New York Attorney General Settles with Bitfinex and Tether for Crypto Violations, Brings Unregistered Token Action Against Coinseed | Practical Law

New York Attorney General Settles with Bitfinex and Tether for Crypto Violations, Brings Unregistered Token Action Against Coinseed | Practical Law

The New York Attorney General (NYAG) reached a settlement with cryptocurrency exchange Bitfinex and crypto issuer Tether in connection with an investigation into allegations that Tether misrepresented the degree to which its cryptocurrency was backed by fiat currency. The NYAG and the SEC also brought charges against crypto-trading app Coinseed alleging that Coinseed was financed through an unregistered securities offering that defrauded.

New York Attorney General Settles with Bitfinex and Tether for Crypto Violations, Brings Unregistered Token Action Against Coinseed

by Practical Law Finance
Published on 03 Mar 2021 • USA (National/Federal)
The New York Attorney General (NYAG) reached a settlement with cryptocurrency exchange Bitfinex and crypto issuer Tether in connection with an investigation into allegations that Tether misrepresented the degree to which its cryptocurrency was backed by fiat currency. The NYAG and the SEC also brought charges against crypto-trading app Coinseed alleging that Coinseed was financed through an unregistered securities offering that defrauded.
On February 17, 2021, the New York Attorney General (NYAG):
  • Entered into a settlement agreement, settling charges against cryptocurrency exchange and trading platform Bitfinex, as well as certain of its affiliates (collectively Bifinex), and cryptocurrency issuer Tether Operations Limited, as well as certain of its affiliates (collectively, Tether), in connection with an investigation into allegations that Tether misrepresented the degree to which its cryptocurrency was backed by fiat currency (see NYAG Settlement with Bitfinex and Tether).
  • Filed a lawsuit against Coinseed, Inc., the owner and operator of a virtual currency (VC) trading platform and its two top executives (collectively, defendants) alleging that defendants attempted to finance Coinseed by raising funds in an unregistered security offering that lured investors with false claims and incomplete disclosures (see NYAG Coinseed Action). The SEC also filed a related action against Coinseed for violation of US securities laws based on the same allegations (see SEC Coinseed Action).

NYAG Settlement With Bitfinex and Tether

Bitfinex is a VC trading platform that allows traders to deposit and withdraw fiat currency. Tether is a popular and widely-traded stablecoin valued at one US dollar.
In 2019, NYAG initiated an investigation alleging that Tether misrepresented the degree to which Tether coins were backed by fiat collateral. NYAG alleged that Bitfinex failed to disclose approximately $850 million in losses to a payment processor, Crypto Capital. Bitfinex allegedly tried to cover up the loss by borrowing USD from Tether to repay the shortfall. NYAG alleges that for a period of time, Bitfinex held millions of Tether's funds in a comingled account, instead of Tether holding the funds as backing for Tethers in circulation.
The use of Tether funds by Bitfinex created a lack of fiat collateral backing for Tether (which claims to be backed 1:1 by USD held by Tether in an account) causing the alleged misrepresentation, which is a violation of the New York General Business Law § 352 et. seq. (Martin Act) and Executive Law § 63(12).
In the settlement agreement, Bitfinex and Tether agreed:
  • To pay an $18.5 million penalty to the state of New York within 30 days of the settlement agreement.
  • Not to claim, assert, or apply for a tax deduction or credit for any portion of the settlement payment.
  • To discontinue trading activity with any New York person or entity.
  • To provide NYAG with quarterly reports of their current reserve status and duly account for any transactions taking place between the two companies for the next 24 months.
  • To provide public reports for the specific composition of their cash and non-cash reserves.
In signing the settlement agreement, Bitfinex and Tether did not admit to any wrongdoing, and released a joint statement.

NYAG Coinseed Action

Coinseed is a mobile phone app that functions as a VC trading platform with its principal place of business in New York. The NYAG brought a lawsuit against Coinseed and its top two executives (collectively, defendants) for allegedly violating New York's Martin Act and Executive Law § 63(12) by:
  • Selling its own unregistered securities in the form of digital tokens.
  • Making material misrepresentations about the composition, responsibilities, and professional experience of Coinseed's management team.
  • Operating as an unregistered commodities broker-dealer through Coinseed's VC-based mobile application.
  • Making material misrepresentations and omissions to investors about the fees associated with the trading of VC.
  • Defrauding investors in the US out of more than $1 million.
In the action, the NYAG is seeking an order from the New York State Supreme Court (New York County):
  • Permanently enjoining defendants from engaging in any business related to the issuance, distribution, exchange, advertisement, negotiation, purchase, provision of investment advice, or the offer and sale of securities and commodities within or from the State of New York.
  • Enjoining acts in furtherance of the fraudulent practices including operating the Coinseed mobile application and making it available online.
  • Appointing a receiver to:
    • wind-down Coinseed's operations;
    • take control of and return investor assets maintained by the company;
    • return all funds raised in the initial coin offering (ICO) that Coinseed held to raise capital for its mobile app by selling a digital token;
    • issue all outstanding dividends to known offering investors; and
    • oversee the recall and destruction of all VC issued by Coinseed.

SEC Coinseed Action

The SEC also filed charges against Coinseed and its founder in connection with Coinseed's offer and sale of digital assets securities. The SEC's complaint alleges that Coinseed and its co-founder violated the registration provisions of Sections 5(a) and (c) of the Securities Act of 1933 (Securities Act) by selling digital assets called CSD tokens to investors. The SEC's position is that the CSD tokens are unregistered securities under the Howey test (see SEC Regulation of Digital Assets: SEC Framework for Analyzing Offer and Sale of Digital Assets). The SEC seeks an order:
  • Permanently enjoining Coinseed and its founder from violating Sections 5(a)and (c) of the Securities Act.
  • Ordering disgorgement with prejudgment interest.
  • Prohibiting Coinseed and its founder from participating, directly or indirectly, in any offering of digital asset securities.
  • Ordering Coinseed and its founder to pay civil money penalties.