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Match point? Bitfinex, Tether file for dismissal in NY OAG lawsuit

Posted: 23 May 2019 4:10 pm News

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From start to potential finish, this has been a very eventful month for Bitfinex and Tether.

The various legal teams representing iFinex, Tether and company, which will collectively be referred to here as Bitfinex, have filed a motion to dismiss the lawsuit the New York Attorney General's Office (NY OAG) levied on them.

If successful, this could be the match point in an eventful legal ping-pong match.


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Play by play

All in all, Bitfinex seems to be sitting quite pretty for a business that was catapulted into the spotlight less than a month ago via the reported seizure of over $850 million, which it desperately needed to keep running smoothly. But since then, Bitfinex has enjoyed a string of partial legal victories and even found a spare billion dollars.

Recap

To recap, in 2018 a Bitfinex payment provider lost $850 million because crypto banking is hard. It said the funds had been seized by various authorities around the world, and though the money was inaccessible, it was still safe. Although this information was not public at the time, Bitfinex's operations were noticeably affected which fuelled suspicions and led people to fear the worst. In 2019 Bitfinex borrowed money from its partner company, Tether, for the purpose of filling the $850 million hole in its pocket.

All this was revealed in 26 April 2019, when the NY OAG filed an application to force Bitfinex to cease trading and hand over a bunch of information.

  • 26 April: NY OAG files an application to freeze Bitfinex funds and force it to hand over more information, alleging that the entire operation is super shady and on the brink of collapse.
  • 1 May: Bitfinex highlights a range of discrepancies in the NY OAG application, which softens and delays the immediate brunt of the NY OAG application.
  • 6 May: Bitfinex announces that it will be commencing a token sale to raise $1 billion, in part to fill in that $850 hole.
  • 13 May: Bitfinex asks for a loosening of the fund restrictions, arguing that it unfairly inhibits its ability to do business.
  • 16 May: Courts hand a pair of wins to Bitfinex by agreeing to loosen fund restrictions and to limit the scope of the NY OAG information requests.
  • 17 May: Bitfinex completes the token sale and is now $1 billion richer.
  • 22 May: Bitfinex files a motion to dismiss the NY OAG application, which would bring an end to this particular chapter of lawsuits.

It's been a busy month for Bitfinex.

Goal

It's not yet clear how Bitfinex's motion for dismissal will shake out, but the track record of results from the last month paints an optimistic picture.

Bitfinex's argument for dismissing the matter consists of two parts.

The first half

The first part is very straightforward. It argues that neither Bitfinex nor Tether has offices in the United States, and that neither serves New York or any US-based customers. To the contrary, it says, Bitfinex has gone to pretty great lengths to actively bar US-based customers from accessing Bitfinex and USDT. As such, it can't have any "victims" in New York and is not within the NY OAG's jurisdiction.

It's tough to argue with that. Bitfinex is actually widely regarded as one of the first major crypto exchanges to abandon the USA. It left the country and barred US customers back in January 2017, citing regulatory uncertainty.

The second half

The second part of the argument is potentially a lot more interesting.

It argues that Tether coins are not a commodity or security as defined by the Martin Act. This act is one of the laws that forms the backbone of the NY OAG's argument, and (paraphrasing) it basically says something like "don't sell fraudulent commodities or securities."

The catch, and the crux of Bitfinex's counterargument, is that the NY OAG did not demonstrate that USDT is either a commodity or a security, and that therefore it's not necessarily covered by the Martin Act.

A security is defined by whether it passes the Howey Test. The short version is that securities will generally be regarded as investments that somehow generate profit for buyers. As a stablecoin, USDT is almost certainly not a security. But whether it's a commodity is less clear.

As Bitfinex said:

"A commodity is defined as 'any agricultural, grain, animal, chemical, metal or mineral product or byproduct, any gem or gemstone (whether characterized as precious, semi-precious or otherwise), any fuel (whether liquid, gaseous or otherwise), any foreign currency, and any other good, article, or material.' Tether does not match any of the items listed... The definition's closest item is a 'foreign currency,' but the qualifier 'foreign' indicates a currency issued by a foreign sovereign government, which Tether is not. And numerous U.S. authorities have correctly recognized that virtual currencies are not foreign currencies."

To support its argument, Bitfinex cites various sources and previous occasions where it has been decided that cryptocurrencies are not real currency.

Grey areas

It's worth noting that with crypto still in early days, the outcomes of these kinds of lawsuits may have lasting impacts on the space as a whole. Beyond its entertainment value and ability to keep lawyers off the streets, this Bitfinex case could help lay down some valuable guidelines and precedents of a sort for the future by helping settle important questions around how exactly crypto should be classified under different laws.

The fact is, contrary to Bitfinex's assertions virtual currencies actually have been found to be a commodity in the USA by at least one interpretation.

The precedent came late last year when a fellow named Randall Crater created a cryptocurrency called My Big Coin and made about $6 million from selling it to a handful of people. He was accused of violating that "no fraudulent commodities or securities sales" law because he was reportedly targeting customers who thought he was saying "Bitcoin" instead of "Big Coin."

And just like Bitfinex, Crater's lawyers argued that digital currencies do not meet the definition of a commodity and therefore are not subject to that law.

The judge disagreed though, and argued that virtual currencies as a whole can be classified as commodities because Bitcoin is a digital currency, and its futures are regulated under the Commodity Futures Trading Commission (CFTC), so therefore the entire virtual currency category is arguably a commodity.

Bitfinex might be aiming to wrap up this whole affair in the near future, but if some new precedents are set and some regulatory wrinkles are smoothed out in the process, some positive after-effects might linger a lot longer.


Disclosure: The author holds BTC, BNB, ATOM and IOTA at the time of writing.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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