NY Attorney General Obtains Court Order Against Bitfinex and Tether

On April 25, 2019, the New York Attorney General's office obtained a court order against iFinex Inc., the parent company of cryptocurrency exchange Bitfinex and stablecoin issuer Tether, alleging that Bitfinex had used Tether's reserves to cover up an $850 million loss. The explosive allegations sent shockwaves through cryptocurrency markets and raised existential questions about Tether's backing and the potential systemic impact if the stablecoin collapsed.

The Attorney General's court filing alleged that Bitfinex had lost $850 million in client and corporate funds seized by authorities or frozen by payment processor Crypto Capital, then secretly borrowed $700 million from Tether's reserves to fill the hole without disclosing the loss to customers or markets. The allegations directly challenged Tether's repeated claims that every USDT token was fully backed by equivalent dollars in reserve, suggesting instead that Tether's assets had been commingled with Bitfinex operations and used to cover exchange losses.

If true, the allegations meant that approximately $2.5 billion in circulating Tether might be backed by only $1.8 billion in actual reserves plus $700 million loan to affiliated exchange—calling into question whether Tether could honor redemption requests if many holders simultaneously sought to convert USDT to dollars.

For cryptocurrency markets, the Tether allegations were potentially catastrophic because USDT served as primary trading pair and dollar proxy across hundreds of exchanges worldwide—if Tether collapsed or lost its dollar peg, it could trigger cascade of liquidations, force exchange closures, and potentially crash entire cryptocurrency market.

Bitcoin's price remained surprisingly stable following the news, suggesting either that markets didn't fully appreciate the systemic risk or that participants believed Bitfinex and Tether would survive the allegations. The court order required Bitfinex and Tether to provide extensive documentation about their reserves, operations, and the alleged commingling of funds, potentially revealing information the companies had long refused to disclose publicly.The Bitfinex-Tether controversy would continue for years through legal proceedings and settlements, but the April 2019 allegations marked the first time regulatory authority had presented evidence suggesting Tether operated with fractional reserves rather than full dollar backing as claimed.