Bitfinex is hacked for ~70 million, ~36% of their user's assets. Only some user's are affected [3].
They spread out the loss amongst their whole user base meaning all their users take a ~36% "haircut" [1].
BFX Tokens (IOUs) were provided to every user to account for their loss [1].
Users could trade the tokens at a sub $1 price with each other. People betting on Bitfinex redeeming the tokens could buy more and those who believed Bitfinex would not redeem the tokens could sell at a loss [2].
Users were then offered the opportunity to convert their tokens to equity. The more tokens converted to equity the less tokens Bitfinex will have to redeem with USD [3].
Bitfinex announces that all users are paid back in full meaning all BFX tokens have either been converted to equity or redeemed with USD. Bitfinex does not make the distinction between USD and USDT (Tether) on their exchange but the USD credits are in fact tethers [4].
Bitfinex files a suit against Wells Fargo for preventing the Taiwanese banks that work with the exchange to send outbound wire transfers [9].
Inside the the legal complaint document, clause 47 says:
Indeed, plaintiffs expressly informed Wells Fargo that its decision to suspend outgoing wire transfers in U.S. dollars from plaintiffs’ correspondent accounts presented an existential threat to their businesses. They informed Wells Fargo that if plaintiffs could not remit to customers U.S. dollars that belong to their customers, plaintiffs’ businesses would be crippled as of Wednesday April 5, 2017. They would be brought to a standstill.
Bitfinex representative says on Reddit that the "funds are not frozen" [11]. Referring to the funds that were blocked from being wired by Wells Fargo.
Bitfinex voluntarily withdraws the complaint [10].
Bitfinex announces that their banking has been disrupted. Nobody except corporate clients can withdraw USD [5].
Tether announces that their banking has been disrupted [6]. This results in only "Large customers" being "able to move money into and out of Tether" [7].
Fortunately for Tether, they are under no legal obligation to redeem Tethers for money:
There is no contractual right or other right or legal claim against us to redeem or exchange your Tethers for money. We do not guarantee any right of redemption or exchange of Tethers by us for money. There is no guarantee against losses when you buy, trade, sell, or redeem Tethers.
[8] section 3: "Purchase and Redemption of Tethers"
This means that Tethers are not a liability for iFinex, the parent company of Bitfinex and Tether, but a liability for anyone who holds them.
Bitfinex's response to criticism on the above legal clause is as follows:
Our Terms of Service have been carefully picked apart by various malcontents and twisted to suggest that Tethers would not be redeemable for currency on some bizarre, malicious whim by Tether. That is untrue. While we reserve the right not to redeem for any particular customer, as we must, we will not do so for no reason. We have a duty to try to ensure that our service is not being used by persons from sanctioned countries, that is otherwise on a sanctions list, or that has some background check problem. In short, redemptions will not be unreasonably denied, but we reserve the right to selectively deny redemption and creation of Tethers on a case-by-case basis. As such, this policy, which is necessary from a regulatory perspective, has no bearing on our presentation of the liabilities of the company.
[7] final section: "Solvency"
Bitfinex suspends U.S. individual verification request and bars U.S. persons who have already been verified from participating in the trading of ERC20 tokens [12].
There's a funny little line at the end of the post:
Please note that nothing in this announcement should be taken as fact or opinion that any such ERC20 tokens are a security pursuant to U.S. law or require regulation under U.S. law.
[12] final section: Restrictions on U.S. Persons Trading Certain Digital Tokens
Tether announces that "Friedman LLP has been engaged to perform historical balance sheet audit procedures for Tether Limited. " [20]. However later in the announcement they say:
These consulting services do not constitute anaudit [sic] or attestation engagement, which would include a significantly expanded scope of procedures and take substantially more time to complete.
[20] end of first paragraph
Inside the memorandum FLLP says:
We make no representation regarding the sufficiency for your purposes of the procedures selected, and those procedures do not necessarily disclose all significant matters about the Client or reveal errors in the underlying information, instances of fraud, or illegal acts, if any. This engagement does not contemplate tests of accounting records or the performance of other procedures performed in an audit or attest engagement. Our procedures performed are not for the purpose of providing assurance and are limited to the findings listed below as of September 15, 2017 at 8:00PM EDT. We have not performed any procedures or make any conclusion for activity prior to or subsequent to September 15, 2017 at 8:00 PM EDT.
[21] 2nd page third paragraph from the bottom
So while the memorandum does show screenshots that indicate Tethers are backed 100% it is not legally an audit.
There was significant discussion about this on r/Buttcoin.
Bitfinex announces that they will terminate their U.S. business and gives U.S. traders until November 9, 2017 to withdraw all their crypto-assets [13].
Tether announces that they have been hacked for 30,950,010 USDT. In the announcement they specify a 3 step process to reclaim the stolen Tether [18]. There's a little gem in the announcement:
Tether issuances have not been affected by this attack, and all Tether tokens remain fully backed by assets in the Tether reserve.
[18] 2nd to last paragraph
Later that day the New York Times publishes an article about Bitfinex and Tether. The author presents the potential dangers of unregulated exchanges like Bitfinex and discusses some of the key events in the timeline [19]. An interesting quote from the article...
“I’m worried about the systemic risk that this centralized company poses, and I’m worried that if they go down, they will take down the space with them,” said Emin Gün Sirer, an associate professor of computer science at Cornell University, who has a track record of successfully predicting problems in the growing virtual currency industry.
[19]
u/bfx_drew, a Bitfinex employee replied to a comment on r/BitcoinMarkets [23].
Isn't it more plausible that this is not someone writing a check for tethers (money coming in from outside the crypto ecosystem) but more likely it is coming from converting other cryptos into USDT? There are whole exchanges that use USDT for their psuedo-USD trading pairs, and these exchanges are dramatically increasing in value of total crypto holdings.
USDT is the rails, and as crypto is exploding and more money is flooding into the space, there is a demand to expand the rails that power a lot of the exchange and arbitrage. Exchanges are by far the biggest users of USDT, as expected since they use it at rails.
bfx_drew
This comment implies that Tethers are created when people convert cryptocurrency into USDT meaning that Tether is not backed by a 100% reserve of USD.
A supposed Bitfinex Quarterly Update is leaked online [24]. In the alleged update, Bitfinex discusses their banking issues and the steps they have been and are making to solve them. More interestingly they also address the Tether related conspiracies.
Because Bitfinex and Tether have common principals and banking, there is no limit to the timing or amount of money that can flow between the two entities even if inbound and outbound customer wires are limited. Bitfinex holds the vast majority of its customer USD balances in the form of USD bank balances. Bitfinex typically only holds less than 20M Tethers for customer withdrawal. When that balance approaches zero, Bitfinex moves money (typically $20M) from the Bitfinex bank account to the Tether bank account at the same bank in order to purchase additional tether from Tether Limited. To be clear, when this happens, cash is credited (or removed) from Bitfinex’s balance sheet and debited (or added) to Tether’s. This can be done electronically, day or night, on weekends and on holidays.
The reason for the continuing creation of Tethers is simple: demand from verified Bitfinex customers. What are customers using it for? Tether recently added the following page to help answer that question. The principal use case for Tether is exchange arbitrage. Bitfinex simply acts as an aggregator of customer demands for bulk creation and acquisition of Tethers. Its balance sheet impact is completely neutral as to Bitfinex—as to Tether, every issuance of Tethers (a credit to its liabilities) is matched by a corresponding debit, or addition, to its assets, as described above—and has nothing to do with the USD lending market. Also, all of the Tether flows and balances are very transparent, which clearly corroborates the truth. Given Tether’s public and verifiable nature, fraud would be easy to detect if it were to occur.
[25] lines 65-67
They explain the constant generation of tether by citing customer demand. The claim that Bitfinex holds only about 20M USDT for customer withdrawals and when that number gets low they "buy" another 20M USDT therefore creating more Tether.
This explanation was not satisfactory for @Bitfinexed however and he wrote up a response [26]. He says essentially that even if Bitfinex says what's going on is actually what's happening, what they're doing is still fraudulent. This is because Bitfinex is sending the $20M to Tether, which is owned by the same company that owns Bitfinex, and then in exchange, provides its users with USDT which is "legally worthless" [26]. @Bitfinexed claims this is basically stealing.
Friedman LLP website no longer lists Bitfinex as a client [27]. This further reduces the credibility of the "audit" Bitfinex claimed to have performed back in September 2017.
Bitfinex has no banking. This is the key assumption made by the conspiracy theory that @Bitfinexed corroborates.
With this assumption we can see that Bitfinex could either cease to operate or to commit fraud until they are banked once again.
Without a bank, Bitfinex cannot accept any fiat deposits or allow for any withdrawals, at least not through a bank. They can however act as a trade facilitator between depositing and withdrawing parties. Here's how @Bitfinexed explains it:
Now, say for some reason you want to deposit money to Bitfinex, let’s say… $5 million dollars. Bitfinex has a customer that wants to withdraw $2 million, and another that wants to withdraw $3 million.
...to deposit $5 million to Bitfinex, please send Alice $2 million, and Bob $3 million. Once Bitfinex confirms that the money was sent, they internally adjust the accounts by removing $5 million from those two accounts, and crediting you $5 million.
Bitfinex could also queue up deposits for handling withdrawals.
For example, say you want to deposit $5 million to Bitfinex, but Bitfinex doesn’t have any large pending withdrawals. In theory, you could sign an agreement to pay them $5 million.
You retain control of the money, they credit your account $5 million while you still have possession of the funds.
Then, when they are ready, they’ll ask you to pay out Janice who wants to withdraw $2 million, you send the $2 million to Janice and Bitfinex simply gives you a receipt that you paid them $2 million.
[14]
The problem with this scheme is that it relies on there being a constant stream of deposits. The only way this happens is if the price of Bitcoin and the global cryptocurrency market capitalization continue to go up. In the case of a bear market Bitfinex would have very few deposits and no longer be able to support any withdrawals.
There's a couple ways Bitfinex and continuously inflate the price of Bitcoin, wash trading, and fraudulent Tether. Wash trading is when sellers are allowed to purchase their own trades. It is a way to create artificial trade volume to make Bitfinex look like a "top exchange" as well as encourage people to buy. @Bitfinexed has an article claiming that wash trading is supported on Bitfinex [15]. It is true that wash trading was allowed on the exchange in the past as Bitfinex admits it themselves:
We have determined that this kind of manipulation - including wash trading and self-funding shorts - is in violation of Bitfinex’s terms of service. Those who intended to take unfair advantage of the circumstances surrounding the BCH distribution at the expense of other users have been sanctioned accordingly.
[16] section 3: "The Situation"
If Bitfinex is generating Tether, even when nobody is depositing USD, they can use that Tether to buy up Bitcoin when the price takes a downward turn. Additionally, they can use it to always ensure that the prices on Bitfinex are in line with the other top exchanges even though nobody is able to deposit USD.
One would think that, if used properly, the number of Tether should be constantly fluctuating as people deposit and withdraw but since it's inception, there has been a steady upward trend in the number of Tether [17]. This means there have been no significant withdrawals. Since November 9th 2017, the day Bitfinex stopped serving U.S. customers, until now (November 19th 2017) over 100 million Tethers have been created [17]. It seems suspicious that a company that stopped servicing U.S. customers is having large clients deposit millions of USD.
One explanation for why the number of Tethers is continuously increasing is that those who have access to Taiwanese banks and USD can take advantage of the price differences between Bitfinex and other exchanges. These arbitragers would also help keep the price of Bitcoin up and prevent Bitfinex from "collapsing" [22].