(Bloomberg) -- Due diligence in the sometimes shadowy universe of digital money often means trying to unscrew the inscrutable.
Bitfinex, one of the largest virtual-currency markets, has been a particular mystery in the crypto world. It was dumped early last year by Wells Fargo & Co. and since then it’s been a secret how the exchange could transfer fiat money, still the lifeblood of global finance, without a bank.
According to three people with knowledge of the matter, Noble Bank International, based in San Juan, Puerto Rico, took over banking duties for Bitfinex last year. As a stopgap between Wells Fargo’s exit and Noble’s entrance, Bitfinex used a string of third-party accounts based in Panama City to stay in the game, according to online documents.
Also affected is Tether, a digital currency traded on cryptoexchanges worldwide that shares a management team with the exchange, including Chief Executive Officer Jan Ludovicus van der Velde. While little public information exists about how Tethers are created, it generally trades for around $1 because each coin is supposed to be backed by $1 of fiat money in a bank. The currency, which started trading in 2015, is described as a stable alternative to Bitcoin’s volatility and can act as a safe haven for crypto investors.
Other inscrutables enshroud the two businesses. British Virgin Islands-based Bitfinex and Tether were subpoenaed by the U.S. Commodity Futures Trading Commission in December. The regulator is investigating whether Tether’s $2.1 billion in customer money backing its virtual coin is really there, a person familiar with the matter said in January. The companies have yet to provide conclusive evidence to the public of its holdings. The lack of transparency has led critics to accuse Bitfinex and Tether of artificially pumping up the price of Bitcoin and other digital currencies.
“I, and many others, suspect Tether is being used to effectively counterfeit hundreds of millions of dollars of perceived value, which are being immediately reinvested into Bitcoin,” Tony Arcieri, a software engineer and independent security analyst, said in a Jan. 19 report.
The U.S. Justice Department has opened a criminal probe into whether traders are manipulating the price of Bitcoin and other digital currencies, Bloomberg reported Thursday, citing four people familiar with the matter.
The destinies of Bitfinex and Tether have repercussions around the world. Tether, the most-traded virtual money behind Bitcoin, has become the glue that holds together a lot of the $375 billion cryptocurrency market. Most banks, fearing money laundering and other shenanigans, have steered clear of the industry. Because Tether has provided a stable value in place of the dollar wherever bank accounts are difficult or impossible to get, an interruption or collapse would make it tough for many crypto traders to cash out.
Friedman LLP, a New York-based auditing firm, was also subpoenaed by the CFTC after Tether hired it last year to assess claims that Tether held enough U.S. dollars, according to a person familiar with the matter.
Most traditional financial institutions, bound to strict government regulations on money laundering and customer verification, don’t want to risk putting their reputations on the line by getting involved with an industry that many still associate with criminal activity. The concern is so great that Bank of America Corp., Capital One Financial Corp. and Discover Financial Services have banned customers from buying virtual money with credit cards they issue.
Puerto Rico has seen an enormous influx of cash related to cryptocurrencies in the past year. The cash and equivalents held by the island’s so-called International Financial Entities such as Noble soared to $3.3 billion at the end of 2017 from $191 million a year earlier, according to data from Puerto Rico’s bank regulator included in a research report by trading platform BitMEX. There are more than 30 IFEs in Puerto Rico, but Noble is almost entirely responsible for that increase, according to a person with direct knowledge of the matter.
$31 Million Hack
Noble doesn’t actually hold the money, however. Instead, it uses Bank of New York Mellon Corp. as its custodian, according to Noble’s website.
Bitfinex incorporated in Hong Kong in 2013. In August 2016, the exchange said it was hacked for a loss of $68 million, which it later spread among customers regardless of whether their account was affected. Just over a year later, $31 million of Tether was stolen in a separate hack.
Calls and emails to Stuart Hoegner, Bitfinex’s general counsel, were not returned. Deirdre Livingston, an outside spokeswoman for Bitfinex, Ryan Dicovitsky, an outside spokesman for Friedman and Jonathan Gasthalter, an outside spokesman for Noble, declined to comment, as did BNY Mellon’s Peter Gau.
As an International Financial Entity, Noble must report suspicious financial activities and help U.S. government agencies stamp out money laundering, but accounts of non-Americans can remain anonymous if the assets are held through offshore companies or trusts. Some of Bitfinex’s customer activity at Noble may be shielded under these rules because of its British Virgin Island registry.
Noble connects crypto users with exchanges by housing both customer and company accounts internally, according to a person with direct knowledge of the matter. Using intrabank transfers, a Bitfinex user who has a Noble account can have dollars or euros moved internally to the Bitfinex account, or vice versa, the person said, enabling arbitrage trades. Noble is courting other exchanges, said a person who’s been pitched by the Puerto Rican bank.
Bitfinex’s bank troubles began in March 2017 when Wells Fargo told the four Taiwan-based banks Bitfinex and Tether were using that it would no longer process their wire transfers coming into the U.S. That cut off the companies’ access to U.S. dollars. Bitfinex CEO van der Velde said Wells Fargo’s decision threatened the entire business.
Before Noble stepped in, Bitfinex looked around the world for banking help.
Last year, the exchange sought the assistance of Crypto Capital Corp., a private Panamanian firm, according to online documents. Through its president, a Canadian who lives in Panama City named Ivan Manuel Molina Lee, Crypto Capital had links to Bank Spoldzielczy in Skierniewice, Poland, which Bitfinex apparently used for euro deposits, and the Portugal-based Caixa Geral De Depositos SA.
A representative for Crypto Capital declined to comment. A request to speak to Lee went unanswered. A spokesman for Caixa Geral said the bank didn’t deal with cryptocurrencies and declined to comment further.
“Essentially, Crypto Capital Corp. and their bank accounts enabled Bitfinex to maintain their access to fiat deposits and withdrawals,” said Robert-Jan den Haan, a Dutch academic who’s researched the Bitfinex and Tether saga. “No access to fiat banking would make it quite problematic for Bitfinex to function as it is today, especially in relation to Tether and its one-to-one dollar backing.”
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