Bitfinex Legal Troubles
Bitfinex has been in some trouble since 24 April 2019 when the New York Attorney General (NYAG) obtained a Court Order against iFinex, Bitfinex’s parent firm to stop violating New York law and defrauding New York residents. In the Order, iFinex was accused of covering its $850 million losses by borrowing from Tether’s reserve. The NYAG also obtained a preliminary injunction against Bitfinex or Tether from accessing its reserves.
This also caused a stir within the cryptocurrency community as it was essentially revealed that Tether is not fully backed by cash. Rather, it is only 75% backed by cash with the remaining through loans or other securities.
To learn more about Tether (USDT) check out my video below:
What is the Bitfinex Initial Exchange Offering (IEO)?
Amid a gaping $850 million hole on Bitfinex’s financial books, Bitfinex has released its official white paper indicating its plan to issue an initial exchange offering (IEO).
The white paper can be viewed here.
The white paper states that 1 billion tokens dubbed LEO will be sold to investors. Notably, LEO tokens will be purchased using USDT, a stable coin issued by Tether Ltd which is also owned by iFinex.
To appease investors, the LEO tokens will enable them to enjoy discounts when trading on Bitfinex and EOSfinex. Additionally, the same benefits will be available on other platforms operated or owned by iFinex.
To evade regulations, the tokens will not be available to investors in the United States or any U.S. persons.
Will the Bitfinex IEO save the exchange?
Notably, the exchange is conducting the initial exchange offering to stitch the $850 million hole in its balance sheet.
Whether the amount will be enough to save the troubled exchange is debatable. Firstly, the chance of success is very high since this is not the first time the exchange is raising tokens to cover up for losses. In 2016, Bitfinex pulled a similar stunt to cover losses incurred after a security breach on its platform. As it did then, the exchange is replicating the same scheme; selling ‘temporary tokens’ which it later buys back.
From the outlook, iFinex has a complex but well thought out plan. Since LEO will be purchased with USDT, raising $1 billion will be enough to reinstate the USDTs 1:1 tether to the U.S dollar, plus some change. iFinex can deposit the change into Bitfinex’s account without going against the court order issued by the New York Attorney General. It will then help settle the loan that Tether gave Bitfinex to cover for the loss.
The only reason that Bitfinex will be able to get away with this plan is that virtual currency exchanges do not fall under the same regulatory framework as traditional financial institutions.
Bitfinex CTO confirms rumours that it has raised $1 billion
Bitfinex’s CTO Paolo Ardoino has confirmed via social media on 13 May 2019 that the Company was able to raise $1 billion USDT by private sales in 10 days.
What happens next? Update: new developments in Court case
The legal proceedings against iFinex by the NYAG are ongoing.
New Court documents were filed on 13 May 2019 where NYAG and Bitfinex are disagreeing on the terms of the injunction.
On the one hand, the NYAG wants to prevent Bitfinex or any of its affiliated entities from accessing Tether’s fund reserves and a 90-day injunction.
On the other hand, iFinex is proposing that its affiliated entities should be able to access the funds, and a shorter period of 45-days for the injunction. However they make this proposal without waiving their previous motion to vacate the NYAG’s previous Court Order entirely.
As both sides cannot come to an agreement on the terms of the injunction, or at all, it is likely that Judge Joel M. Cohen, who oversees this case would want to schedule a hearing. This is so both parties would have a chance to present their arguments and for the Court to come to a determination on these opposing views.
However as CoinDesk reports and as seen from the Court documents filed, it is unclear when this hearing will be.
Court gives Bitfinex room to conduct its business. Bitfinex praises Judge’s decision.
On 16th May 2019, Judge Joel M. Cohen Ordered that the terms of the preliminary injunction should be tailored so that the legitimate business activities of Bitfinex and Tether would not be interfered with.
Specifically the Court ordered that:
- Tether can now loan assets to Bitfinex or other parties in its normal course of business;
- Tether can only distribute funds from its reserves for payroll, and paying contracts, consultants or vendors;
- Bitfinex or Tether must provide the documents asked for in the NYAG’s original subpoena; and
- The injunction will expire in 90 days. BUT the NYAG can request for the period to be extended.
Bitfinex considers this a victory. In its statement, Bitfinex repeated that the NYAG’s order was made in bad faith, and says the Court’s decision leaves “no doubt” that Tether and Bitfinex are entitled to continue running their business as normal.
Update: LEO token will list on Exchange starting 20 May 2019
Bitfinex announced on 17 May 2019 that its LEO token will commence trading on 20 May 2019 at 8:00a.m. UTC on Bitfinex.
It is considered that LEO token is a utility token similar to Binance’s BNB token.
The token will be tradable against BTC, USD, USDt, EOS, and ETH.