Analysis of December NYAG and Tether Filings

Disclaimer: I am not a lawyer, this is not legal advice or financial advice or life advice or medical advice or romance advice. Especially not romance.

So this is more than a little bit delayed, but better late than never I figure. You can see the original threads that I am going to be reviewing for this analysis here: NYAG and here: Tether.

The fundamental tension between the NYAG has become less a dispute about facts and more frequently a dispute about service, jurisdiction, precedents, and language. Tether especially was much more creative in this filing than previous ones.

Let’s start by outlining the broad strokes of the NYAG argument. Their primary thrust seems to be that Tether’s claim of improper service is invalid, due to existing precedence and their failure to bring it up in an earlier motion. They also find themselves frustrated by the lack of documents that have been provided by the merry men of Digfinex.

Listen if I am going to be blunt I think all of this posturing around jurisdiction is a load of shit. The Block reported [paywalled] that it was relatively easy for a NY resident who was moderately comfortable with lying to get an account there. Now based on the New Yorkers I have seen on the national stage recently I have reason to believe at least some New York residents are comfortable lying. Also it appears that the requirements for Martin Act jurisdiction are relatively light and we also know that an accounting firm they hired, a PR firm they hired, were also in New York. Oh also they helped onboard a New York based trading outfit and loaned them Tethers. Now you can argue that the Martin Act provides too much jurisdiction, but if that is the thrust of your argument you’re going to struggle.

Now looking more in detail at the Tether response we see some excitement from their lawyers for once. One of their primary thrusts seems to be that they were improperly served, and thus everything from then is bunk. It really comes down to whether serving the outside counsel of Bitfinex who was communicating with NYAG was appropriate or not. I am not qualified to assess the law, but it seems to me that they are unlikely to win this service argument.

The second thrust of their argument is jurisdictional. Namely the New Yorkers we worked with either were technically international or we did not know they were New Yorkers. This argument would hold a little more impact if they did you know anything except asking a single question to determine if someone was from New York.

Then they try to argue that Tether is not a security or a commodity and thus not subject to Martin Act. This is their most creative argument, but it seems the reach of the Martin act will still bring them to heel here.

Overall, my assessment of these two responses together is that Tether and Bitfinex are in a pickle and are taking steps to lengthen the proceedings and win in the court of public opinion.

Key Excerpts and Commentary from NYAG/Tether Court Transcript

First of all link to the transcript: https://www.docdroid.net/Wk3pePO/transcript-may-16-2019.pdf

Second of all congrats to @lawmaster and The Block for a great scoop.  https://t.co/22w3xY8mc8 Now let’s get down to business.

Bitfinex is still being hesitant to hand over documents to the NYAG.  They have struggled to get access to documents relating to the transfer from Tether to Bitfinex, and this suggests to me that either the documents don’t exist or there is a very good reason they are not being shared.

Screen Shot 2019-05-21 at 5.03.56 PM

This is directly contrary to what Bitfinex has claimed to the public wherein they have claimed that they have been fully cooperative. https://www.bitfinex.com/posts/356 Archive link: https://web.archive.org/web/20190521220643/https://www.bitfinex.com/posts/356Screen Shot 2019-05-21 at 5.05.47 PMHowever, I’m sure that there is no reason to think that Bitfinex is hiding something. No reason at all.Screen Shot 2019-05-21 at 5.09.29 PM

Shortly after this we learn very interesting things, Tether’s lawyer admits to Tether investing in Bitcoin:

Screen Shot 2019-05-21 at 5.13.37 PM

Luckily we have a sharp judge here who quickly gets to the meet of the issue and correctly points out that this seems contrary to the nature of a “Stablecoin”.Screen Shot 2019-05-21 at 5.14.31 PM

The Tether lawyer responds by confirming what we all suspected since the ToS change is that other assets includes cryptocurrencies:Screen Shot 2019-05-21 at 5.15.35 PM

The Tether lawyer then continues basically saying they will not produce documents and will instead appeal and challenge every single step of the way:Screen Shot 2019-05-21 at 5.17.11 PM

The Tether lawyer then also says that they do not think there is any amount of dollars they need to keep in reserve:Screen Shot 2019-05-21 at 5.19.17 PM

The Tether lawyer then takes the classic Tether defender tactic of it’s okay because banks do it too:Screen Shot 2019-05-21 at 5.20.19 PM

The judge quickly ascertains the issue with this and points out that this effectively means there is no reserves:Screen Shot 2019-05-21 at 5.21.18 PM

The Tether lawyer responds by saying it’s okay, if they need to they’ll earn money some other way, pay it back, and just delay redemptions:

Screen Shot 2019-05-21 at 5.22.23 PM

A little further down the NYAG reveals that Bitfinex/Tether executives get lump sum payouts from the unsegregated Tether accounts where no reserves have to be kept:

Screen Shot 2019-05-21 at 5.25.12 PM

The NYAG also reveals the juicy tidbit that the largest redemption ever was less than $25 million:

Screen Shot 2019-05-21 at 5.29.07 PM

Why is this particularly juicy? Well let’s take a quick trip over to their treasury address on Omni: https://omniexplorer.info/address/1NTMakcgVwQpMdGxRQnFKyb3G1FAJysSfz/1 here it does not take long to find bigger transactions coming in than that like this: https://omniexplorer.info/tx/572792736c6846998ac0b8c532d0317f7d8460886ce900bb6005260ed66cd80a So somethign is seriously amiss here.

Now relevant to this entire document is the issue of disclosure. Tether claims that they are not in the wrong because once they started using other assets they disclosed it.  However, is that true? I will contend it is not. Let us consider Tether’s own website: https://web.archive.org/web/20150521003646/https://tether.to/faqs/

In 2015 Tether openly admits to exchanging Bitcoins for Tethers without KYC. Now it is possible, but in my opinion unlikely that they still had sufficient fiat reserves at that point, but I think it is plausible to doubt that and to believe that Bitcoins have often been a part of the backing.

Screen Shot 2019-05-21 at 5.48.34 PM

In conclusion: Tether has paid executives dividends out of non-segregated accounts, does not feel a need to keep cash reserves, is buying bitcoins with reserves, and cannot handle a rush to redeem.  Their largest claimed transaction is also smaller than multiple apparent redemptions on the blockchain.

Update 5/23/19: I remembered in a dream last night that Tether discussed in their whitepaper people being able to redeem for bitcoins. https://tether.to/wp-content/uploads/2016/06/TetherWhitePaper.pdf

tetherbits

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