Companies associated with Bitfinex and its associated stablecoin, tether, were named in a putative class action lawsuit, alleging that, from October 1, 2014 through the present, they manipulated bitcoin and futures contracts based on bitcoin traded on the Chicago Mercantile Exchange and the Cboe Futures Exchange (CFE). According to the plaintiffs, defendants effectuated their manipulation by issuing tether digital tokens that were not backed 100 percent by reserves to purchase bitcoin. The plaintiffs claimed that statistical analysis demonstrated that "[b]itcoin returns generally declined just before [tether] issuance dates and improved afterwards. This suggests that Defendants printed [tether] to manipulate and support the price of Bitcoin upwards."
Plaintiffs filed their lawsuit in a federal court in New York City.
During November 2019, two of the three current named plaintiffs – Eric Young and Adam Kurtz – filed the same essential lawsuit in a federal court in Washington State (click here to access the relevant complaint) then withdrew that lawsuit on January 7. David Crystal is a new plaintiff added to the latest action. At the time of the prior action, Bitfinex issued a statement denying plaintiffs' allegations, claiming that "Bitfinex and its affiliates have never used Tether tokens or issuances to manipulate the cryptocurrency market or token pricing. All Tether tokens are fully backed by reserves and are issued and traded on Bitfinex pursuant to market demand, and not for the purpose of controlling the pricing of crypto assets." (Click here to access Bitfinex's full statement.)
In April 2019, the Office of the Attorney General for the State of New York obtained an ex parte order from a New York State court prohibiting companies associated with the management of the cryptoasset exchange Bitfinex as well as the stablecoin tether from accessing, loaning or encumbering in any way US dollar reserves supporting tether digital coins. The NY AG had applied for such order without giving respondents notice or having an opportunity to object, claiming such emergency action was necessary because of the potential danger of respondents compromising tether’s supporting balances to help fund Bitfinex's operations. (Click here for background in the article "NY Attorney General Sues Stablecoin Issuer and Related Companies for Purportedly Misusing Tethered Fiat Currency Without Customer Disclosure" in the April 28, 2019 edition of Bridging the Week.)
In December 2019, the NY AG opposed efforts by respondents to have all legal proceedings against them by the AG dismissed. Defendants claimed such action was warranted because of improper service of court papers initiating the legal action; because the dispute does not emanate from activity in New York; and because tether is not covered by the reach of the relevant law – the Martin Act – because the stablecoin is neither a commodity nor a security. (Click here for background in the article "Bitfinex Entities and NYS AG Express Different Views Regarding Legitimacy of AG's Tether Investigation" in the December 15, 2019 edition of Bridging the Week.)
In other legal and regulatory developments involving cryptoassets:
- Defendant Charged by SEC With Unlicensed Securities Offering in Connection With Proposed ICO at Least Temporarily Prevails in Challenge to Commission’s Subpoena of Bank Records: A federal court in New York City denied, without prejudice, a request by the Securities and Exchange Commission to compel Telegram Group Inc., and its wholly owned subsidiary, TON Issuer Inc. to produce subpoenaed bank records. Defendants had claimed that such production could violate foreign data privacy laws. On January 10, the SEC renewed its motion to compel defendants to produce the subpoenaed bank records, claiming that their claim of potential violation of foreign data privacy laws was too vague but, in any case "insufficient to rebut the presumption in favor of discovery that applies in federal courts even in the face of an assertion that foreign blocking statutes impede production." (Click here for a copy of the relevant SEC letter.)
In October 2019, the SEC sued the defendants and obtained a temporary restraining order, claiming that, beginning in January 2018, they engaged in an unregistered securities offering to fund the development of a proprietary blockchain – the Telegram Open Network – as well as their mobile messaging application, Telegram Messenger. Subsequently, defendants denied that their proposed issuance of “Gram” digital tokens would have been part of an illegal securities offering because, said the defendants, when issued, Grams would have constituted a virtual currency and/or a commodity and not a security under federal law. (Click here for background in the article "Messaging Service Company Denies SEC’s Claim That Sale and Issuance of Cryptocurrency Constitutes Unlawful Security Offering" in the November 17, 2019 edition of Bridging the Week.)