UPDATE (May 23, 16:30 UTC): Judge Joel Cohen has granted a partial stay on the New York Attorney General’s request for documents from Bitfinex and Tether, pending a July 29 hearing on the companies’ motion to dismiss.
The NYAG has until July 8 to file a response to the motion, and until the hearing, Bitfinex and Tether are required only to produce documents deemed relevant by a third-party to the question of whether they fall under state jurisdiction.
Bitfinex and Tether have asked a judge to dismiss the New York Attorney General’s (NYAG) case against the controversial cryptocurrency firms, claiming they have no customers in the state.
In new court filings Tuesday, lawyers for the two companies, which have overlapping owners and managers, also asked Judge Joel M. Cohen of the New York Supreme Court to stay the NYAG’s “onerous” request for documents from Bitfinex and Tether while he considers the motion.
The firms “have nothing to do with New York investors — the businesses do not allow New Yorkers on their platforms and do not advertise or otherwise do business here,” attorneys Jason Weinstein and David I. Miller wrote.
Further, the attorney general “has not identified, even in a general sense, any ‘victim’ in New York (or, it should be noted, anywhere else),” and the office is using a New York law, the Martin Act, that governs securities and commodities, of which Tether’s product, the stablecoin USDT, is neither, the lawyers argued.
Hence, the companies “respectfully request that the entire proceeding be dismissed for lack of personal and subject matter jurisdiction.”
In a separate affidavit, Stuart Hoegner, general counsel for both Bitfinex and Tether, wrote that both companies prohibit any U.S. residents, including New Yorkers, from transacting on their platforms, and that only verified Tether customers are allowed to redeem USDT for dollars, not just anyone who buys the stablecoin on the secondary market.
Backed by … bitcoin?
Separately, in a hearing last week, Miller let it slip that Tether had previously invested a portion of its reserves in bitcoin.
At some point before the NYAG obtained its preliminary injunction against the companies, “Tether actually did invest in instruments beyond cash and cash equivalents, including bitcoin, they bought bitcoin,” Miller told the court, according to a transcript of the May 16 hearing published Tuesday by crypto publication The Block. He later said it was “a small amount.”
It was a notable admission since until recently Tether has maintained that USDT was backed 1-for-1 with U.S. dollars (in February it updated its terms and conditions to say the collateral could include other assets, which later turned out to include a loan to Bitfinex). Even Judge Cohen sounded surprised.
“Tether sounded to me like sort of the calm in the storm of cryptocurrency trading,” he told Miller, according to the transcript. “And so if tether is backed by bitcoin, how is that consistent?”
One possible explanation is that the “small amount” is very small, and not really part of the backing. Alistair Milne, an investor in Bitfinex’s recent token sale, wrote on Twitter Tuesday afternoon that Tether holds less than 1 bitcoin simply to fund transactions on the Omni protocol, which runs on top of the original cryptocurrency’s blockchain.
To be precise, the company has 0.075 bitcoin, or about $600 worth, a speck compared to the $2.8 billion in tethers outstanding, according to an Omni Explorer link shared by Milne. Neither a spokesperson for Tether nor its attorney Miller had answered CoinDesk’s requests for comment by press time.
Late last month, the NYAG secured the preliminary injunction freezing Tether’s assets and asking for documents about a $625 million loan and a $900 million line of credit it offered to Bitfinex.
The crypto exchange needed the funds to continue processing customer withdrawals after losing access to some $850 million that is said to be held by Crypto Capital, a payment processor that is also in the cross-hairs of investigators.
UPDATE (May 21, 21:30 UTC): This article was updated to include a possible explanation of Tether’s bitcoin holdings from investor Alistair Milne.
New York Supreme Court image via Nikhilesh De for CoinDesk