SEC Investigates Fraud At Bitfinex, Tether

On December 6th 2017, the U.S. Commodity Futures Trading Commission subpoenaed virtual-currency exchange Bitfinex and Tether, a company which issues a digital coin it says is pegged to the value of the U.S. dollar. The anonymous source that disclosed this to Bloomberg asked not to be identified.

As of January 30th, cryptocurrency exchanges worldwide have about $2.3B of the Tether tokens outstanding. Tether has yet to provide conclusive evidence that they indeed are holding $2.3B in reserve of real U.S. dollars. It has become a popular digital coin because of its supposed stability: for every tether created, they are supposed to hold one U.S. dollar in a bank account, meaning that its value can’t veer in price away from one U.S. dollar; unlike Bitcoin, the value of which can radically move up and down in the course of a week. There have been fears for several months that Tether doesn’t in fact hold this money in reserve.

The concern is that Tether may have been printing Tethers without real U.S. dollars backing them, then using them in the market to get a real dollar for each Tether, then buying Bitcoin with that money. An additional concern is that as this activity was a significant source of demand for Bitcoin, and it might in fact be phantom, the value of Bitcoin is also radically undermined. Trading the token for Bitcoin at Bitfinex has helped increase Bitcoin prices.

It is not clear from the Bitfinex and Tether websites or publicly available documents where the companies are actually located or who is in charge. The SEC can issue a subpoena as Bitfinex has U.S. customers. However, in a December 3rd email, a spokesperson for the firms, Ron Torossian, said that the firms share the same CEO, Jan Ludovicus van der Velde. According to the Paradise Papers, recently leaked by the International Consortium of Investigative Journalists, another executive, Phil Potter also has ties to both firms – as a director at Tether and a chief strategy officer at Bitfinex.

Adding to the intrigue and speculation is the January 27th news that Tether’s relationship to the audit firm Friedman LLP has come to an end. Friedman had been working closely on an audit of Tether. It is unclear from Tether’s statement to Coindesk, which confirmed the end of the relationship, how it came to an end.

“We confirm that the relationship with Friedman is dissolved.  Given the excruciatingly detailed procedures Friedman was undertaking for the relatively simple balance sheet of Tether, it became clear that an audit would be unattainable in a reasonable time frame. As Tether is the first company in the space to undergo this process and pursue this level of transparency, there is no precedent set to guide the process nor any benchmark against which to measure its success.”

The spokesperson added that the company remained “committed to the process”.

Friedman also recently deleted Bitfinex’s name for its list of clients on its website. Friedman has not yet issued a comment on the matter.

In a preliminary report issued in September, Friedman confirmed that Tether had just over $440M of cash on reserve, matching its outstanding issuance of USDT, however, the report contained numerous caveats and said it was based on a partial audit.

Scroll Up