On April 25 2019, news broke that the New York Attorney General office had sued Bitfinex and Tether on allegation of fraud carried out by the companies against users in the state of New York. The key allegation was that Bitfinex and Tether had engaged in “undisclosed, conflicted transactions to cover Bitfinex’s losses by transferring money out of tether (USDT) reserve funds”. In total, around $700 million had been drained from Tether’s reserves and a line of credit had been issued to Bitfinex for loans totaling up to $900 million. The reason why Bitfinex had required the line of credit was because of the loss or theft of around $850 million of their funds by Crypto Capital – a Panama-based payment processor who had been helping the exchange handle customer withdrawals. Bitfinex has since responded to NYAG’s allegations and the investigation is ongoing.
One of our past research notes went into great detail about the immediate impact of the news of the NYAG investigation. The charts below compare pricing on Bitfinex for the BTC/USD trading pair with that of Coinbase and Kraken. One can see that, once the news broke, Bitfinex’s trading pair had been consistently trading at a premium to that of its competitors as investors try to get their funds out of the exchange.
On the day of the news, the premium was as much as 3% when compared to the averages of Kraken and Coinbase Pro. This point becomes even more obvious when we begin to look at Bitfinex’s on-chain inflows and outflows and how they have changed since the news broke. Below we plot the net outflows for both ETH and BTC on Bitfinex (Data: Token Analyst).
Moreover, another helpful metric to ascertain the effect the news had on users’ behavior is the number of new stable coins which have been issued since the April 25th announcement.
The spike in issuances amongst three of the most popular stable coins (PAX, TUSD, USDC) is noticeable and the highest it has been in the two months period around the news. The previous data showed the short-term impact of the news but two months on, the impact of the news can still be felt.
Bitfinex and Tether had always been met with some caution from some within the industry due to their sour history of hacks and fund withdrawal issues. However, the market has failed to react as strongly as some would expect following the data immediately following the news. For example, Bitfinex has remained one of the world’s most prominent crypto asset exchanges. Below we plot the most exchange’s trading volume for the BTC/USD pair from the start of the year. Bitfinex has maintained a steady share of overall volume throughout the year despite the news.
Whilst the outcome of the NYAG investigation is uncertain, Bitfinex’s launch of their LEO token can be said to have been the greatest resultant event of the drama. In order to raise funds to make up for Bitfinex’s and Tether’s aforementioned shortfall, the firm reportedly raised $1 billion in a token sale for an exchange token – LEO. The token was listed on Bitfinex on Monday 21 May and will be bought back and ‘burned‘ on a pre-defined schedule using Bitfinex’s accrued exchange fees, any funds recovered from Crypto Capital, and 80% of funds recovered from their 2016 hack.
LEO has performed exceptionally well since its listing – having returned around 76.6% to date. The chart below plots LEO’s price and trading volume on Bitfinex since May 21.
Moreover, we show the total amount of LEO which has been burned thus far.
Despite the ostensible implications of the NYAG investigation which could greatly impact Bitfinex’s ability to operate in the United States in the long term, the exchange seems to have survived relatively unscathed thus far. We expect this to change as the investigation progresses and there is the chance that the crypto asset market has not sufficiently priced in the possible negative long term consequences of the investigation.