The Tether and Bitfinex Controversy, Explained
Really, we could have just as easily called this ,“The iFinex Controversy, Explained,” as it’s squarely their mess. But what are the odds you’ve heard of the Tether and Bitfinex parent company? Before this mess?
Wait, iFinex Who?
What it boils down to, overall, is iFinex played some questionable ledger-keeping between Tether and sister company Bitfinex. Now, the New York Attorney General’s office claims the crypto exchange operator depleted a popular coin’s nest egg to hide an $850-million loss. There is not a criminal charge brought against iFinex – not yet – nor is the company legally prevented from conducting its business, but the NYAG wants a closer look at its internal dealings.
Bitfinex, you see, uses a third party, called Crypto Capital, to process some transactions with its customer base. Those Bitfinex customers had numerous issues completing withdrawals, all because, according to claims made by Crypto Capital, their assets and funds had been seized by the regulators in numerous countries, including the US, the UK, Poland, and Portugal.
From iFinex’s internal accounting, a special “transaction” took place, transferring $625 million out of sister company Tether’s on-hand assets to Bitfinex, and the same amount was transferred from Bitfinex’s Crypto Capital account to Tether’s. The benefit here is that Bitfinex customers’ transactions now processed in a timely and orderly fashion. However, the assets now backing Tether’s value are … cryptocurrencies? Maybe? Possibly. These were never supposed to provide Tether’s backing.
Here’s the Rub
It’s a bit of a pickle due to Tether’s standing as a stablecoin. The USDT, the Tether equivalent of a Bitcoin, is meant to be a fiat cryptocurrency. Bitcoin and other cryptocurrencies are notoriously volatile, as they have no intrinsic value beyond how much the market is values them. USDT is meant to work as a crypto through blockchain technology, but with the one dollar backing, its value and use should be about on par with the US dollar in world markets.
From the outside, it looks like the cash on hand meant to act as Tether’s fiat backing was transferred to Bitfinex to cover a loss. It’s a bad look for Tether, and worse for iFinex, if there is no USD reserve backing their USDT. Tether, it would appear, is either unwilling or unable to provide audits verifying they have the reserves necessary to back their own coin.
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