Tether, Bitfinex Ordered to Pay Over $42 Million in Fines by CFTC

The Commodity Futures Trading Commission (CFTC) has ordered Tether and Bitfinex (iFinex) to pay $42.5 million in fines, according to a statement by the regulator.

Tether, a leading dollar-based stablecoin, must pay $41 million in regards to claims that Tether (USDT) was fully backed by the US dollar.

Bitfinex, a crypto trading platform, must pay $1.5 million for “illegal transactions” and “violation of prior CFTC order.”

Tether must also cease and desist from any further violations of the Commodity Exchange Act (CEA) and CFTC regulations.

The CFTC claims that since its launch in 2014, Tether has represented that the Tether token is a stablecoin with its value pegged to fiat currency and 100% backed by corresponding fiat assets, including U.S. dollars and euros. However, the Tether order finds that from at least June 1, 2016, to February 25, 2019, Tether misrepresented to customers and the market that Tether maintained sufficient U.S. dollar reserves to back every USDT in circulation with the “equivalent amount of corresponding fiat currency” held by Tether and “safely deposited” in Tether’s bank accounts. The CFTC order states that Tether reserves were not “fully-backed” the majority of the time. The order further finds that Tether failed to disclose that it included unsecured receivables and non-fiat assets in its reserves, and that Tether falsely represented that it would undergo routine, professional audits to demonstrate that it maintained “100% reserves at all times” even though Tether reserves were not audited.

According to the CFTC order, Tether held sufficient fiat reserves in its accounts to back USDT tether tokens in circulation for only 27.6% of the days in a 26-month sample time period from 2016 through 2018. The order also finds that, instead of holding all USDT token reserves in U.S. dollars as represented, Tether relied upon unregulated entities and certain third-parties to hold funds comprising the reserves; comingled reserve funds with Bitfinex’s operational and customer funds; and held reserves in non-fiat financial products. The order further finds that Tether and Bitfinex’s combined assets included funds held by third-parties, including at least 29 arrangements that were not documented through any agreement or contract, and that Tether transferred Tether reserve funds to Bitfinex, including when Bitfinex needed help responding to a “liquidity crisis.”

In addition, the order finds that Tether failed to complete routine, professional audits during the relevant time period. According to the order, Tether retained an accounting firm to perform a review of Tether reserves on a date Tether selected in advance, and Bitfinex transferred over $382 million to Tether’s bank account in advance of that review. The order recognizes that Tether has not completed an audit of the Tether reserves.

The charges against iFinex Inc., BFXNA Inc., and BFXWW Inc. (d/b/a Bitfinex) are in connection with their operation of the cryptocurrency trading platform. The order finds Bitfinex engaged in illegal, off-exchange retail commodity transactions in digital assets with U.S persons on the Bitfinex trading platform and operated as a futures commission merchant (FCM) without registering as required. The CFTC further finds that, through this same conduct, BFXNA Inc. violated Part VII. A. of the CFTC’s June 2, 2016 order.

The Bitfinex order finds that from at least March 1, 2016, through at least December 31, 2018, Bitfinex offered illegal, off-exchange financed retail commodity transactions with U.S. persons that were not eligible contract participants (ECPs) under the CEA.

According to the CFTC order, the substantial majority of margin trading was financed through Bitfinex’s peer-to-peer funding program through which Bitfinex customers who held fiat or crypto in their Bitfinex account would “lend” those funds to other Bitfinex customers who would then use those funds to buy, sell, and trade on the Bitfinex platform. The order also finds that, during the relevant period, Bitfinex force-liquidated certain customer positions and acted as the counterparty to certain transactions.  In so doing, Bitfinex violated the terms of the 2016 order, which had directed Bitfinex to cease and desist from offering, entering into, executing, or confirming the execution of illegal, off-exchange financed retail commodity transactions, and from accepting orders and receiving funds in connection with retail commodity transactions.

Bitfinex is also prohibited from further violations of the CEA and Bitfinex is required to implement and maintain additional systems designed to prevent “unlawful retail commodity transactions.”

Acting CFTC Chairman Rostin Behnam stated:

“This case highlights the expectation of honesty and transparency in the rapidly growing and developing digital assets marketplace. The CFTC will continue to take decisive action to bring to light untrue or misleading statements that impact CFTC jurisdictional markets.”

Acting Director of Enforcement Vincent McGonagle added:

“As demonstrated by today’s actions against Tether and Bitfinex, the CFTC is committed to carrying out its statutory charge to promote market integrity and protect U.S. customers. The CFTC will use its strong anti-fraud enforcement authority over commodities, including digital assets, when necessary. The CFTC will also act to ensure that certain margined, leveraged or financed digital asset trading offered to retail U.S. customers must occur on properly registered and regulated exchanges.  Moreover, as the Bitfinex order reflects, the CFTC will take decisive action against those who choose to violate CFTC orders.”

Last month, Bitfinex announced the launch of a regulated investment exchange in Kazakhstan. US citizens are prohibited from using the crypto exchange.

The enforcement action by the CFTC should come as no surprise as federal regulators have been voicing their intent to enforce greater compliance of crypto service providers as well as stablecoin issuers. You may anticipate future actions emanating from US regulators in the future.

The CFTC Orders targeting Tether and Bitfinex are available below.


CFTC Bitfinex Order 10.15.21

CFTC Tether Order 10.15.21
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