A Timeline of Deeply Conflicted Tether Transactions

On November 1st 2018 Tether proudly proclaimed that they were once again banked, this time with Deltec Bank in the Bahamas (archive). This announcement included a letter (my copy) (archive) signed by someone associated with Deltec that stated that Tether had a ‘portfolio cash value’ of $1,831,322,828 on October 31st. This suggested to all that Tether had the value to back their tethers.

Continue reading “A Timeline of Deeply Conflicted Tether Transactions”

Raphael Nicolle and the Founding of Bitfinex

Raphael Nicolle is the founder of Bitfinex. Before that he had an interesting path.

By day a helpdesk technician, during his free time Raphael became active under the account ‘unclescrooge‘ on BitcoinTalk. From this account he makes some interesting posts, including occasional climate change denialism, saying he would invest in illegal businesses, and at least one joke about underage prostitution to make bitcoin. First he got into pyramid schemes, schemes that were not legally registered, and then he got really into pyramid schemes, and then he started defending a pyramid scheme scammer (repeatedly), and then he lost all the bitcoins he gave that scammer.

Shortly after this, Raphael decides he will start his own OTC desk and his own lending program. People will lend him Bitcoin and he will guarantee them a 2% return per week. To make this money he said he would be performing arbitrage, which he described as ‘buy low and sell high’. (Astute readers will note that this at best an extraordinarily simplified definition of what arbitrage is.) This program appears to not have taken off, perhaps due to questions from other forum members about his advocacy for pyramid schemes in the past. The text of the post was later deleted.

After this Bitfinex launched! (Though Raphy could be found still trying to do what look like OTC trades.) Bitfinex was a brand new ‘Meta-Exchange’ that would allow people to trade at either Mt. Gox or at Bitstamp through the BitFinex interface. They also had their own exchange that was based on stolen Bitcoinica code. Bitcoinica was an exchange that was rife with security issues that had recently shut down. The unique feature for Bitfinex that made it attractive (besides the ability to aggregate liquidity across multiple exchanges) was the fact that they had margin and lending integrated into the platform. However, the fact that it was built on stolen code with a multitude of issues in the early months. However, eventually they started to even out. However, there were still some interesting posts including at one point Raphael even made sure to point out that his exchange was a bucket shop. (This was a fact that Vitalik Buterin had warned about in Bitcoin Magazine.)

Raphael gradually took a less and less public role in Bitfinex until (according to his LinkedIn) left his role as CTO the same month that the Bitfinex hot wallet was hacked. He is now interested in anti-aging and looking for an executive producer (he should get in touch with the chairman of Deltec).

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My Appearance on The Blockchain Debate podcast with Larry Cermak and Patrick McKenzie

You can find it here.

I had a ton of fun recording this podcast, however, due to time constraints I was not able to get to all my notes on whether or not Tether acts in good faith. I would like to summarize a few of the things I was not able to get to here:

  1. Bitfinex has used the bank accounts of friends and family of Bitfinex in order to service withdrawals.
  2. The firm who provided Tether’s last attestation is no longer operational, and Freeh, one of the lawyer behind it UPDATE: is no longer a lawyer is no longer practicing law, but may still be licensed.
  3. Tether advertised no KYC swaps between Bitcoin and Tether.
  4. Tether held tens of millions of dollars in the bank account of their General Counsel.
  5. The founder of Bitfinex was promoting ponzis right up until he announced Bitfinex.
  6. The founder of Bitfinex once described his own exchange as a bucket shop.

There are many more, but I just wanted to give you a taste of some of the stuff we ran out of time to get to.

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An Introduction to the Tether/Bitfinex Controversy

Bitfinex is one of the historically largest Bitcoin exchanges and Tether is by far the largest stablecoin. Each potentially has significant influence over the industry on their own, and their interconnectedness makes this more of a concern. However, since both were founded years ago and many of the events have happened and been in revealed in bits and spurts it can be difficult to understand their place in the cryptocurrency environment. This will hopefully serve as a basic introductory document that will then prompt further research.

Continue reading “An Introduction to the Tether/Bitfinex Controversy”

Analysis of the New York Supreme Court Remittitur in the Tether and Bitfinex New York Attorney General Cases

UPDATE: This was refiled presumably as part of the formal movement from the Supreme Court back to trial and the actual decision came down in July. Thank you to Rob Stevens for reminding me of this fact.


There was finally a new development in the long delayed Digfinex/iFinex/Bitfinex/Tether NYAG case. The New York State Supreme Court heard the appeal from Bitfinex and unanimously decided to send them back to trial, dismissed their motion to dismiss, and reaffirmed that they need to supply the ordered documents.

I will review the document below.

The judges lay out initially that this appeal was absolutely meaningless from the start, and nonetheless take the time to lay out why each of Bitfinex’s arguments are invalid.

They begin (as shall I) with Tether’s argument that it is neither a security or a commodity and as such these activities surrounding Tether are not covered under the Martin Act. The judge strongly disagrees.

The first point laid out here is explaining that Bitfinex did not appeal correctly to challenge the NYAG jurisdiction, and instead in effect were trying to appeal the right of the Supreme Court to hear an application for this type of order.

The second point follows along with this one to emphasize that they did not appeal the order they appear to have a problem with.

The third point, is laying out even if they had handled this appeal correctly Tether would still be found to be covered under the Martin Act.

After settling the issue of whether Tether was neither a commodity a security they addressed the argument by Bitfinex that the New York Supreme Court lacked personal jurisdiction. In this argument Bitfinex tried to claim that there was insufficient link between their activity in New York and the alleged fraud. The judge did not find this argument convincing at all.

The first point that the judge emphasizes is that a single transaction is sufficient for their to be jurisdiction. They further affirm that since the investigation now centers around a fraud perpetrated by deceit about backing that it would affect the New York traders/Tether holders.

The judge then conveniently reviews for us some of the many ways that Bitfinex/Tether are tied to New York. Namely: they had traders in New York, they had traders in New York even after allegedly banning traders from New York, they had an executive working in New York (Phil Potter), the New York based executive they had specifically collaborated with other businesses who were based in New York, and finally that they hired multiple other firms in New York.

Even after thoroughly pointing out that Tether was deeply linked to New York, the judge elected to continue and point out that generally as long as there is sufficient evidence of some connection they will allow for an order like discovery to go forward in order to determine the extent to which a connection exists.

The final argument that Bitfinex has trotted out several times is that they were not served properly. The judge clearly points out that this is a ridiculous claim, and that Bitfinex’s counsel who had been working with the New York Attorney General during the investigation was served by hand, email, and overnight delivery.

In conclusion, this case has been moved from the appellate court back to trial, Bitfinex and Tether must hand over the documents requested, and they are now in an extraordinarily difficult position.

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A List of Companies Who Worked With Crypto Capital

Crypto Capital is the money processor famous in both the QuadrigaCX case and the Bitfinex and Tether cases. Bitfinex famously handed them approximately $1 billion without even a contract. This is a list of companies who have worked with them for my own reference as I do research:

AirBEx – No longer open

MIMEX – No longer open

1BTCXE – No longer open (appears to have been owned by Crypto Capital)

Coinapult – No longer open

1EX.Trade – ‘There has been no trading activity in the last 24 hours’

MonetaGo – Appears to be still be open

BitMEX – https://www.forbes.com/sites/tatianakoffman/2020/10/01/bitmex-exchange-charged-with-failing-to-prevent-money-laundering/

Chip Chap – No longer open

Charna Crypto Exchange – No longer open

X-Coins – No longer open

WLOX (White Label Open source eXchange) – Last commit 7 years ago https://github.com/9cat/wlox

Kraken – Second largest United States exchange by volume (as this is being written)

Bitfinex – Well…

Decentralized Capital – Was a stablecoin, now closed

Bitt – Still open

Foxbit – No longer open

The Rock Trading – Still open

BTCC – No longer open

CEX.IO – Still open

QuadrigaCX – https://www.financemagnates.com/cryptocurrency/news/quadrigacx-trustee-recovers-30m-creditors-seeking-171m/

Exmo – Still open

The Time Brock Pierce DMed Me

Image of Brock Pierce DMing me with the following messages: "If you seriously want to short tether i can find the long", "Would have to be substantial to justify all costs to be compliant"

One of the best things about Twitter is all the different people that you get to meet and communicate with. For example, the founder of Tether (infamously sued for child sexual abuse and arrested in a house full of child pornography) would semi-regularly talk to several of us Tether skeptics in threads. In one he even told us that we knew more about Tether than he did (despite founding it):

Around this same time I received a direct message out of the blue from the one and only Brock Pierce who offered to help me short Tether, the ‘dollar-backed’ stablecoin that he had created. This was a very unexpected message, as I had never messaged with Brock before, and I had never before seen someone offer to help someone else short an asset they created.

My response to this was, “I am not an accredited investor, nor do I have enough funds to make the costs worth it”, but my internal monologue was more like, “what in the ever-loving fuck is going on.” I was a college student when this happened, and apparently Brock Pierce was under the impression that now only did I have a deep desire to short Tether, but enough money to make his own efforts in facilitating this trade worthwhile. Even more strange, is that his initial message seems to be responding to a point where I said that I would be interested in shorting Tether, but in reviewing my tweets I cannot seem to determine a single time that I have ever done that.

Zooming out from the batshit absurdity of this moment we are left wondering, what in the world motivated Brock to think this was a good idea? Who decides that the solution to the problems of the beleaguered asset of their own creation is more people shorting it? Who decides that the best person you should contact out of the blue is a college student who angrily yells at you on Twitter? Who decides to spontaneously ‘run’ for president? Who decides to promise to donate more money than they have ever had? Who decides it’s a good idea to hang out in a house filled with child pornography with a fugitive from the law? The answer to all of these is Brock Pierce.

(Important note: Brock Pierce was released from custody without charges being filed after his arrest and the child sexual abuse lawsuits against him were dropped. However, it is true that Pierce did go to Spain with Marc Collins-Rector after his (Marc’s) indictment.)

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Why Does Tether Deserve the Benefit of the Doubt?

I have been told that I am prone to seeing plots in the mundane, and in trying to make mountains out of molehills when it comes to Tether. I have been told that I do not give them the benefit of the doubt or try to find charitable explanations for their behaviors. I am left wondering, why does Tether deserve the benefit of the doubt?

Tether was founded in 2014, and was almost immediately owned and controlled by the same principals as Bitfinex. This was not fully brought to light until the Panama Papers were leaked and it was also mentioned in Bitfinex’s lawsuit against Wells Fargo. Does this level of transparency deserve the benefit of the doubt?

Tether originally claimed to be backed solely by the currency represented. So USDT would be backed solely by USD. However, early on they also advertised exchanging Bitcoin for Tether through Tether. This was also advertised as a way to get Tethers without going through Know Your Customer regulations and processes. Does that also deserve the benefit of the doubt? Coincidentally, Tether’s lawyer said in the recent NYAG case that part of their reserves were invested in Bitcoin. I’m sure that is nothing though.

Tether loaned 100’s of millions of dollars to another business well knowing that the funds that business was going to give in return were currently not able to be withdrawn. Does that deserve the benefit of the doubt?

Tether was once hacked for ~$30m. Their response was to never explain what happened and force a hard fork of the Omni protocol to freeze those tokens. Does that deserve the benefit of the doubt? Luckily for Tether the Omni devs added in the ability for them to freeze any Tether at will.

Tether was supposed to be regularly audited for transparency. They eventually released monthly attestations from an accounting firm in Taiwan, and then those stopped. Then they released a statement from an auditing firm, and then there was nothing for a long time, and then they released a statement from a law firm, and since then nothing.

Perhaps the reason they are having so much trouble getting audited is because they’re incompetent at record keeping. They admitted during the proceedings of the NYAG case that they commingled corporate and client funds. Furthermore, Tether has a transparency page that has been incorrect for months. They claim that they have $31,304,655.00 Tether on Omni. Let’s go to the blockchain quick and check their math: $354,645.00 + $3,100,000.00 + $30,950,000.00 + $940,000.00 + $2,039,980.00 = $37,384,625. So they are unable to even add, yet we are supposed to give them the benefit of the doubt?