As we have previously reported, the New York Attorney General has been in protracted litigation to enforce an investigative subpoena under New York’s expansive Martin Act against cryptocurrency exchange Bitfinex and its affiliated companies that issue the Tether stablecoin. On February 23, 2021, the Attorney General announced a definitive settlement of the matter.
The settlement agreement alleges that Bitfinex and Tether made various misrepresentations to the market about Tether’s US dollar backing and the status of Tether reserves after Bitfinex lost several hundred million dollars in a series of opaque transactions, all the while conducting business in New York State without appropriate licensure.
In addition to the payment of an $18.5 million penalty, the terms of settlement include numerous robust undertakings on the part of Bitfinex and Tether:
- Repayment of an intercompany line of credit;
- Implementation of internal controls and procedures to ensure against the use of products and services by New York persons or entities, supplemented by quarterly reporting to the Attorney General for two years on Bitfinex and Tether’s “policies, operations, investigations and surveillance” in respect of the bar against transacting with New York persons and entities;
- Discontinuing any trading activity with New York persons and entities, including registered broker-dealers and entities holding a BitLicense or trust account from the New York Department of Financial Services;
- Ceasing all over-the-counter trading activity with any New York persons and entities;
- Mandated quarterly reporting to the Attorney General for two years on various business operations, including:
- documents substantiating Tether’s reserve accounts;
- verification that Bitfinex and Tether have appropriately segregated client, reserve, and operational accounts, including verification that (a) Tether reserves are segregated from operational accounts; (b) Bitfinex and Tether maintain separate accounts; (c) virtual assets for customers and the companies are held at separate, segregated deposit addresses (if stored in an omnibus wallet); and (d) accounts holding fiat deposits from Bitfinex clients are segregated from company operational accounts, including accounts used to pay or distribute to executives or for other company obligations; and
- documents and information reflecting transfers of funds between and among Bitfinex and Tether;
- Publishing, on a quarterly basis for two years, details on Tether’s reserves, including the categories of assets backing tether stablecoins (e.g., cash, loans, securities, etc.), specifying the percentages of each category, and specifying whether any such category constituting a loan or receivable is to an affiliated entity;
- Reporting to the Attorney General, on a quarterly basis for two years, details about Bitfinex and Tether’s transactions with certain non-bank payment processors used to transmit customer funds; and
- As to future activities in New York, an undertaking that Bitcoin and Tether will do so in accordance with applicable law and licensing requirements.
The settlement brings to a close another prominent regulatory investigation in the digital asset space, with yet another well-known digital asset firm choosing settlement over continued litigation against the government. It cements the New York Attorney General’s intention aggressively to police the virtual currency marketplace using the expansive anti-fraud authority granted under the Martin Act and confirmed in an earlier appellate decision in the case. The broad company undertakings also foreshadow a series of compliance and disclosure measures that the Attorney General is likely to view as best practices for many virtual currency businesses going forward.