 million at the time. At the same time, it announced that almost all users shared 36% of the loss at the same time, but Bitfinex did not disclose all the details of the hacker. Confusingly, BitGo, the security company that provides digital signature services, claims that its servers have not been compromised. Of course, Tetherye is not safe. On November 19, 2017, Tether was hacked, and 31 million USDT was transferred from Tether's wallet to an unauthorized bitcoin address.

Tether was established in September 2014. Until November 7, 2017, it declared that Bitfinex and Tether were two completely independent entities. But in November 2017, leaked documents from the "Paradise Papers" revealed that Bitfinex and Tether were run by the same people. Tether and Bitfinex insisted that "businesses are separate."

Due to the opaqueness of Tether’s audit, users’ legal currency deposits have always been questioned, and the deposit and withdrawal bank channels that previously cooperated with Bitfinex have been cut off one after another. After parting ways with Wells Fargo and Noble Bank, no one bank was willing to provide banking services for Bitfinex, which caused difficulties in depositing and withdrawing funds.

In October 2018, Bitfinex claimed to have a business relationship with Deltec Bank & Trust Limited in the Bahamas, but subsequent evidence showed that Tether had deposited to deltec Bank but had withdrawn the funds. As a last resort, in November 2018, Bitfinex began to use Crypto Capital, a "pseudo bank", to provide deposit and withdrawal services. This laid the groundwork for the later "Eastern Window Incident". Many traditional banks are unwilling to cooperate with encryption companies for reasons such as money laundering, which has given birth to "shadow banks" such as Crypto Capital. The parent company of Crypto Capital is Global Trade Solutions AG, which has obtained a financial institution license in Switzerland, and appears as a banking service provider. According to Wei Zhou, chief financial officer of Binance and Christina Lee, chief brand officer of Kraken exchange, two cryptocurrency exchanges, Binance and Kraken, have also cooperated with Crypto Capital in the past, and lost 190 million US dollars due to the unexpected death of the CEO. Canadian cryptocurrency exchange QuadrigaCX is also among Crypto Capital's key partners.

Crypto Capital is an unregulated Panamanian company. In early May of this year, two people related to Crypto Capital were accused of money laundering. They provided banking services for crypto companies through Global Trading Solutions LLC and processed various illegal transactions, involving hundreds of millions of dollars. Dollar. Global Trading Solutions LLC was identified as one of the shell companies of Crypto Capital, and there was a capital exchange with Bitfinex. It is not the first time for Bitfinex to get into trouble because the account is opened in a bank suspected of money laundering. In April 2018, Bitfinex’s cooperative bank account in Poland was frozen for 400 million euros in connection with money laundering by a Colombian drug group. But Bitfinex later clarified that it had not found any connection between its business and two shell companies accused of defrauding the Belgian government and laundering money in Colombia.

In fact, Bitfinex and Tether appeared to be "not that simple" at the beginning of their birth. Brock Pierce, the chief planner behind the scenes, always cleverly concealed the connection between his companies and registered in different offshore places. In 2012, Bitfinex was incorporated in Hong Kong, China. In 2014, Tether was incorporated in the British Virgin Islands, and in the same year, Noble Bank was incorporated in Puerto Rico. These three companies all have Brock Pierce, Tether controls the issuance of USDT, Bitfinex is responsible for providing circulation exports for USDT, and Noble Bank is responsible for opening up the encrypted world and the banking system. The huge and secretive business channel is gradually exposed due to USDT's delay in publishing the third-party audit results.

2. The New York prosecutors make good use of the Martin Act, which can not only clean up the financial market, but also meet the aspirations of the people.

Why did New York prosecutors persevere in tracking Bitfinex and Tether since 2018 to investigate and deal with the underground and secret money laundering channel business? In the meantime, it involves the power of the Martin Act. Many attorney generals in New York State have relied on the "Martin Act" to punish financial chaos and combat financial crimes to gain higher approval ratings.

From 1929 to 1933, the collapse of the U.S. stock market caused heavy losses to countless investors. After the incident, New York Chief Prosecutor Thomas Dewey (Thomas Dewey) used the "Martin Act" to send criminals engaged in securities business on Wall Street to prison , and later Thomas was elected Governor of New York State. When "Black Monday" occurred in the United States in 1987, then-New York State Attorney General Rudy Giuliani (Rudy Giuliani) brought to justice Ivan Berski and Michael Milken for profiting from inside information .

After 1999, Eliot Spitzer, who is Jewish, served as New York State Attorney General. During this period, "whenever the media mentioned that he was eyeing a certain industry, it caused panic, and the stock price of the industry fell. There will be a sharp drop, the chief executives will turn pale, and the crisis management consultants will cancel their vacations." Because of his excellent regulatory deterrence, he was later crowned the governor of New York State.

The current Attorney General of New York State is Ms. Letitia James. Before her appointment, Barbara Underwood released the "Virtual Market Integrity Investigation Report" in the name of the New York State Attorney General in September 2018, pointing out that many virtual currency exchanges The lack of basic safeguards makes investors extremely vulnerable to exploitation by market manipulators. After the current Attorney General Letitia James took office, he focused on investigating the FaceTime wiretapping incident, investigating the business relationship of President Trump’s family, and investigating the illegal activities of Bitfinex and Tether.

It has to be said that the Attorney General of New York State has always been a "hard bone" role. The biggest deed this year is to obtain Trump's tax returns at all costs, which made President Trump very angry. This accusation against Bitfinex and Tether is the result of more than a year of investigation by the New York prosecutors, and it is also an opportunity for Letitia James to report on the achievements of the former attorney general. In short, the New York prosecutors came prepared.