An affidavit of the lawyer of Bitfinex submitted to the Supreme Court of the State of New York is shedding light on a controversial turn in the policy of Tether in March. The company is issuing a so-called stable coin, whose value is pegged to $1 US dollar in reserves. Back in March, the firm revised its stance on what constitutes a backing.
The attorney of Bitfinex and Tether, Stuart Hoegner confirmed in his affidavit confirmed that the company issuing the stable coin used $900 million worth of the funds backing the value of the pegged cryptocurrency to provide a loan to Bitfinex.
A total of $900 million worth of credit was made available to Bitfinex at a fixed interest rate of 6.5 percent over three years. The attorney of the companies explains that the Office of the Attorney General was made aware of the intentions of the companies about a month before the conclusion of the transaction.
Reasons for Tether’s Loan to Bitfinex
The background provided by Hoegner elaborates on what led to the $900 million loan. The banking challenges for the company emanating from strict compliance regulations that hampered the crypto industry’s access to banking services forced the firm to look for alternatives. Apparently, one such alternative was a payment processor called Crypto Capital owned by a company called Global Trade Solutions.
The lawyer of Bitfinex elaborates on the relationship between the companies since 2015 when that started. After the exchange was denied services from Wells Fargo, the company intensified its relationship with the Panama-based firm. Over 2017 and 2018 the company is said to have processed millions of dollars worth of transactions on behalf of Bitfinex.
The closer the companies became, the more funds were being processed via Crypto Capital until August 2018, when the “payment processor” informed the exchange that a multitude of government-related funds seizures have been affecting the ability of the firm to transfer money.
A “Good-Faith Solution”
Starting in August of last year, Bitfinex and Tether, which both held accounts with Crypto Capital entered into a series of transactions. Tethers have been transferred to the accounts of Tether, while fiat money was transferred from the stable coin issuer’s account to the exchange’s coffers.
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During that time, the lawyer of both companies states that they believed in the assurances on the part of Crypto Capital that funds that were being frozen by some government entities, would soon be released.
Too Big to Fail
Realizing the gravity of the situation and the risks to the broad cryptocurrencies market, the management team of Bitfinex negotiated a credit line with Tether to the tune of $900 million. After three months of negotiations, and informing the Office of the Attorney General about their intentions, the companies concluded that the deal was safe.
The lawyer proceeds to justify the move as a step to protect the orderly functioning of the cryptocurrency market. Allegedly, the risks to holders of Tether were bigger if a market player like Bitfinex was to face the imminent liquidity crunch. A total of 60 million shares of the parent company of Bitfinex, iFinex was also posted as collateral.
Around the same time Tether’s message to its holders changed. Instead of ensuring 1:1 backing for every Tether with USD, the company changed the statement on its website to the current one.
“Every tether is 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties which may include affiliated entities,” the message states.
Fractional Reserve Backing
To date, Tether has 74 percent backing with the company elaborating that its daily redemption is close to $500,000 per day. If the full amount in the credit facility provided to Bitfinex is to be used, the figure drops to 68 percent.
In his affidavit, the lawyer of Bitfinex and Tether highlights that the Federal Reserve’s fractional reserve banking system requires banks to keep 10 percent of their liabilities on hand. The worrying aspect of this statement is the fact that it compares the stable coin’s position to that of the US central bank.