The Stablecoin Wars: How to Properly Fight the U.S. Power Establishment?
Editor's Note: This article comes fromEditor's Note: This article comes fromLatePost
(ID: postlate), author: Wu Yangyinghui, editor: Song Wei, published with authorization.
No matter who it is, it is not always a pleasant thing to confront the US government.
This is the story of the world's largest stablecoin battling the world's largest government.
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Sudden lawsuit
The stablecoin USDT has encountered a heavy blow from the U.S. government—the U.S. New York State Prosecutor filed a lawsuit against USDT’s company Tether and its parent company iFinex. Stablecoins refer to cryptocurrencies with relatively stable prices, and the common practice is to anchor the price to fiat currencies 1:1.
On April 25, 2019, New York State Attorney General Letitia James announced that her office has obtained a court order prohibiting iFinex and Tether from carrying out virtual currency activities that endanger investors.
USDT is the world's largest stable currency, once monopolizing the market share as high as 96%. It’s down slightly today, but even at its low point in late 2018 it held 73% of the market. iFinex is also the operator of Bitfinex, one of the world's top ten exchanges. This sudden lawsuit has caused a huge impact on the business of USDT and Bitfinex.
Bitfinex was accused by New York State prosecutors of having lost USD 850 million and secretly misappropriating Tether’s USDT reserve funds to make up for it. The investigation information released by the prosecution stated that Bitfinex transferred 850 million US dollars of customer and company funds to a Crypto Capital company located in Panama without any written contract, causing losses. They never disclosed this loss to investors.
Prosecutors also allege that Bitfinex and Tether executives engaged in a series of conflicting corporate transactions in order to close the shortfall. Bitfinex reached out to Tether's $900 million cash reserves. According to documents filed by prosecutors, Bitfinex has benefited from Tether’s cash reserves by at least $700 million. These funds were originally used for Tether’s commitment to users to support the USDT 1: 1 exchange of US dollar reserves.
“Our investigation has determined that the operators of the Bitfinex exchange also controlled the Tether virtual currency. They concealed an apparent loss of $850 million in mixed customer and company funds,” said New York Attorney General Letitia James.
"This is a typical American gangster behavior." Bitfinex said in the telegram group through shareholder Zhao Dong.
(Court order filed by US Attorney's Office in New York State)
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real hit
Litigation isn't the worst thing about USDT. The real blow is the destruction of confidence.
After the New York State prosecutor released the news, the price of the stablecoin USDT experienced a brief panic-like drop within 4 hours. The price against the US dollar fell from 1:1 to 1:0.9799. But soon the price gradually picked up and stabilized.
Greater market panic spreads across the Bitcoin price. The price of BTC fell 6.3% in 3 hours, from $5530.32 to $5182.71.
Users crashed. Within 9 hours, more than 13,377 BTC were transferred out of Bitfinex exchange, whereabouts are unknown. This batch of BTC is worth nearly 91 million US dollars. Immediately afterwards, nearly 500,000 ETH was transferred out of the Bitfinex exchange, worth approximately US$73 million.
A series of panic moves were spread around the Internet, and there were even rumors that Bitfinex was "about to run away." Everything that happened within 24 hours brought the confidence of a large number of users to USDT and Bitfinex close to collapse.
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(The price of USDT fell in a panic within 4 hours)
Stablecoin Wars
Bitfinex called this fight with the US New York State prosecutors an "American underworld behavior", behind which lies the commercial dispute over global stablecoins.
USDT is the largest stable currency in the world, monopolizing the entire stable currency market with a share of more than 70%. Tether, the company that issues USDT, and its parent company iFinex are located in Hong Kong and are not subject to the jurisdiction of the US government.
The state of New York in the United States has a positive attitude towards cryptocurrencies—but it is conditionally positive. They believe that cryptocurrencies must be compliant and subject to financial regulation, and they have been promoting the implementation of relevant policies.
In September 2018, the New York State Department of Financial Services (NYDFS) approved two compliant stablecoins - GUSD and PAX. This is the world's first stable currency recognized by the government.
The relationship here is quite subtle. USDT is not a compliant cryptocurrency recognized by the U.S. government, nor is it regulated by the U.S. government. But it occupies a monopoly dominant position in the entire market. Obviously this is not consistent with the compliant cryptocurrency that the New York State government wants to see.
The New York State prosecutors in the United States repeatedly emphasized in the announcement that Bitfinex’s behavior will “harm New York State investors” as a basis for law enforcement. The legal support behind it is that the United States has "long-arm jurisdiction": when the defendant's domicile is not in the state where the court belongs, as long as there is a "minimum contact" (Minimum Contacts) between the defendant and the location of the filing court, and the plaintiff's claim and When this connection is relevant, the court has personal jurisdiction over the defendant and can issue a subpoena against the defendant even if the defendant is out of state or even abroad.
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USDT's fight back
Facing the panicked market, iFinex showed its determination to fight against the US government at all costs. Within 15 days of fighting with New York State prosecutors, iFinex made two strategic counterattacks.
First of all, it is the counterattack of the battlefield of people's hearts-they choose to appease users with "candid everything" and restore market confidence.
They have denied the allegations made by New York state prosecutors and released more details of the charges. The Bitfinex exchange announced on its official website that New York state prosecutors maliciously wrote content. The USD 850 million funds deposited by Bitfinex in Crypto Capita were frozen due to the investigation of its banking service provider Crypto Capita. It is not a "loss", but is temporarily seized and protected. They are working on remedial steps to release those funds.
Regarding the improper transfer of funds alleged by the prosecution, iFinex said it was a fair transaction. According to the contract signed by the two parties, Bitfinex borrowed about US$700 million from Tether by paying an annual interest rate of 6.5% with shares worth US$60 million as collateral.
Tether's lawyer also admitted that USDT is currently only about 74% backed by cash and short-term bonds. He said that USDT had revised its terms of service in March 2019, changing "1:1 pegged to the US dollar" to "75% US dollar anchor and 25% iFinex stock secured loan".
At the same time, Bitfinex reassures users that this will not affect their interests. The Bitfinex official reply stated that although the funds are frozen, it will not affect the withdrawal of users. Bitfinex's profit in 2018 was about US$400 million, and its expenses were only US$12 million. The company used part of the profits for user withdrawals.
Secondly, it is a counterattack on the commercial battlefield-Bitfinex launched the IEO fundraising of its own platform currency (LEO) with great fanfare. The full English name of IEO is Initial Exchange Offerings, the first trading offering. Refers to the project that uses the exchange as the core to issue tokens and raise funds, and directly go online on the exchange. Bitfinex does not hide the purpose of this IEO: During the period of 850 million US dollars being frozen, Bitfinex urgently needs a working capital. The fundraising method used by IEO is USDT, and the fundraising target is US$1 billion.
Bitfinex's IEO can be described as a "jedi counterattack" that kills two birds with one stone, and at the same time solves the current urgent problems of Bitfinex and USDT. On the one hand, if the goal of US$1 billion can be achieved, Bitfinex’s US$850 million fund freeze problem can be resolved. On the other hand, using USDT as a means of fundraising achieves the purpose of recycling USDT in the market, reducing the market circulation of USDT to a state of 1:1 with cash reserves.
Can these actions achieve their goals? It depends on how many people in the market are willing to believe in the future of Bitfinex and USDT and vote with money.
But more importantly, Bitfinex and USDT sent a signal to all users through this series of actions: "We will not run away, we will fight the US government to the end."
The cryptocurrency world is like pirates, the market is their own territory. In this world, their relationship with power is not up or down, they can only cooperate or become rivals.
There is only one battlefield for power, and companies that insist on fighting will lead the battle to the battlefield of people's hearts and business. Here, user confidence is their greatest weapon.
