The Not-So-Fun Adventures of Tether & Bitfinex

Avi Felman
May 2, 2019 · 6 min read

Legend has it that if you say Tether five times in a row, the ghost of Mt. Gox will appear in the mirror and take all your Bitcoin…

At the risk of diving too deep into a subject thoroughly discussed, I wanted to write about the latest Tether fiasco and it’s potential implications. Lots of people have tackled this discussion from different viewpoints, so what I would like to do is take a look at a few different angles and attempt to help you draw conclusions on what the future might look like due to these events. Hopefully along the way you find something interesting you hadn’t thought of previously. I’ll be staying away from legal implications as that’s best left to lawyers.

First, an explanation of what happened.

As many of you already know, Tether is a stablecoin company domiciled in the British Virgin Islands. Bitfinex is a cryptocurrency exchange also domiciled in the British Virgin Islands. Both Bitfinex and Tether started as separate entities but then sometime between 2015 and 2017 became inextricably linked, a suspicion many in the space had and was finally confirmed by a Bitfinex representative who confirmed the two companies shared a CEO, Jan Ludovicus van der Velde.

As many cryptocurrency companies unfortunately know, banking is difficult and traditional banks generally don’t support companies that transact large volumes of cryptocurrency. Due to this, both Bitfinex and Tether have bounced around banks quite a bit. After losing it’s relationship with both Wells Fargo and HSBC, Bitfinex put out a statement saying that have “solved” their banking issues. As we now know, this was because they contracted with Crypto Capital, a crypto-native payment processor, to act as their bank. Tether on the other hand managed to secure a relationship with Deltec, a Bahamas based bank.

This is where it really starts to go south. According to the AG report:

During November 2018, Tether transferred $625 million held in its account at Deltec to Bitfinex’s account at Deltec. Bitfinex, in turn, caused a total of $625 million to be transferred from Bitfinex’s account at Crypto Capital to Tether’s account at Crypto Capital, through a ledger entry at Crypto Capital crediting Tether’s account in the amount of $625 million and debiting Bitfinex’s account by a corresponding amount. The purpose of this exchange was to allow Bitfinex to address liquidity issues unrelated to tethers.

Oof. That’s no good. So basically what’s happened is that Bitfinex had a bunch of funds locked up (that’s bad). Tether had a bunch of liquid funds (that’s good). Tether gave Bitfinex a bunch of liquid money (that’s bad), and then Bitfinex gave Tether a bunch a locked up money (…that’s really bad). Of course, they didn’t actually give Tether anything other than a claim to the locked up money if it ever gets unlocked.

If you really want to get into the weeds, I’ll note that technically this transaction of $625M was a sub-transaction of a $900M credit line that Tether extended to Bitfinex. Bitfinex in order to secure this credit line, Bitfinex pledged iFinex shares (the holding company of Bitfinex).

Now, according to the participants — this money is theoretically safe. It’s being housed by governments who would never steal the money and will eventually return the money to Tether holders. This is in line with the thoughts of the market, seeing as Tether’s peg is holding steady after an initial drop off.

The recent timeline:

General thoughts on the matter:

Wave Financial

Wave Financial offers early-stage investment, asset…

Avi Felman

Written by

WashU ’17. Crypto enthusiast. Builder of three multi dollar companies @BearStudios, @VentureFocus, @LedgerCapital. Telegram @delta_neutral

Wave Financial

Wave Financial offers early-stage investment, asset management, and treasury management to further the growth of the digital asset ecosystem

Avi Felman

Written by

WashU ’17. Crypto enthusiast. Builder of three multi dollar companies @BearStudios, @VentureFocus, @LedgerCapital. Telegram @delta_neutral

Wave Financial

Wave Financial offers early-stage investment, asset management, and treasury management to further the growth of the digital asset ecosystem

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