Wang Yijia: Bitfinex's lawsuits are intensifying, but USDT's long-term risks are still controllable

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, Author: Wang Yijia, published with authorization.

Since Bitfinex is an overseas entity, all management are not US residents. So even if the New York High Court makes a judgment this time, there will be corresponding obstacles at the level of law enforcement. The possible direct impact is that Bitfenex's business in New York and even the United States will be affected accordingly. However, if Bitfinex abandons the US financial system and does not have a US bank account, it will have a greater obstacle to the enforcement of US fines.

Author: Wang Yijia. Senior lawyer in the field of digital currency, Master of Laws from Northwestern University, serving top exchanges, mines, mining pools, digital currency banks, etc. in the field of digital currency.

The battle between Bitifinex and the New York Attorney General's office has intensified.

On August 19, 2019, the New York State Supreme Court (hereinafter referred to as the "New York High Court") filed a lawsuit against the New York State Attorney General (the Attorney General of the State of New York, hereinafter referred to as "NYAG") and the cryptocurrency exchange Bitfinex (IFINEX INC., hereinafter referred to as "Bitfinex") has made a ruling on the issue of jurisdiction involved in the case of "allegedly mixing funds and misleading investors about its US dollar reserve stable currency".

In response to this high-profile case, Bitfinex and NYAG have conducted several rounds of games in the past few months. Previously, Bitfinex filed a motion to withdraw the NYAG's investigation, because the connection between its business and New York is not enough to trigger the NYAG's "Personal Jurisdiction" (Personal Jurisdiction), and because Tether's attributes are not "Securities" (Securities) Therefore, NYAG's investigation of Bitfinex's business activities is beyond the law enforcement authority stipulated in the Martin Act (the Martin Act), so there is no "subject matter jurisdiction" (Subject matter Jurisdiction) in this case.

“Whenever the attorney-general has determined to commence an action under this article, he may present to any justice of the supreme court, before beginning such action, an application in writing for an order directing the person or persons mentioned in the application to appear before the justice of the supreme court or referee designated in such order and answer such questions as may be put to them or to any of them, or to produce such papers, documents and books concerning the alleged fraudulent practices to which the action which he has determined to bring relates, and it shall be the duty of the justice of the supreme court to whom such application for the order is made to grant such application…” 

However, the presiding judge of the New York High Court, Joel M. Cohen, ruled to reject Bitfinex’s above-mentioned motion and confirmed the jurisdiction of the case, and the previous suspension order for the investigation was revoked accordingly, which means that Bitfinex should comply with the requirements of the NYAG before October 14th. Submit to it all documents related to this investigation.

The above provisions give the NYAG the right to file a written application with the Supreme Court to subpoena, question and request relevant documents from persons accused of fraudulent conduct before filing a lawsuit under the Martin Act. It is also based on this clause that the NYAG requested to investigate Bitfinex.

Therefore, the focus of the New York High Court's judgment on this case is undoubtedly whether the "Martin Act" is applicable in this case.

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The Ins and Outs of Bifinex v. New York Attorney General

The main legal disputes between the two sides in this round of confrontation are:

1. Based on the business relationship between Bitfinex and New York, does NYAG have "personal jurisdiction" over Bitfinex, so that NYAG can have the basis for law enforcement against Bitfinex to obtain relevant materials under Section 354 of the Martin Act?

In this regard, Bitfinex pointed out that it has stopped serving New York residents since January 2017—Bitfinex and Tether have prohibited any entity whose domicile, place of business is located in New York State or conducts business in New York State in the revised terms of service. Trading on Bitfinex; in August of the same year, it further stopped serving all US residents, and all entities and corporate customers in the US will be banned from accessing Bitfinex services after one year.

In addition, Bitfinex also claimed that they conducted user screening to prevent US customers from opening accounts on their website, and closed accounts that were opened but were later found to belong to US customers. At the same time, Bitfinex also contends that neither it nor Tether has advertised or marketed to individuals or entities in New York or the United States. All users using Bitfinex and Tether must acknowledge and declare that they are not New York residents.

• Therefore, Bitfinex believes that it should not be bound by the NYAG, and that the NYAG should not govern it under the Martin Act.

• The NYAG responded that: Evidence shows that as early as January 2015—long before the change of Bitfinex’s terms of service, and until after the change of the above terms of service, both Bitfinex and Tether maintained “substantial ties” with New York residents. There is evidence that both companies:

• Allow some clients located in New York to trade on the Bitfinex trading platform after January 30, 2017;

• Allow traders located in New York to use Bitfinex services;

• Agreed to lend to a New York-based virtual currency exchange by 2019;

Open an account with a bank located in New York and use its services;

and, at least prior to 2018, having a physical presence in New York State through an executive who resides and works in New York State.

Based on the above information provided by NYAG and by citing relevant precedents, the New York High Court supported NYAG's claim in this ruling.

2. Can Tether be considered a "securities or commodities", thereby giving NYAG "target jurisdiction"?

In this regard, Bitfinex asserts that Tether is a form of "stable currency" whose value is pegged to traditional currencies such as the US dollar and the euro. Tether can be exchanged one-to-one for traditional currencies, subject to certain restrictions. However, Tether (coin) does not constitute an ownership interest in Tether, and users generally do not purchase stablecoins for investment purposes. The main function of Tether is to facilitate transactions of other virtual currencies. Therefore, Tether has neither securities nor commodity attributes.

In this regard, the NYAG argued that it is too early to characterize Tether at this stage, and pointed out that "there is reason to believe that certain materials will eventually prove that it is a security or commodity within the scope of the Martin Act." In short, NYAG Hope to collect more material before making final characterization. The NYAG believes that Tether’s application on exchanges and Bitfinex’s recent IEO project both have obvious characteristics of securities offerings governed by the Martin Act.

• In this ruling, the New York High Court held that: Although it does not intend to characterize Tether at this stage, because Bitfinex failed to prove that the investigation by NYAG was obviously unreasonable or undoubtedly exceeded the scope of the Martin Act, and did not Can cite any jurisprudence to prove that Tether is not under the jurisdiction of the Martin Act, thus rejecting the objection to the "target jurisdiction" in the Bitfinex motion.

• Foreign companies should theoretically enjoy immunity from civil suits in New York if they do not conduct U.S. business. However, that doesn't mean it's immune to NYAG investigations (to determine whether it violated relevant laws). (That doesn't sound like good news for the multitude of blockchain projects.)

As long as the NYAG has reasonable grounds to believe that the company violated New York statutes, the due process clause of the U.S. Federal Constitution does not prevent it from exercising the corresponding subpoena powers and launching investigations aimed at finding out the facts.

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Will Bitfinex be fined?

After the judgment of this case is issued, it can be said that the trend of the case is becoming more and more unfavorable to Bitfinex. According to this judgment, the following considerations are triggered:

1. If a foreign company has clearly stated in its agreement with the user that it has no business dealings with the user, and the user has clearly stated that he is bound by the contract, can the contract be effective? So is it reasonable for the court to judge whether it can be subject to the jurisdiction of the corresponding law based on the "substantial connection"?

In my opinion, if both parties have made clear corresponding constraints in the contract, it should have corresponding effect. In the evidence collection of this case, NYAG also used the situation of "phishing law enforcement" accordingly, that is, it agreed that it was not a New York resident, but successfully carried out transactions on the platform. And whether this behavior should be regarded as its own fundamental breach of contract, and it may not be very reasonable that the "substantial connection" caused by such behavior should be fully borne by Bitfinex. And as an exchange, the responsibilities of "identification" and "KYC" it needs to bear will also increase accordingly. However, from another perspective, if the exchange deliberately leaves room to accept New York users, it may cause even greater problems in future law enforcement.

The High Court's judgment on "substantial connection" this time actually expresses its corresponding attitude on this issue. Supervision will use the substantive transaction as the basis for judgment. As the United States is a country of case law, this judgment may affect the direction of judgments in subsequent related cases.

2. If the investigation and evidence collection by NYAG continues, what kind of ruling may be finally made on Bitfinex?

At present, the New York Supreme Court is only making a corresponding ruling on whether NYAG can conduct investigations and evidence collection on Bitfenex, but it is still too early to judge whether the results of the investigation will eventually lead to criminal proceedings or issue a ticket.

However, let's sort out some of the previous cases:

(1) In January 2019, Rosen Yosifov, the owner of the digital currency exchange RGCoins, a non-US digital currency exchange executive, was detained by the US government’s “Global Law Enforcement” for intentionally or unintentionally violating US anti-money laundering and sanctions laws. extradited to the United States.

(2) In August 2018, the Financial Crimes Enforcement Network (Financial Crimes Enforcement Network) of the U.S. Department of the Treasury imposed a record-breaking $110 million fine on BTC-e on Wednesday night, and fined Russian Alexander Vinnik $12 million. Said that Vinnik is the beneficial owner of a Seychelles-based company that manages BTC-e. The fines follow Vinnik's arrest in Greece at the request of U.S. government agencies, based on 21 charges brought by the U.S. Department of Justice in a district court in Northern California.

(3) The CFTC, the highest regulator of financial derivatives in the United States, banned Cabbage Tech and its principal, Patrick K. McDonnell, from trading digital asset futures. The New York Eastern District Court recognized the CFTC injunction and ruled that the defendant Cabbage Terch or Coin Drop Markets and its principal McDonnnell were permanently banned from trading digital asset futures for deceiving customers in violation of the Commodity Exchange Act, with a fine of approximately $871,287— — Between $1,161,716 and $290,429 in compensation to victims.

It can be seen from the above cases that the relevant regulatory agencies in the United States continue to supervise major trading platforms and impose fines or even criminal penalties. Even for exchanges outside the United States, the consistent attitude of US regulators is still to use "actual contact" as the basis for corresponding judgments and penalties.

3. After the final judgment of this case, how can the New York High Court enforce the law? And what impact may it have on USDT in the future?

Since Bitfinex is an overseas entity, all management are not US residents. So even if the New York High Court makes a judgment this time, there will be corresponding obstacles at the level of law enforcement. The possible direct impact is that Bitfenex's business in New York and even the United States will be affected accordingly. However, if Bitfinex abandons the US financial system and does not have a US bank account, it will have a greater obstacle to the enforcement of US fines.

At this stage, Tether's Bank of America risk has been basically digested. If the U.S. regulators do not impose substantial criminal penalties on Bitfinex, in the long run, USDT may not be greatly affected. In fact, although the lawsuits are intensifying, the price of USDT is still strong, and its market performance also illustrates this point.

In my opinion, regardless of the reasons (political factors, personal preference of the presiding judge, etc.), this ruling more or less reveals a certain degree of favoritism of the New York High Court towards the NYAG. Compared with NYAG's vague and general opinion (especially on the "subject jurisdiction" part), Bitfinex's defense in this case is more clear and convincing. However, the presiding judge ultimately supported the NYAG's claim and gave the green light for its investigation.

There are many cryptocurrency exchanges in the market, and Bitfinex is one of the few that plays the role of "bad boy". It is like a warrior, insisting on suing NYAG instead of directly complying with regulatory opinions, and is fully facing the next round of challenges from NYAG. The latest news shows that after experiencing the above-mentioned court ruling, Bitfinex decided to appeal the judgment of the New York High Court yesterday, insisting that NYAG does not have the corresponding jurisdiction.