Chart from Sigma by Hydra X
BTCUSD suffered a(nother) tumultuous week when the Office of the AG of New York State announced a lawsuit against Bitfinex and Tether, two affiliated companies. Tether is a ‘stablecoin’, each coin being ostensibly backed by one US dollar, ensuring that the value of the coin remains at or very close to parity with the dollar. Doubts have long existed about the bona fides of Tether and Bitfinex, but Tether remains the dominant stablecoin, representing ~96% of daily trading volumes in that category. Its status as the de factor ‘central bank’-issued medium of transactions has also given rise to its position as the single largest potential systemic risk for the cryptocurrency universe.
The allegations against the exchange essentially were that: (a) Bitfinex used a Panamanian financial intermediary, Crypto Capital (not a real bank), as a payments processor to transfer money to its customers; (b) over one billion dollars of co-mingled customer and corporate funds were deposited with Crypto Capital – with no contract or similar written agreement ever entered into, no less; (c) Crypto Capital stopped responding to requests from Bitfinex to process payments; (d) Bitfinex then took $625m from its Tether bank accounts (with a real bank) to use for itself in order to meet customer withdrawal requests; (e) in exchange for the $625m from the real bank, Bitfinex gave Tether back the same amount, $625m, but from the non-real bank, i.e. the money which it could no longer access; (f) eventually, Bitfinex then re-papered this as a $900m loan from Tether to Bitfinex.
In short, the stablecoin was then partly backed by a $900 million loan to an affiliate crypto exchange which no longer had sufficient funds to operate.
BTCUSD proved remarkably resilient, and apart from a wicked stop-hunt that took prices down to the low $4,000s (in the process, taking out all sensible stops placed by recent longs), it has recovered to trade firmly above $5,100, as if not much ever happened. Bitfinex has accused the AG of filings “written in bad faith and [riddled] with false assertions”. It will be interesting to see if there will be a run on the bank, and how Bitfinex/Tether/BTC ride out this drama. In the crypto world, nothing surprises.
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