A long-standing legal drama finally found resolution on Feb. 23, with the New York Attorney General’s office announcing that it had come to a settlement with cryptocurrency exchange Bitfinex after a 22-month inquiry into whether the company had been trying to cover up its losses — touted to be worth $850 million — by misrepresenting the degree to which its Tether (USDT) reserves were backed by fiat collateral.
According to the terms of the announced settlement, which now marks an end to the inquiry that was initiated by the NYAG back in Q1 2019, Bitfinex and Tether will pay the government body a fixed sum of $18.5 million but will not be required to admit to any wrongdoing. That being said, the settlement clearly states that henceforth, Bitfinex and Tether can no longer service customers in the state of New York.
Furthermore, over the course of the next 24 months, Bitfinex and Tether will be required to provide the NYAG with quarterly reports of their current reserve status and duly account for any transactions taking place between the two companies. Not only that, but the firms will also be required to provide public reports for the specific composition of their cash and non-cash reserves.
On the subject, NY Attorney General Letitia James said that both Bitfinex and Tether had covered up their losses and deceived their customers by overstating their reserves. When asked about this most recent development, Stuart Hoegner, general counsel at Tether, replied to Cryptox with a non-committal answer, stating:
“We are pleased to have reached a settlement of legal proceedings with the New York Attorney General’s Office and to have put this matter behind us. We look forward to continuing to lead our industry and serve our customers.”
Does a New York exclusive ban even make sense?
To gain a better legal perspective of the situation, Cryptox spoke with Josh Lawler, partner at Zuber Lawler — a law firm with expertise in crypto and blockchain technology. In his view, the lawsuit, and particularly the nature of the settlement in which Tether and Bitfinex agreed to cease actions, underscore the confusion inherent in the regulation of digital assets in the United States.
Additionally, the agreement by Bitfinex and Tether to prohibit the use of its products and services by New York persons and entities seems on paper to be nearly impossible to accomplish, with Lawler opining:
“Are they saying that no one with a New York nexus can own or trade Tether? Tether is traded on virtually every cryptocurrency exchange in existence. Even if Tether could restrict the use of Tether tokens by New Yorkers, is that really a good idea? Do we now have a world in which every state can pick off particular distributed ledger projects from functioning within their jurisdiction?”
Lastly, even though the deal between Bitfinex/Tether and the NYAG has come in the form of a settlement — i.e., it is not subject to an appeal or federal scrutiny under the commerce clause — state-centric bans may further add to the existing regulatory uncertainty.
Added transparency is always a good thing
With regulators now asking Tether and Bitfinex to be more forthcoming about their monetary dealings and issuing an arguably small fine on them, it seems as though an increasing number of firms dealing with USDT will now have to pull up their socks and get their account books in order. Joel Edgerton, chief operating officer for cryptocurrency exchange bitFlyer USA, told Cryptox:
“The key point in this settlement is not the elimination of the lawsuit, but the increased commitment to transparency. The risk from USDT still exists, but increased transparency should cement its lead in transaction volumes.”
In a somewhat similar vein, Tim Byun, global government relations officer at OK Group — the parent company behind cryptocurrency exchange OKCoin — believes that the settlement can be looked at as a win-win scenario not only for NY OAG and Tether/Bitfinex but also for the cryptocurrency industry as a whole, alluding to the fact that that the 17-page settlement revealed no mention of Bitcoin (BTC) being manipulated via the use of USDT.
Lastly, Sam Bankman-Fried, chief executive officer for cryptocurrency exchange FTX, also believes that the settlement, by and large, has been a good development for the industry, especially from a transparency perspective, adding:
“Like many settlements, this one had a messy outcome, but the high-level takeaway here is that they found no evidence to support the heaviest accusations against Tether — no evidence of market manipulation or unbounded unbacked printing.”
Will scrutiny of stablecoins increase?
Even though stablecoins have been under the regulatory scanner for some time now — since they claimed to be pegged to various fiat assets in a 1-1 ratio — it stands to reason that added pressure from government agencies may be present when it comes to the transparency side of things from here on out.
Another line of thinking may be that governments all over the world will now look to curtail the use of stablecoins, such as USDT, especially as a number of central banks are coming around to the idea of creating their very own fiat-backed digital currencies. As a result, governments may want to push their citizens to use their centralized offerings instead of stablecoins.
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On the subject, Byun noted: “Stablecoin is just one type of cryptocurrency or ‘convertible virtual currency,’ and therefore, stablecoins and the stablecoin market will continue to attract scrutiny and mandated examinations from regulators.” That said, Byun believes that whether it’s Bitcoin, Ether (ETH) or Tether, crypto investors generally understand that investing in crypto remains a high-risk activity and that they “must practice caveat emptor” at all times.
Does Tether impact institutional adoption?
Another pertinent question worth exploring is whether or not the settlement may have an adverse impact on the institutional investment currently coming into this space. In Lawler’s opinion, the decision is not going to slow down adoption even in the slightest. “Institutions are not principally focused on Tether. There are other stable coins, and Bitfinex is all but irrelevant to them,” he added.
Similarly, it could even happen that the ongoing reporting requirements set by the NYAG for Bitfinex and Tether may end up bolstering institutional confidence in Tether — a sentiment that some of Tether’s most vocal and consistent critics also seem to agree with.
That being said, a lot of speculation around Tether’s fiat reserves continues to linger on; for example, Tether Ltd.’s finances are handled by Bahamas-based Deltec bank. In this regard, one anonymous report claimed that “from January 2020 to September 2020, the amount of all foreign currencies held by all domestic banks in the Bahamas increased by only $600 million,” up to $5.3 billion. Meanwhile, the total volume of issued USDT soared by a whopping $5.4 billion, up to around $10 billion.
As Tether states on its website USDT is covered by fiat and other assets, so such investigations cannot be conclusive. However, what both NYAG and the anonymous authors of the report agree upon is that Tether needs to be more forthcoming about its financial status. With that in mind, Tether’s commitment toward transparency and revealing its reserves to a regulator seems like a step in the right direction.
