BITFINEX

DESCRIPTION OF EVENTS

"Bitfinex is a Hong Kong-based cryptocurrency exchange owned and operated by iFinex Inc., which is headquartered in Hong Kong and registered in the British Virgin Islands." "The Bitfinex exchange is a popular platform for exchanging cryptocurrencies, also hosting spot and derivatives trading as well as certain lending, borrowing and staking features. Bitfinex came into existence in 2012." "BitFinex offers three main functions - it is a pure bitcoin to fiat exchange, a margin trading exchange and a liquidity provider. The platform offers a number of features available that expand the financial positions you can take - for example, the ability to short Bitcoin via margin trading."

"Bitfinex also has its own utility crypto token called Unus Sed Leo (LEO). Because it restricts a number of regions, Bitfinex U.S. customers are not allowed. On Bitfinex, KYC and Anti-Money Laundering procedures are employed." "It serves all except few countries in the world (mentioned below) and supports both fiat-to-crypto and crypto-to-crypto trades. Other notable features include margin trading, limit and stop orders, over-the-counter (OTC) trades, and others. While there are many options available, everything is laid out in an impressively intuitive fashion, with easy-to-navigate dashboards and menus."

"Crypto Capital has been in operation since 2013, with Braveno’s Mathias Grønnebæk claiming that Reddit user u/bitfan2013 was the firm’s founder. In May 2013, u/bitfan2013 posted to the r/Bitcoin subreddit, probing the community sentiment regarding a proposed bank that would comprise a means to convert between BTC and fiat currency, in addition to providing services to companies operating in the crypto sector."

"The poster asserted that his family and he sat on the board of directors for four “small – medium sized private banks” in Panama. The following week, u/bitfan2013 announced that they had decided to “offer private international banking to bitcoin customers, merchants and traders.”"

"In June 2013, Crypto Capital (then operating under the name Crypto Financial) launched, and then conducted what it called an initial public offering to raise 30,000 BTC through Panama-based Havelock Investments in August 2013. By 2015, Crypto Capital had attracted several notable exchanges as clients, providing services to Bitfinex and Coinapult, among others."

"Bitfinex was accused of having sent the $850 million to Crypto Capital Corp, a payment processor believed to be in Panama, without telling clients, and after the funds went missing, draining at least $700 million from Tether’s reserves." "Bitfin[e]x transferred about $1 billion of its own and client money to Crypto Capital." "Crypto Capital is a Panama-based firm that the U.S. Department of Justice claims provided shadow banking services to several cryptocurrency exchanges, including Bitfinex, Binance, Cex.io, Coinapult and QuadrigaCX." "However, starting from August last year, Crypto Capital refused to provide withdrawal service for customers and refused to return funds to Bitfin[e]x exchange." "Bitfinex claims that Crypto Capital falsely referred to its integrity, banking expertise, robust compliance program and financial licenses to reassure it was capable of handling the company’s transactions."

"Bitfinex holds that in August 2018, Crypto Capital informed the exchange that approximately $500 million of Bitfinex’s funds were being “held up” by authorities in Poland and Portugal. When pressed to provide evidence of the frozen funds, Bitfinex was issued a reference letter signed by Monroe stating that more than $300 million worth of Bitfinex’s funds were being held with TCA Bancorp by Global Trade Solutions AG, operating as Crypto Capital." "Following criminal investigations by multiple international bodies, including U.S. authorities, this past Spring, Crypto Capital’s funds were frozen. Of the funds seized from the banking solution platform, $880 million belonged to crypto exchange Bitfinex which maintained a relationship with the company."

"Bitfinex claims that its partnership with Crypto Capital began to deteriorate in April of last year, following reports indicating that Polish authorities had seized roughly $350 million from an account belonging to Crypto Capital subsidiary Crypto Sp. z. oo. with Bank Spółdzielczy w Skierniewicach." "Crypto Capital’s partnership with Bitfinex has garnered significant scrutiny in recent months, with the exchange claiming that the liquidity issues had been triggered by an inability to access $880 million worth of its funds that were being held by Crypto Capital." "So far, Crypto Capital has a total of $851 million of funds has not been returned to Bitfinex."

"Several months ago, Ivan Manuel Molina Lee, a principal of Crypto Capital, was detained by authorities in Greece." "Crypto Capital president Ivan Manuel Molina Lee was extradited to Poland by Polish authorities on charges of money laundering. Lee is charged with laundering 1.5 billion zloty, or about $390 million." "Authorities had written that Molina Lee’s crimes included “laundering dirty money for Columbian drug cartels using a cryptocurrency exchange.”" "Also, Oz Yosef (also known as Oz Joseph), another principal of Crypto Capital, has been indicted on three criminal counts by the U.S. Attorney for the Southern District of New York. As has already been mentioned publicly in court filings, Crypto Capital processed certain funds for and on behalf of Bitfinex for several years. During that period, Bitfinex relied upon various systematic representations from Crypto Capital, including from Molina and Yosef, that proved to be false. Among those misrepresentations, Crypto Capital regularly referred to its integrity, banking expertise, robust compliance programme and financial licences. This was designed to assure us that Crypto Capital was capable of handling Bitfinex's transactions."

"Bitfinex is the victim of a fraud and is making its position clear to the relevant authorities, including those in Poland and the United States. We cannot speak about Crypto Capital's other clients, but any suggestion that Crypto Capital laundered drug proceeds or any other illicit funds at the behest of Bitfinex or its customers is categorically false. This week's developments do nothing to affect or otherwise deter Bitfinex's claims to funds in Poland or anywhere else. We will continue to work to recover all funds for and on behalf of our stakeholders." “We cannot speak about Crypto Capital’s other clients, but any suggestion that Crypto Capital laundered drug proceeds or any other illicit funds at the behest of Bitfinex or its customers is categorically false,” wrote Bitfinex general counsel Stuart Hoegner.

"Tether extended a $900 million line of credit after $880 million was plundered from the exchange, allegedly by Crypto Capital Corp." "To address the “temporary liquidity crisis,” Bitfinex “borrowed” $400 million from Tether by transferring the money from Tether’s bank account to its own bank account. Bitfinex also directed Crypto Capital to transfer funds between its Bitfinex account and Tether account at Crypto Capital – effectively, if the money was frozen with Crypto Capital, at least Bitfinex could move it around there to finagle its internal books. During this time, reports began to surface that Bitfinex was insolvent. Bitfinex denied the allegations."

"On November 1, 2018, Tether announced a partnership with a new bank in the Bahamas, Deltec Bank and Trust Ltd. With that announcement, Tether publicized a letter from the bank that stated Tether’s account maintained a value of $1,831,322,828, which was equal to the amount of Tether currently on the market. The next day following the announcement, Tether moved almost $500 million in funds to Bitfinex’s account. Bitfinex also “purchased” nearly $150 million in Tether. Merely a day after Deltec’s representations, Tether was no longer truly backed one to one."

"Crypto exchange Bitfinex said Friday that it repaid its sister company Tether the remaining loan balance of $550 million." "Bitfinex repaid the outstanding balance of $550 million in fiat currency, with interest, the exchange said in a very terse statement on Feb. 5." "Bitfinex told The Block that the payment was made to Tether in January, and the line of credit has now been closed." "Bitfinex general counsel Stuart Hoegner told The Block that the loan was taken out because Bitfinex was in a "short-term need for cash, and Tether was prepared to lend on commercially reasonable terms." In 2019, the New York Attorney General's (NYAG's) office argued in court documents that Bitfinex lost $850 million after payment processor Crypto Capital seized the funds, alleging that the exchange secretly covered the shortfall via the Tether credit line." "Bitfinex said it repaid a remaining balance of $550 million on a loan that was at the heart of the attorney general’s allegations of fraud." "We are pleased to be in a position to pay off the loan in its entirety," said Stuart Hoegner, Bitfinex's general counsel, in an email to Fortune. "Our performance has made it possible to repay the remaining balance of the outstanding revolving credit facility early. "The loan balance has been paid ahead of schedule, said Bitfinex, adding that it wasn't due until November 5, 2021."

"Bitfinex is happy to announce that in January it repaid the remaining balance of $550,000,000 of the outstanding revolving loan facility to Tether. Bitfinex made this payment in fiat currency wired to Tether's bank account. All interest due on the loan has been paid. The loan has now been repaid early and in full and the line of credit has been cancelled."

"The owner of the Tether cryptocurrency and Bitfinex trading platform will pay an $18.5 million fine to settle charges it commingled client and corporate funds to cover up $850 million that went missing, New York Attorney General Letitia James said on Tuesday." "Without admitting or denying any wrongdoing, the officials who control Bitfinex and the affiliated stablecoin Tether, agreed to pay $18.5 million, the state attorney general’s office said in a statement on Tuesday."

"James said the civil settlement with Hong Kong-based iFinex Inc and related entities will also require them to halt trading activity with New Yorkers." “These companies obscured the true risk investors faced,” James said in a statement. "Tether and Bitfinex will be required to cease trading activity with New Yorkers and submit quarterly transparency reports, the attorney general’s office said."

“The settlement amount we have agreed to pay to the attorney general’s office should be viewed as a measure of our desire to put this matter behind us and focus on our business,” Stuart Hoegner, general counsel for Bitfinex and Tether, said in a statement.

"Bitfinex and Tether said they’re still working to recover funds lost when Crypto Capital was shut down." "Bitfinex continues to make progress in its recovery actions against the Crypto Capital group around the world," Bitfinex said Friday. "Crypto Capital and related parties victimized Bitfinex. We reserve our rights to seek all available legal remedies against them. We also look forward to continuing our productive and constructive discussions with the New York Attorney General’s Office."

Due to the challenges in obtaining a banking relationship, BitFinex used Crypto Capital, a fraudulent company, for banking services.

Crypto Capital funds were seized and BitFinex is still working on recovering them. In the meantime, they took a loan from Tether, which they eventually repaid.

HOW COULD THIS HAVE BEEN PREVENTED?

A proper framework for exchanges would allow them to operate without having to obtain shadow banking relationships.

Check Our Framework For Safe Secure Exchange Platforms

SlowMist Hacked - SlowMist Zone (Jun 26)
Bitfinex | Latest Bitfinex News by Cointelegraph (Aug 7)
Bitfinex Review (2021) - Is It Trustworthy? (Aug 7)
Bitfinex Exchange Reviews, Live Markets, Guides, Bitcoin charts (Aug 7)
Bitfinex, Tether owner pays $18.5 million fine to settle NYAG cryptocurrency cover-up charges | Reuters (Aug 7)
Bitfinex | Cryptocurrency Exchange | Bitcoin Trading | Futures Trading | Margin Trading (Aug 7)
Bitfinex Cries Fraud as Crypto Capital Executive Indicted by US (Aug 7)
Crypto Capital Principal Indicted on Fraud, Confirming Bitfinex Allegations - CoinDesk (Aug 7)
Bitfinex Denies Laundering, Says It's a Victim of 'Fraud' by Crypto Capital - CoinDesk (Aug 7)
Bitfinex Claims to Be Victim of Fraud After Crypto Capital President Arrested – Exchanges Bitcoin News (Aug 7)
Bloomberg - Are you a robot? (Aug 7)
Bitfinex says it has repaid Tether remaining loan balance of $550 million (Aug 7)
Bitfinex says it repaid $550 million Tether crypto loan central to fraud probe | Fortune (Aug 7)
Bitfinex Exchange: User Review Guide - Master The Crypto (Aug 7)
What is Crypto Capital Corp? "Bitfinex became effectively insolvent and unable to service customer withdrawals.....left Tether effectively insolvent. None of this was disclosed until the New York Attorney General investigation" : btc (Aug 7)
@BennettTomlin Twitter (Aug 7)
Bitfinex repays $750M Tether loan, but lawsuits remain | Modern Consensus. (Aug 7)
The New York Attorney General’s Office Reaches Settlement with Bitfinex and Tether | Michael Volkov - JDSupra (Aug 7)
Crypto Capital arrest could be disaster for Bitfinex, Binance, BitMEX - CoinGeek (Aug 7)
Tether, Bitfinex reach settlement with New York attorney general (Aug 7)

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