Tether admits in court to investing some of its reserves in bitcoin

Count this as the latest revelation to emerge in Bitfinex's battle with the New York Attorney General's office.

Tether, a stablecoin that has overlapping management and ownership with Bitfinex, admitted the company has historically used some of its reserves to make investments in bitcoin and “other assets," according to court documents obtained by The Block. It's the latest insight from recent court proceedings into the operations of Bitfinex and Tether — two entities that have played a major role in crypto markets whilst operating mostly opaquely.

In April, the NYAG issued a court order against Bitfinex in which they alleged the firm commingled client funds and borrowed money from its sister company Tether to cover-up the seized funds. Jean Louis van der Velde, CEO of Bitfinex, responded by saying that the lawsuit is “filled with inaccuracies and false assertions.”

Throughout these court proceedings, new details about how Bitfinex ran its business have been revealed. For instance, the market has learned that only 74% of outstanding Tether tokens were backed by cash held in its reserve.

On Feb. 25, Tether quietly changed the wording on its homepage, admitting for the first time that its reserves included “traditional currency and cash equivalents”, as well as “other assets and receivables from loans made by Tether to third parties.” Prior to the change, Tether always claimed that Tether was 100% backed by “traditional currency.” The statement used to read: “Every tether is always backed 1-to-1, by traditional currency held in our reserves.”

In a court transcript from the hearing on May 16 obtained exclusively by The Block, David Miller, an attorney for Bitfinex said: “Prior to the April 24th order … Tether actually did invest in instruments beyond cash and cash equivalents, including bitcoin, they bought bitcoin.” In the hearing, Miller argued that the Attorney General's Office wants to have restricted language that limits Tether’s investments to cash or cash equivalents because “they don't like some of [Tether's] investments." Miller claims the Attorney General's Office is acting beyond its jurisdiction in trying to exert regulatory authority.

New York Supreme Court Judge Joel M. Cohen questioned the logic, noting the paradox of a stablecoin being invested in a volatile asset like bitcoin. He said: “Tether sounded to me like sort of the calm in the storm of cryptocurrency trading. And so if Tether is backed by bitcoin, how is that consistent? If some of your assets are in a volatile currency that Tether is supposed to somehow modulate, that seems like it’s playing into what they are saying.”

Miller clarified that it was “a small amount” and argued that the disclosures, “especially the disclosure of February 25th, demonstrate that Tether is not just taking it in cash or cash equivalents. It does make other investments, including purchasing other assets.”

Following the court hearing on May 16, the judge allowed Tether to invest its reserves as part of its operations but issued a preliminary injunction ordering Tether and Bitfinex to:

• Restrain access to credit lines on USD reserves held by Tether

• Principals, executives, and agents of Bitfinex shall not receive distribution or dividends from funds received from Tether

• Not tamper with the documents that NYAG originally requested

The preliminary injunction expires in 90 days, before which time the NYAG can file an extension up to 14 days to petition a longer time-frame on its provisions.

Bitfinex claims since the injunction it has successfully raised nearly $1 billion in a private token sale for its exchange token LEO. The issuance was planned to cover the $850 million currently frozen in several accounts controlled by the payment processing company Crypto Capital, which is at the heart of the lawsuit. LEO tokens started trading on Bitfinex on Monday and currently trade at $1.043 with a 24-hour volume of $3.6 million.

Paolo Ardoino, CTO of Bitfinex, said in a tweet that on May 16, 2019, Tether owned 0.076 BTC. It’s still unclear how much bitcoin the firm has owned historically and in how many addresses. Stuart Hoegner, General Counsel for both Bitfinex and Tether, in a tweet referred to this report as "neither breaking (as advertised) nor news."

Frank Chaparro contributed to this report.

UPDATE: We have updated the article to reflect Ardoino's and Hoegner's statement.