Opinion: Tether Debacle Kills Bitcoin ETF Prospects for NowBy Nick Chong
For the past few years, investors have waited for the launch of a U.S.-regulated and based Bitcoin exchange-traded fund (ETF). But these already quixotic hopes may have been temporarily dashed with news that iFinex, the operator of both Bitfinex and Tether Limited, two firms integral to the cryptocurrency market, are in precarious financial standing.
New York Attorney General Dives Deep Into iFinex's Finances
For those who haven't been checking Crypto Twitter or trade publications over the past 48 hours, here's a brief recap of the news that could potentially put Bitcoin ETF applications in jeopardy. An ETF is a purchasable security that tracks an index and is backed by shares or units of an underlying asset. Due to their highly-regulated nature, ETFs could make it easier for more risk-averse investors to enter the Bitcoin market. Some thus believe that the introduction of ETFs could be a positive catalyst for Bitcoin’s price.
On Thursday, the office of the New York State Attorney General (NYAG), Letitia James, issued a press release in which it was stated that iFinex may be participating in "ongoing activities that may have defrauded" cryptocurrency investors. A 23-page document signed by Brian Whitehurst, the Assistant Attorney General, unveiled more about the situation.
It was stated that as per the authority's investigations, Bitfinex currently has an $850 million hole in its books, due to an inability to obtain these funds from Crypto Capital, a Panama-based payments processor. Crypto Capital is believed to have the assets under its management frozen by governmental entities in Poland, Portugal, and the United States. As a result, Bitfinex went into a frenzy, purportedly searching for funds to satisfy customer withdrawal requests and business expenses. Eventually, the exchange's management determined that the best course of action would be to secure a line of credit with the affiliated Tether Limited, the firm behind the USDT stablecoin. Whitehurst then revealed that Bitfinex still has a $700 million line of credit, backed by shares in iFinex, open with Tether, indicating that USDT isn't entirely backed by fiat reserves. As the press release further explains:
"According to the filings, Bitfinex has already taken at least $700 million from Tether’s reserves. Those transactions – which also have not been disclosed to investors – treat Tether’s cash reserves as Bitfinex’s corporate slush fund, and are being used to hide Bitfinex’s massive, undisclosed losses and inability to handle customer withdrawals."
Bitfinex's chief financial officer, Giancarlo Devasini, has since asserted to Chinese cryptocurrency investor Zhao Dong that the exchange will need a "few weeks" to unfreeze the funds. But, this shakedown, if perpetuated by either iFinex or the office of the NYAG, could be a long-term detriment to the cryptocurrency market.
What This Could Mean For Current Bitcoin ETF Proposals
Over the course of the past 24 months, the U.S. Securities and Exchange Commission (SEC), has consistently beat down applications for Bitcoin ETFs, citing concerns of manipulation, a lack of investor safety, and minimal market surveillance. This may not seem relevant in the context of iFinex's legal troubles, but it should be. As the SEC's mission statement reads:
"The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”
In other words, the regulator's central mission is to protect investors, through promoting the "proper disclosure of market-related information," ensuring fraud is kept to a minimum, and aiding firms and investors across the board. The key terms, in this case, are the "proper disclosure" of "market-related information." As the NYAG notes, Bitfinex and Tether employed these backdoor deals without as much as a notice to investors. Instead of issuing a public statement, Tether quietly altered its terms of service, and Bitfinex kept silent and was subsequently troubled with dramatic withdrawal delays and unstable relationships with banks.
What makes this extremely worrying is that Bitfinex is currently (and often is) the second largest spot exchange for Bitcoin trading, per data compiled and interpreted by Bitwise's BitcoinTradeVolume.com. A key Bitcoin exchange, which Bitwise touted as trusted/bonafide in a closed-door SEC symposium, isn't properly conveying updates to its clientele about their funds. This could easily irk the SEC's commissioners, giving them reasons to doubt Bitcoin markets.
The SEC has yet to comment on this situation, and it likely won't. Regardless, this entire drama could give the SEC a reason to believe that these embryonic markets aren't conducive to the safety of American investors.
But there's still hope
While this latest news may cause additional delays for ETFs, there's still hope over the longer term. There are currently two ETFs that are being considered by the SEC. In a recent interview with CNBC, Hunter Horsley of Bitwise, a crypto-backed ETF hopeful, opined that Bitcoin as an asset is in its "most viable" state ever. Horsley added that a Bitcoin fund could thus be the next logical stage of crypto's journey to financialization—which is important for speculators.
When questioned by the CNBC anchor about the SEC’s fears about the current state of cryptocurrency affairs, the Bitwise chief executive responded with confidence. Horsley noted that now, the SEC has a "lot more understanding in place" about the nuances of Bitcoin, especially the idea that "numbers you see on various crypto-related websites aren't accurate." In the end, he explained, what truly matters is a fleshed-out comprehension of this ecosystem's ins and outs, not a confirmation that all Bitcoin exchanges, investors, and other players are infallible.
This interview, however, happened before the latest revelations. The fact remains that one of the crypto ecosystem’s largest trading platforms has potentially infringed on the safety of its users and shareholders, not to mention cryptocurrency holders the world over, with its financial dealings. The SEC will surely take note.