On Thursday, April 25, 2019, the office of the Attorney General of the State
of New York filed a motion in New York’s supreme court for injunctive relief against Bitfinex and Tether.
The thing that I love about Crypto-currencies is that they are distributed and
trustless. When I use the word “trustless” I have a very specific meaning in mind: You don’t need to trust any one person or group or organization with your crypto wealth. Two prerequisites make this true:
- You personally maintain the private key(s) to lock/unlock your account.
- All crypto-currency transactions are validated by a large group of un-coordinated actors (miners), who have a monetary incentive to accurately maintain the transaction ledger (blockchain).
But there’s a catch. Crypto-currencies are new and complex, and because people are lazy and gullible, they’re taken in by organizations that thwart these exact benefits. Here are two examples:
- Many crypto-currency exchanges act as custodians for your private keys, or simply “hold” your funds for you. If you deposit your crypto-currency with one of these exchanges you are completely at their mercy. They could turn around tomorrow and steal your funds, or simply say that they lost them. This is the opposite of “trustless.”
Note: there are decentralized exchanges (eg. Radar Relay). These exchanges are not run by any one individual or company but instead are implemented as program code which, for example, runs on a distributed network of computers or on the Ethereum blockchain. Decentralized exchanges can actually be trustless. Unfortunately, lots of people still use centralized exchanges.
- Some organizations issue so-called crypto-tokens that in fact are completely managed by a single entity. The most notorious example of this is Tether — a company that mints Tether tokens and claims to have US dollars to back them up. There are no miners validating on a “Tether Blockchain” — There is no “Tether Blockchain” — it’s just one company that creates this fake crypto-currency, and makes the dubious claim that each Tether is worth one US dollar.
For several years plenty of people have been warning crypto-currency enthusiasts to steer clear of centralized crypto-currency exchanges and faux tokens like Tether. In particular, there’s been an unholy alliance between the Bitfinex exchange and Tether, in which it appears that Tether tokens were minted “out of thin air”, and then transferred to the Bitfinex exchange, to purchase Bitcoin at inflated prices. That is, the Bitfinex exchange validated Tether’s claim that each Tether token was worth one dollar. By the way, it seems that some of the owners of Bitfinex were major stakeholders of Tether. Hmmm…
Thursday’s Court Motion
The wheels of justice turn slowly. And even though many people have long suspected Bitfinex and Tether of fraud, it’s taken years for the US. government to take any action against them. Finally, it appears on Thursday that there was some movement in this case.
A Telling Excerpt From the Motion Filed with the Court
Here’s a juicy excerpt from the motion filed with the court. Notice that in item #58 Bitfinex claimed to have deposited over $1,000,000,000 with the company Crypto-Capital, and in item #59 they claimed that they never had any contract or written agreement with Crypto Capital. Does that strike anyone as just a little fishy?
You can see the entire text of the motion presented to the court here.
For years, people have been prognosticating a huge crash in Bitcoin and other cryptos on account of the Bitfinex/Tether fraud. And who knows, as this case progresses and gains some notoriety it might cause panic selling. I’m not writing this because I know the future… My point is that the Bitfinex/Tether fraud is not a problem with crypto-currencies per se — it is a problem with centralized systems that require trust — in this case, centralized tokens that masquerade as crypto-currency, and centralized exchange. Moreover, the “trusted” US government has done a terrible job and has failed to protect people from these centralized hucksters. If anything the Bitfinex/Tether debacle proves how much we need trustless crypto-currencies with trustless decentralized exchanges and applications. In this sense whatever the short-term effects of this debacle, the future of crypto-currency is still as bright as ever.