U.S. District Court Judge Katherine Polk Failla dismissed claims against cryptocurrency exchange iFinex Inc., DigFinex Inc., stablecoin issuer Tether Holdings Limited and its relevant entities for racketeering, wire fraud, bank fraud, and money laundering brought under Racketeer Influenced and Corrupt Organizations (RICO), according to a court filing last September.
“The causal connection between defendants’ purported racketeering and plaintiffs’ injury is insufficiently “direct” and “straightforward” to satisfy the proximate cause requirement,” the judge wrote.
With part of the claims being dismissed, the companies still face legal scrutiny under the Sherman Act, the Commodities Exchange Act and the New York General Business Law, for claims including forming a monopoly power and manipulating the cryptocurrency market.
Bitfinex and Tether said they look forward to litigating this case and won’t settle what remains of the plaintiffs’ ”baseless claims.” In their latest statement, the companies called the complaint “a clumsy attempt at a money grab, which recklessly harms the whole cryptocurrency ecosystem.”
The lawsuit was initiated in October 2019 by a group of individual cryptocurrency investors. In the 593-paragraph complaint submitted to the United States District Court, Southern District of New York, plaintiffs said the company Tether arbitrarily printed 2.8 billion tether stablecoins (USDT) from 2017 through 2018 to flood the Bitfinex exchange and purchase other cryptocurrencies, causing their prices to spike.
“Tether’s 1:1 USDT/USD guarantee is a lie,” according to the complaint, “Together, Bitfinex and Tether manipulated a market that, by design, is supposed to be decentralized”.
A blockchain-based cryptocurrency, Tether’s tokens in circulation are in theory backed by an equivalent amount of U.S. dollars, making it a stablecoin with a price pegged to USD $1.00. As of February 2022, Tether is the third-largest cryptocurrency by market capitalization, worth more than $77 billion.
The lawsuit is the latest movement of a series of legal inspections against Tether and Bitfinex in the last two years. Early in February last year, The New York Attorney General’s office (NYAG) alleged that Bitfinex and Tether attempted to cover up the loss of approximately $850 million in customer funds. As part of the settlement, Bitfinex and Tether agreed to pay $18.5 million, cease trading with New York residents and entities, and provide quarterly transparency reports to the NYAG.
According to its recent report as of September 30, 2021, the company’s consolidated assets exceeded its liabilities by more than $1 million, a sign that its reserve is sufficient for potential redemptions of the digital asset tokens issued, according to its accounting report audited by Moore Cayman, an accounting firm.
Tether and Bitfinex petitioned the New York State Supreme Court in August to block the NYAG from providing the cryptocurrency news site CoinDesk with documents detailing the reserves, according to the petition filed.
“The full detail of the investment strategy behind how Tether achieves its returns, and the counterparties and issuers it works with to achieve them, is a key part of its business and one it does not want to reveal to the broader public,” according to the filing.
Meanwhile, the Commodity Futures Trading Commission (CFTC) stepped in last October and fined Tether $41 million for misleading statements and omissions of material fact in connection with the U.S. dollar tether token (USDT) stablecoin. It also fined Bitfinex $1.5 million for not registering for “illegal, off-exchange digital asset transactions”.
The CFTC said that between June 1, 2016 and February 25, 2019, Tether misrepresented to customers and the market that it had sufficient U.S. dollar reserves to back every USDT in circulation which they “safely deposited” in Tether’s bank accounts.
The U.S. government agency, which regulates derivatives markets, found Tether’s fiat reserves in its accounts to back USDT tether tokens could only support 27.6 percent of the days in a 26-month sample time period from 2016 through 2018. Instead of holding all USDT token reserves in U.S. dollars as claimed, Tether relied upon unregulated entities and certain third-parties to hold funds comprising the reserves. Tether and Bitfinex’s combined assets included at least 29 unregistered arrangements that were not documented through any agreement or contract.
“This case highlights the expectation of honesty and transparency in the rapidly growing and developing digital assets marketplace,” said Rostin Behnam, Acting Chairman of CFTC in the press release.
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