The creators of a key digital asset called Tether, which is intended to allow easier trading of cryptocurrencies, told investors “a lie” about its backing by U.S. dollars, according to New York Attorney General Letitia James.
The attorney general settled with Tether, which operates the Tether coin, and Bitfinex, an exchange where people can trade tether, on Tuesday. The companies agreed to pay $85 million and cease trading operations with New York customers.
Stuart Hoegner, general counsel for both Bitfinex and Tether, noted in a statement that the companies did not admit wrongdoing and the settlement “should be viewed as a measure of our desire to put this matter behind us and focus on our business.”
Bitfinex and Tether have some overlapping shareholders but are not controlled by the same group or company, according to Hoegner.
The settlement and critical words from the attorney general may be having an impact on the price of Bitcoin, although it can be very difficult to divine the reason behind Bitcoin’s day-to-day price movements. Bitcoin was down 9% on Tuesday to $48,800 after hitting an all-time high above $58,000 on Sunday.
Tether is a so-called stablecoin, designed to track the value of the dollar and have less volatility while still being able to trade like other cryptocurrencies. Traders use it so that they can quickly move between cryptocurrencies without cashing out into U.S. dollars or other fiat currencies.
Analysts say Tether is a major source of liquidity in the crypto market, and if investors lose faith in it that could lead to a liquidity crisis.
“Thus, were any issues to arise that could affect the willingness or ability of both domestic and foreign investors to use USDT [Tether], the most likely result would be a severe liquidity shock to the broader cryptocurrency market, which could be amplified by its disproportionate impact on high-frequency trading-style market makers which dominate the flow,” J.P. Morgan wrote in a report on Bitcoin last week.
Bitcoin is mostly traded against stablecoins, not the dollar, so “without USDT, the market would lose access to its largest pools of liquidity in both spot and derivatives,” J.P. Morgan analyst Joshua Younger wrote.
That said, the New York investigation, which first become public in 2019, does not appear to have shaken the market so far. The market value of all tethers has increased to $34 billion from $2 billion two years ago.
James said her office found that Tether was not in fact fully backed by the dollar.
“Bitfinex and Tether recklessly and unlawfully covered-up massive financial losses to keep their scheme going and protect their bottom lines,”James said. “Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie. These companies obscured the true risk investors faced and were operated by unlicensed and unregulated individuals and entities dealing in the darkest corners of the financial system.”
As part of the settlement, Tether will give an accounting of its reserves to the attorney general’s office every quarter.
Attorneys for Bitfinex and Tether said in a statement that the attorney general’s findings essentially amounted to a disclosure issue.
“Putting aside the attorney general’s characterization of these disclosure issues as misrepresentations or violations of any legal obligation, the attorney general’s Office concluded, in essence, that Bitfinex and Tether could have done better in publicly disclosing these events,” said attorneys
and Charles Michael. “To the attorney general’s office’s credit, after 2½ years of investigation, their findings are limited only to the nature and timing of certain disclosures. And contrary to online speculation, there was no finding that Tether ever issued tethers without backing, or to manipulate crypto prices.”
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