New York Settlement Outlines Cryptocurrency’s Early Banking Odyssey

By Valentina Pasquali

A recent settlement between state prosecutors in New York and a pair of cryptocurrency firms headquartered in Hong Kong sheds new light on the nascent industry’s early struggle to secure access to mainstream financial services and how that challenge impacted transactions.

Cryptocurrency exchange Bitfinex and cryptocurrency issuer Tether, which share the same owners and managers, agreed Feb. 17 to pay an $18.5 million penalty, cease any dealings with residents of New York and make accurate earnings disclosures going forward to resolve claims by the state’s attorney general that they misled investors as to their financial health.

The case largely centers on financial statements made between March 2017 and February 2019 by Tether, which issues an eponymously named stablecoin that trades on Bitfinex, among other cryptocurrency platforms. According to the settlement, Tether falsely claimed it always kept enough U.S. dollars in reserve to back each Tether coin on a one-to-one basis.

Tether and Bitfinex’s inability to secure an account at a regulated bank over a period of several months in 2017 and the ensuing financial machinations the firms’ higher-ups allegedly made to compensate for that deficiency appear to have played a significant role in disrupting the coin’s peg to the U.S. dollar.

“Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie,” New York Attorney General Letitia James said in a Feb. 23 statement announcing the settlement, which did not require the two firms to admit wrongdoing. “These companies obscured the true risk investors faced, and were operated by unlicensed and unregulated individuals and entities dealing in the darkest corners of the financial system.”

Up until March 2017, Bitfinex and Tether processed transactions, including deposits and withdrawals of U.S. dollars by their clients, through several lenders in Taiwan that held correspondent accounts at Wells Fargo, according to the 17-page settlement.

That month, the San Francisco-based global bank decided to cease clearing payments for the two cryptocurrency firms just as the number of tethers in circulation had begun to rapidly grow, from 50 million to nearly 110 million by May.

Wells Fargo’s decision left Bitfinex, one of the world’s largest bitcoin exchanges, and Tether, its sister company, on a quest for new banking relationships that ultimately ended when the firms landed accounts at Puerto Rico-based Noble Bank in June and September 2017 respectively.

During its six months of functioning without a formal banking relationship, Tether kept up to $61.5 million in a trust account that its general counsel held at Bank of Montreal, according to prosecutors.

Tether also apparently held a claim to $382 million that Bitfinex kept in a “comingled account” at Noble Bank from mid-June to mid-September, when the cryptocurrency issuer finally managed to open an account of its own. But those funds allegedly did not act as reserve for the approximately 442 million tethers which by that point had entered into circulation.

Many early cryptocurrency firms began as small, financial technology-based startups, or fintechs, and failed to raise their staff numbers, compliance resources and available expertise to sufficient levels after suddenly growing into billion-dollar enterprises, said Yaya Fanusie, a former analyst with the Central Intelligence Agency.

“Over the past two to three years they have become more compliance-focused,” said Fanusie, now a cryptocurrency and anti-money laundering consultant in Washington, D.C. “Where things have moved least is the banking sector, because even though there is better compliance among many of these companies, there is still widespread reluctance to bank them.”

Silvergate Bank in San Diego, San Juan Mercantile Bank & Trust International in Puerto Rico and Spain’s Banco Santander are among the few lenders that have publicly embraced the cryptocurrency industry.

Trouble ahead

Over the summer of 2017, rumors circulated online that Tether was struggling to maintain its peg to the U.S. dollar.

The two firms responded by commissioning a New York-based accounting and tax advisory, Friedman LLP, to publicly verify Tether’s cash reserves as of the evening of Sept. 15, 2017, hours after the company landed its own account at Noble Bank and transferred $382 million from the Bitfinex account.

“No one reviewing Tether’s representations would have reasonably understood that the $382,064,782 listed as cash reserves for tethers had only been placed in Tether’s account as of the very morning that Friedman verified the bank balance,” prosecutors later alleged.

The firms’ adventures through the underbelly of the global financial system continued.

Bitfinex began to route more and more transactions through independent payment processors, and by mid-2018 had stashed an estimated $1 billion in customer deposits, more than 80 percent of its total, at Crypto Capital, a Panama-based, non-bank financial services firm launched in June 2013.

In April 2019, federal prosecutors in New York charged two representatives of Crypto Capital, Reginald Fowler of Arizona and Ravid Yosef, who at the time was thought to reside in Israel, with operating an unlicensed money services business.

“Reginald Fowler and Ravid Yosef allegedly ran a shadow bank that processed hundreds of millions of dollars of unregulated transactions on behalf of numerous cryptocurrency exchanges,” then-U.S. Attorney Geoffrey Berman said at the time.

Between May and July 2018, Bitfinex’s point of contact at Crypto Capital, an individual who, according to prosecutors, alternately went by “Oz Yosef,” “Oz Joseph” or just “Oz,” informed his clients that authorities in Poland and Portugal had frozen more than $500 million in Crypto Capital accounts that held Bitfinex’s funds.

“In the ensuing months, ‘Oz’ would go on to provide a number of different excuses for why he could not return the funds to Bitfinex (or its clients), including tax complications, hurdles placed by various compliance personnel at various banks, bankers being on vacation, typos in wire instructions, and corruption in the Polish government,” prosecutors wrote in the settlement.

Suddenly faced with a liquidity crisis, Bitfinex appears to have dusted off its early playbook of secretly moving funds to and from Tether-held accounts to avoid going under.

From Aug. 21 through September 2018, Tether transferred $400 million in four instalments from an account at Deltec Bank in the Bahamas to Bitfinex’s account at the same lender. A month later, Bitfinex “redeemed” 400 million tethers as repayment.

Another five transfers between the two accounts for a combined $475 million occurred in November. The firms disclosed neither those wires nor the earlier batch of transfers, and continued publicly rejecting reports they were on the brink of insolvency.

Bitfinex instructed Oz to credit Tether’s ledger at Crypto Capital with sums equivalent to those transferred between the accounts the two firms held at Deltec in the Bahamas, or, alternatively, arrange for Crypto Capital to buy corresponding amounts of tethers.

Bitfinex repeatedly demanded that the Panamanian payment processor release its funds throughout the alleged debacle, but to no avail.

“We have 860m with you. I can’t believe we can’t even get 20 or 30 million out,” a Bitfinex representative told Oz on Nov. 21, 2018. “Where is all the money, it doesn’t sum up … 350 in Poland, 150 in Portugal.'”

Upon entering into the settlement with New York last month, Bitfinex and Tether agreed to report all transfers between each other, provide a detailed disclosure of the various assets that back tethers, and give regulators information on the payment processors they use for client deposits and withdrawals.

Bitfinex still has not said when it expects to recoup its funds from Crypto Capital.

Heightened regulatory scrutiny of cryptocurrency may ultimately help the industry by shining a light on how exchanges and other firms operate, as well as by separating the licit from the illicit, said Ari Redbord, a former federal prosecutor who later held a senior role at the Treasury Department.

“Virtual asset service providers have had a very difficult time getting access to banking because there is an unfair perception that there is a disproportionate amount of criminal activity happening in crypto as opposed to cash or other fiat currencies,” Redbord, now head of legal and government affairs at TRM Labs, a San Francisco-based blockchain intelligence firm, said.

The mainstream financial services industry’s grasp of the cryptocurrency industry improved over the past year as regulators implemented appropriate rules, guidance and oversight, giving banks “the comfort they need to deal with crypto and crypto businesses,” he said.

Contact Valentina Pasquali at

Topics : Anti-money laundering , Cryptocurrencies
Source: U.S.: State Attorneys General
Document Date: March 4, 2021