The Bitfinex exchange's misappropriation of funds to cover losses is a typical case of regulatory violation in the cryptocurrency industry that triggered market turmoil.
In its early years, Bitfinex relied on the Panama-based third-party payment processor Crypto Capital to handle user deposits and withdrawals. In 2018, this entity was frozen due to regulatory investigations, resulting in the seizure of $850 million in customer funds that Bitfinex had stored there. Bitfinex falsely claimed that the funds were merely protected and not lost, deliberately concealing the true situation that this substantial amount of money was difficult to recover.
Since Bitfinex and the issuer of USDT, Tether, are both part of iFinex and share a highly overlapping core management team, Bitfinex chose to misappropriate Tether's USDT reserves to fill this funding gap. It is important to note that Tether had previously claimed that every USDT was backed by a 1:1 reserve of US dollars, and this misappropriation directly broke that promise. To cover their tracks, both parties packaged this misappropriation as a related loan.
In April 2019, the New York State Attorney General's office intervened and filed a lawsuit, revealing the violations committed by both parties. The investigation also found that Tether's previous claims about USDT reserves had inconsistencies, such as temporarily depositing the corresponding funds on the same day the reserve report was released and then transferring hundreds of millions back to Bitfinex the next day. Subsequently, Tether quietly changed the wording on its official website from '1:1 dollar cash reserves' to a vague statement that included cash equivalents and other assets.
After the incident was exposed, the trust in the peg between USDT and the US dollar completely collapsed, triggering panic in the cryptocurrency market. Before and after the investigation results were disclosed, Bitcoin's 24-hour decline once exceeded 17%, and the market evaporated nearly $10 billion in value in a short time. Bitfinex users faced significant asset depreciation and withdrawal concerns, leading to a sharp decline in their assets. In February 2021, both parties reached a settlement with the New York prosecutors, paying a $18.5 million fine, and were required to disclose details of USDT reserve assets quarterly, as well as being prohibited from providing services to users in New York State.
In its early years, Bitfinex relied on the Panama-based third-party payment processor Crypto Capital to handle user deposits and withdrawals. In 2018, this entity was frozen due to regulatory investigations, resulting in the seizure of $850 million in customer funds that Bitfinex had stored there. Bitfinex falsely claimed that the funds were merely protected and not lost, deliberately concealing the true situation that this substantial amount of money was difficult to recover.
Since Bitfinex and the issuer of USDT, Tether, are both part of iFinex and share a highly overlapping core management team, Bitfinex chose to misappropriate Tether's USDT reserves to fill this funding gap. It is important to note that Tether had previously claimed that every USDT was backed by a 1:1 reserve of US dollars, and this misappropriation directly broke that promise. To cover their tracks, both parties packaged this misappropriation as a related loan.
In April 2019, the New York State Attorney General's office intervened and filed a lawsuit, revealing the violations committed by both parties. The investigation also found that Tether's previous claims about USDT reserves had inconsistencies, such as temporarily depositing the corresponding funds on the same day the reserve report was released and then transferring hundreds of millions back to Bitfinex the next day. Subsequently, Tether quietly changed the wording on its official website from '1:1 dollar cash reserves' to a vague statement that included cash equivalents and other assets.
After the incident was exposed, the trust in the peg between USDT and the US dollar completely collapsed, triggering panic in the cryptocurrency market. Before and after the investigation results were disclosed, Bitcoin's 24-hour decline once exceeded 17%, and the market evaporated nearly $10 billion in value in a short time. Bitfinex users faced significant asset depreciation and withdrawal concerns, leading to a sharp decline in their assets. In February 2021, both parties reached a settlement with the New York prosecutors, paying a $18.5 million fine, and were required to disclose details of USDT reserve assets quarterly, as well as being prohibited from providing services to users in New York State.
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