How The Bitfinex Tether Fraud Ends

On November 5th, 2017, in the second biggest data leak in history, confidential documents pertaining to offshore investments were leaked to the International Consortium of Investigative Journalists(ICIJ) by German newspaper, Süddeutsche Zeitung.

The leak laid bare the fiscal tax-dodging shenanigans of various government officials, royals and corporate entities, exposing the double standards of the tax system. The ICIJ has been investigating the documents with 100 media partners.

Until now, there were no implications in the leak regarding cryptocurrencies. However, an interesting revelation has surfaced and it shouldn't surprise anyone that it concerns the self-proclaimed ‘largest and most advanced cryptocurrencies exchange', Bitfinex.

It is revealed that Giancarlo Devasini, CFO of Bitfinex and Philip Potter, CSO of Bitfinex, established Tether in the British Virgin Islands way back in 2014 with the aid of Appleby, an offshore legal services provider headquartered in Bermuda. The papers evidence Potter as Tether's director. However, Devasini and CEO of Bitfinex, Van der Velde were recently revealed as directors of Tether.

Past Shenanigans From Bitfinex

Potter has refuted claims of a nexus between Bitfinex and Tether in the past, insisting that except for using the same bank, the companies had no other affiliation. He has also contradicted himself by recently conceding that Bitfinex is indeed a majority shareholder of Tether.

Only a few hours prior to the $30 million Tether ‘hack' last week, the exchange reassured its users, ‘Bitfinex is solvent and both fiat and crypto withdrawals are functioning as normal, a formal announcement is forthcoming.'

Despite this, in the wake of the announcement, Bitfinex kept mum amidst accusations on social media from various observers of wash trading, through a cycle of issuing new Tether and using the currency on Bitfinex to pump the price of Bitcoin, exchanging with fiat and converting back to Tether, thereby creating money out of nowhere.

After the 2016 hack, when 120,000 Bitcoins were stolen on the exchange, Bitfinex gave all its users a 36% ‘haircut', spreading out the losses to all customers, even those who were not holding Bitcoin at the time of the hacking, saying that it was the ‘only alternative to bankruptcy'.

The lack of detail that Bitfinex provided about the hacking drove away some large customers. Van der Velde said the company was “as public and transparent as possible about the security incident in August 2016 given the ongoing criminal investigations.”

The background stories of the people who run Bitfinex can be quite alarming for those who trust the exchange with their assets. The most frequent public face of Bitfinex, its CSO, Phil Potter, worked for Morgan Stanley in New York in the 1990s but lost his job after bragging at length in The New York Times about his $3,500 Rolex, his opulent lifestyle and his aggressive tactics for making money.

There are also various other questions hanging over Bitfinex for quite some time, such as who they are banking with after Wells Fargo cut ties with them in April, lack of transparency with its users regarding previous hacks, employing unethical practices to stay solvent or at least portray a facade of solvency and why there hasn't been an official audit as promised several months ago?

Arthur Hayes, the founder of Bitmex, urged Bitfinex to be transparent about their finances, “There are so many questions about them. All of this could be easily rectified by just showing all the figures.”

Will The Chickens Come Home To Roost?

“I’m worried about the systemic risk that this centralized company poses, and I’m worried that if they go down, they will take down the space with them,” said Emin Gün Sirer, an associate professor of computer science at Cornell University, who has a track record of successfully predicting problems in the growing virtual currency industry.

Bitcoin is not an unreliable currency. It's unregulated, unscrupulous exchanges who take liberties with how far they can go and get away with it that distort the cryptocurrency market. Users must exercise caution and desist from supporting exchanges who employ questionable practices or lack transparency.

If it turns out as most people expect that Bitfinex, fined by regulators in the United States, cut off by American banks and having lost millions in so-called ‘hacks', does not even have the money it claims to hold, it could have a seismic effect on the entire cryptocurrency market to an even greater extent than Mt. Gox's insolvency in 2014.

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