The new OAG Bitfinex and Tether revelations explain a lot

The good news is that Bitfinex and Tether theoretically have the money. The bad news is everything else.

• Bitfinex allegedly has $851 million locked in Crypto Capital which it can't access.
• Varying reports say Crypto Capital is either trying to steal the money or that the funds were seized by authorities in several countries.
• Bitfinex allegedly took a loan from the Tether treasury to support itself through the loss.

An investigation from the New York attorney general's office (OAG) has pulled back the curtain on much of what allegedly goes on behind the scenes at Bitfinex and Tether.

Here's how it goes, as per the OAG's documentation.

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Once upon a time...

There was once a company called Bitfinex, which is largely indistinguishable from the company called Tether. It had been using a company called Crypto Capital Corp, among others, as a payment processor since about 2014.

Everything was groovy for them until March 2017 when Wells Fargo, their primary US bank, decided it would no longer process wire transfers from Bitfinex and Tether accounts. This meant Bitfinex would have an awful lot of problems processing customer withdrawals.

This was problematic for a while, until Bitfinex hooked up with the Puerto Rico-based Noble Bank some time by or before September 2017.

The day was temporarily saved, but Bitfinex still wasn't finding the transaction volumes it needed through Noble, and it was also chafing at the bank's low interest rates, which saw Bitfinex sour on that arrangement. It broke up with Noble Bank by October 2018, and the bank went out of business.

At around the same time, Bitfinex kicked off operations with the Bahamas-based Deltec Bank, as well as a haphazard set of others.

The report potentially explains this weirdness, saying Bitfinex used "friends" to handle payments. As in, the human friends of Bitfinex employees would literally handle customer transfers through their own personal bank accounts, and Bitfinex executives would use the bank accounts of other companies they owned to perform Bitfinex customer transfers.

Then along came Crypto Capital Corp

The entire time, Bitfinex never told customers it was using third party payment processors, the OAG said. In this case, the main payment processor was a company called Crypto Capital, which had reportedly been tied up with Bitfinex since 2014.

Crypto Capital is believed to have been holding some of the missing QuadrigaCX funds at the time it disappeared, it's developed a reputation for being unreliable and has also allegedly acted as the payments provider for binary options scammers and similar.

But none of that stopped Bitfinex from entrusting Crypto Capital with over a billion dollars all up, of both company and customer funds, without any kind of written agreement or contract.

When everything came to a head, Crypto Capital was holding over US$850 million of commingled Bitfinex and Bitfinex customer funds, and showing increasingly little intention of letting go of any of it.

BTC could tank to below 1k if we don't act quickly... too much money is trapped with you, and we are currently walking on a very thin crust of ice." - Bitfinex to Crypto Capital

The increasingly desperate situation was documented by the OAG in a series of conversations between Bitfinex and Crypto Capital between April 2018 and early 2019. Over the course of it, Bitfinex sounds increasingly frustrated with the lack of movement from Crypto Capital.

In April 2018, "Merlin" from Bitfinex wrote to "Oz" at Crypto Capital to politely request help.

Over the following months, Merlin would describe a more dire situation, and Oz would assure them that Crypto Capital was doing all it can.

"Please understand all this could be extremely dangerous for everybody. The entire crypto community," Merlin wrote in October 2018. "BTC could tank to below 1k if we don't act quickly."

"I need to provide customers with precise answers at this point. Can't just kick the can a little more... people are enraged... Too much money is trapped with you, and we are currently walking on a very thin crust of ice."

Things came to a head in November 2018 when Bitfinex borrowed $625 million from the Tether treasury to address its liquidity issues. This was followed up with an agreement in early 2019 where Bitfinex would take a line of credit from Tether's reserves to help keep it going.

This explains a lot

It's clear now that the market's crisis of faith in Tether's backing in October 2018, and insolvency concerns relating to withdrawal difficulties at Bitfinex, were based on very real issues, rather than just hysteria.

In November 2018, Bitfinex started leaning on the Tether treasury for liquidity because so much of its money was locked up in Crypto Capital. That was when Bitfinex transitioned USDT to a floating market value and Tether re-opened direct USDT redemptions. The intention may have been to take some weight off Bitfinex withdrawal requests and buy some time.

It's also clear that when Tether quietly conceded to not being fully fiat backed, it was probably making that concession in response to the line of credit agreement.

The breakup

"I am not your enemy. I am here to help you and have been very patient so far. But you need to cut the crap and tell me what is going on," Merlin wrote to Oz in November 2018.

According to Bitfinex speaking to the OAG, Crypto Capital then came back and told Bitfinex that the Bitfinex's funds, the $851 million it was holding at the time, were seized by government authorities in Portugal, Poland and the USA.

And according to the OAG, Bitfinex doesn't believe a word of it and instead suspects that Crypto Capital is trying to screw it.

But that's not really the OAG's problem. It's more concerned with protecting investors, specifically those in New York, from all these shenanigans, and it's taken a dim view to this whole "line of credit" business given that Bitfinex and Tether share the same executives.

To recap, some $851 million belonging to Bitfinex and its customers is locked away with Crypto Capital, then Bitfinex tried to cover those losses by drawing down on the Tether treasury, and now both Tether and Bitfinex may be at risk.

There are "serious questions about the viability of Bitfinex as an ongoing concern, the possibility that Tether's cash reserves would be dissipated and unrecoverable, and whether Bitfinex and Tether have misled their clients (including both clients of the Bitfinex trading platform and holders of tethers) regarding the matters described above," the OAG summarised.

The upshot

The bad news is that the OAG report suggests that both Tether and Bitfinex are now facing serious issues with all that money locked away at Crypto Capital. There are no two ways about it, a Tether bankrun would lead to a lot of bagholders, according to the report.

The good news is that despite any questions of competency or legality which might arise from the report, it looks like Bitfinex and Tether have actually been fairly up-front and customer-focused in their own ways. The money was there, and it looks like the companies did their level best to serve customers through the headaches allegedly caused by Crypto Capital.

But Bitfinex's response to the report raises some new questions, and from one angle may hint at the relationship between Bitfinex and Crypto Capital being a bit more complicated than most business arrangements, despite the alleged lack of paperwork.

"The New York Attorney General’s court filings were written in bad faith and are riddled with false assertions, including as to a purported $850 million "loss" at Crypto Capital. On the contrary, we have been informed that these Crypto Capital amounts are not lost but have been, in fact, seized and safeguarded. We are and have been actively working to exercise our rights and remedies and get those funds released. Sadly, the New York Attorney General’s office seems to be intent on undermining those efforts to the detriment of our customers," Bitfinex said. "The New York Attorney General’s office should focus its efforts on trying to aid and support our recovery efforts."

Disclosure: The author holds BTC at the time of writing.