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The Bitfinex IEO, how did we get here?

by Robert-Jan den Haan

May 8, 2019, 7:15AM EDT  ·  15 min read

Quick Take

  • Bitfinex is to conduct a $1 billion Initial Exchange Offering in order to cover the $850 million currently inaccessible with Crypto Capital
  • Although it can be confirmed that some of the missing dollars are in fact seized, emerging facts make clear that the location of part of the money is unknown
  • A reconstruction of the timeline, filling in details where possible, that led to this point in the Bitfinex, Tether and Crypto Capital story

by Robert-Jan den Haan

May 8, 2019, 7:15AM EDT  ·  15 min read

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Bitfinex is looking to raise $1 billion through an Initial Exchange Offering (IEO), confirming rumors going around the internet last week. As the now published white paper makes clear, the IEO is meant to cover the inaccessible $850 million tied up with its former payment processor and shadowbank Crypto Capital. What follows is a timeline reconstruction of how we got here.

Last week, the New York State Attorney General (NYAG) sued Bitfinex and Tether, the crypto exchange and the firm behind the stablecoin with the same name, respectively. In the suit, the NYAG’s office claimed Bitfinex and Tether had misled investors by failing to disclose that $850 million belonging to Bitfinex is inaccessible and that Bitfinex had received a line of credit from Tether to continue operations. The line of credit inadvertently means that the outstanding Tether tokens are no longer backed one-on-one with dollars held in its reserve.

The $850 million is believed frozen in multiple accounts controlled by Crypto Capital, according to what Bitfinex told the NYAG’s office. Specifically, according to the filing by the NYAG’s office, Crypto Capital told Bitfinex and Tether that the dollars have been seized by authorities in Poland, Portugal and the U.S. However, the filing also states that Bitfinex and Tether do not believe Crypto Capital’s representation that the funds have been seized.

Earlier this week in an article diving into this claim and confirming that at least some of the missing $850 million has in fact been seized, I explained why it is unrealistic that dollars would be retrieved from Crypto Capital in the near future and that the IEO could therefore be Bitfinex’s Plan B.

Just now, we learned that Plan B is becoming Plan A.

Excerpts of the white paper already revealed that Bitfinex plans to issue and sell 1 billion exchange tokens at 1 USDT each to raise funds to cover for the $850 million hole in Bitfinex’s books. Every month, Bitfinex intends to buy back the tokens, called LEO, at a market rate using at least 27% of its monthly profits, until only 100 million tokens remain. In addition, the excerpts specify that Bitfinex reserves the right to buy back the tokens within 18 months in case its funds with Crypto Capital become accessible.

Although under different circumstances, the IEO draws parallels to 2016 when Bitfinex offered BFX tokens to cover for a roughly 70 million dollar loss as a result of a hack. But how did we end up here, again?

Early 2017

Although working with Crypto Capital since 2015, the payment processor became instrumental to Bitfinex in early 2017. Back then, Bitfinex had bank accounts at multiple Taiwanese banks, but ran into trouble when Wells Fargo stopped offering its correspondent banking services to Bitfinex (and Tether) in March of 2017. Bitfinex’s Taiwanese banks blocked and refused wire transfers only a few weeks later. Jan Ludovicus van der Velde, Bitfinex CEO, said the decision by Wells Fargo jeopardized the entire business at the time.

Unable to secure stable banking relationships, Crypto Capital provided a way for Bitfinex to hold its customers and corporate funds. As Stuart Hoegner, Bitfinex’s and Tether’s general counsel, explains in response to the NYAG lawsuit, Bitfinex and Tether opened additional accounts with Crypto Capital during 2017 and 2018, entrusting the payment processor with an increasing amount of funds.

From early 2017 on, Crypto Capital became the main entity processing fiat deposits and withdrawals to and from Bitfinex, at least for its retail customers. Bitfinex listed bank accounts in control of Crypto Capital as their fiat deposit address, even though the name Crypto Capital was nowhere to be found on its platform. In addition however, Bitfinex also stored part of its corporate and customer funds in Crypto Capital accounts.

Late 2017 and January 2018

Even though Bitfinex and Crypto Capital never engaged in a formal contract according to the NYAG’s office, the arrangement worked well, until the end of 2017. By then and going into 2018, some Bitfinex customers complained (archived link) about waiting for, at times, a month to receive their fiat deposits and withdrawals, or not receiving them at all. In February, Bitfinex posted a fiat transaction delays notification, specifically mentioning transactions executed between Jan. 10 and Feb. 5.

At the time, Bitfinex listed a deposit account belonging to a Polish company named Crypto SP. Z O.O., with SP. Z O.O. being the Polish equivalent of LLC. A document signed by Crypto Capital’s compliance officer obtained by The Block states that “iFinex Inc. is a valued corporate client of our financial institution.” The document further lists funding instructions including a bank account number at the Cooperative Bank of Skiernicewiece in the name of Crypto SP. Z O.O. According to the document, Crypto SP. Z O.O. is a “wholly owned subsidiary of Crypto Capital.” Documents from the Polish business registry confirm that the Polish company is owned by Crypto Capital and also lists Crypto Capital’s president, Ivan Manuel Molina Lee.

Based on information obtained by The Block and reported on earlier this week, Polish authorities seized bank accounts in name of Crypto SP. Z O.O. as part of an anti-money laundering operation. Authorities seized equivalent to $350 million from Crypto SP. Z O.O. and another company called NESO SP. Z O.O., which is registered at the same address and also lists Molina as its president.

It appears that at least the first move in this investigation was executed at the end of January 2018, coinciding with Bitfinex’s customers complaining about not receiving their fiat deposits and withdrawals. Furthermore, also in January, the Cooperative Bank in Skierniewice had to report (in Polish) an increase in deposits equivalent to around $275 million, more than doubling the amount of money deposited in the bank compared to June 2017. By February however, the amount of deposits reportedly (in Polish) declined by around the same amount, negating the initial increase.

The Polish follow-up investigation led to a third company, ITRAN SP. Z O.O., from which authorities seized additional assets. On its own platform at the time, Crypto Capital referred its customers to an account in name of the third company. The salient detail is that the original name of the company was not ITRAN, but Global Transaction Services, also a payment processor. Daniel Barrs, then head of Global Transaction Services, was indicted for failing to follow anti-money laundering requirements in 2016.

The exact relationship between ITRAN and Crypto Capital is unknown, although the Polish investigation appears to focus on the Crypto and NESO companies and related individuals. According to a source familiar with the matter and information reviewed by The Block, the investigation appears to be ongoing.

Pressed on the investigation back in 2018, Bitfinex’s head of marketing Kasper Rasmussen said in an emailed statement that “despite some of the speculation that occurred at the time of the initial reporting, Bitfinex’s platform/operations and user funds have not been impacted or affected by this investigation. Deposit addresses on Bitfinex changed frequently before this story broke and have continued to do so after. Our users have not lost funds or have had funds seized as a result of this investigation. Additionally, to date neither Bitfinex nor any of its users/related parties have been called as a witness or a party to this investigation.”

Although proven untrue now, at least in regard to Bitfinex’s operations being unaffected, it could not be verified last year. The statement may have also been consistent with Bitfinex’s knowledge about the investigation at the time. In his affidavit, Hoegner writes that “at least one governmental entity has confirmed that it was involved in the seizure of Crypto Capital funds,” which seems to at least refer to the Polish authorities.

Molina declined to comment, citing ongoing legal proceedings, as did a spokesperson for the Polish Ministry of Justice. A spokesperson for the Cooperative Bank of Skiernicewiece in Poland offered no comment, citing bank secrecy. A spokesperson for Europol confirmed Europol’s involvement in the operation, but declined to speak in detail and referred back to the Polish authorities.

February to April 2018

With the Polish bank accounts no longer usable, Bitfinex changed its deposit address to a Dutch account at ING at the end of January. That account, in name of a company called Haparc B.V., was not linked to Crypto Capital, with ING confirming to be aware that Bitfinex was behind the account. Nevertheless, the account was only used for about ten days before being closed down according to a person familiar with the matter. A spokesperson for ING declined to comment.

Bitfinex subsequently moved back to list a bank account linked to Crypto Capital at the Portuguese bank Caixa Geral de Depositos in name of Swiss-based Global Trade Solutions AG. Crypto Capital seems to have been able to operate that account until around May. It is unclear whether the account was closed down by the bank or seized by authorities. Portugal is named as one of the three countries where portions of Bitfinex’s $850 million are supposedly held.

Around the same time, Reginald Fowler, indicted this week by the Southern District of New York (SDNY) for bank fraud and running an unlicensed money transmitting service among others, entered the scene. An article published last week explains how the Fowler indictment is directly related to the Bitfinex and Crypto Capital situation.

Fowler registered the company Global Trading Solutions LLC, the company described to The Block in mid-February as an agent for Crypto Capital. In addition, wire details obtained by The Block, the earliest dated in February, show that Crypto Capital used Portuguese companies MOGW ENERGY TRADE LDA and Eligibility Criterion Unipessoal LDA, both (co-)owned by Fowler, to process fiat withdrawals for Bitfinex. The companies too had accounts at Caixa Geral de Depositos. A spokesperson for Caixa Geral de Depositos declined to comment, citing bank secrecy obligations.

May to October 2018

Global Trading Solutions LLC became the supplier of bank accounts for Bitfinex’s fiat transactions through multiple U.S. financial institutions, namely Citibank, Enterprise Bank & Trust and HSBC. The fiat transactions had their hiccups now and then, according to correspondence between Crypto Capital and Bitfinex customers, with some customers who spoke to The Block only receiving a refund on the Bitfinex platform after half a year.

By mid-2018, Bitfinex became more and more aware of Crypto Capital’s problems, as laid out in chat logs between Bitfinex and Crypto Capital executives in the NYAG’s filing last week. In a message on Aug. 15, Merlin asks Oz, Bitfinex and Crypto Capital executives, if he can make $100 million available to Bitfinex to process customer withdrawals. Referring to what appears to be the Polish investigation, Merlin follows up by saying “I understand some of the funds are being held by [redacted], but what about the rest?”

It remains unknown what happened to the U.S. accounts, but it appears that the accounts at Citibank and Enterprise Bank & Trust were closed down. U.S. authorities seized the HSBC account in October last year, according to the superseding indictment by the SDNY against Fowler and co-conspirator Ravid Yosef.

A spokesperson for Citibank declined to comment, but did state that Citibank has a policy not to service cryptocurrency companies. Enterprise Bank & Trust did not reply to a request for comment.

In an extraordinary shareholder meeting held on the Jun. 13, 2018, Crypto Capital Corp., the Panama-based company behind Crypto Capital, decided to dissolve and liquidate itself, according to a public registry filing. Since then, Crypto Capital’s website says it is operated by the Switzerland-based Global Trade Solutions AG, the same company that held bank accounts used by Bitfinex in Portugal.

An interesting detail is that Crypto Capital appears to have bought up a company related to software engineering incorporated in 2001 before changing its name to Global Trade Solutions AG in 2016, according to the Swiss business registry. Its website however, lists a logo that includes 2001, providing the impression that Global Trade Solutions AG is actually a much older company than it seems.

It is unclear how the dissolution of Crypto Capital Corp affects any investigations and the retrieval of Bitfinex’s inaccessible dollars. It appears as though, from mid-2018 onwards, all bank accounts used by Crypto Capital were linked to Global Trading Solutions LLC, Fowler’s company, rather than any accounts in its own name or that of its subsidiaries. Crypto Capital continued to process Bitfinex’s fiat transactions, according to correspondence reviewed by The Block.

By October 2018, when Bitfinex listed the HSBC account as its deposit address, the delays on fiat withdrawals intensified. Fully grasping the seriousness of the situation, Bitfinex issued a statement on Oct. 15 to refute rumors of insolvency. However, as the chat logs printed in the NYAG’s filing reveal, a Bitfinex representative writes that it is running low on cash reserves apart from those that are with Crypto Capital on the same day.

The indictment against Fowler and Yosef further reveals that all funds from the HSBC account were seized by U.S. authorities on Oct. 23. It is unknown how much, if any, of the funds seized from the bank account are part of Bitfinex’s inaccessible $850 million.

November and December 2018

Having learned of the New York State investigation, Bitfinex contacted the NYAG’s office in early November. On Nov. 27, the same day Tether announced reopening direct redemptions, the NYAG’s office issued subpoenas to both Bitfinex and Tether seeking documents and information that includes the identification of “any bank, depository institution, money transmitter, trust, account, or other similar entity currently used by Tether and Bitfinex for Virtual Currency or fiat currency. Identify and describe the decision(s) by Tether and/or Bitfinex to change banks (or other similar entities as noted above) between January 1, 2016 and the present date.”

Around the same time, Bitfinex grew more and more worried about the funds stuck with Crypto Capital. A day after the NYAG issued its subpoena, Merlin writes to Oz that “we are at the end of the month and you haven’t been sending out one wire. [Not] even 1 usd for the whole month” and “I think you should stop playing and tell me the truth about what is going on.”

To keep Bitfinex’s operation going, we have now learned that Tether transferred $625 million from its cash reserves to Bitfinex. In return, Bitfinex transferred the same amount to Tether internally at Crypto Capital. The move can basically be seen as a book entry that has no apparent changes other than guaranteeing Bitfinex access to funds. However, the move directly exposed Tether to the funds frozen with Crypto Capital. Neither Bitfinex nor Tether publicly declared the transactions and we may have never learned of either if the Crypto Capital situation had resolved itself.

By December last year, Crypto Capital no longer listed Bitfinex as a partnered exchange. At this point, as written in a letter to the NYAG’s office, Bitfinex and Tether questioned Crypto Capital’s side of the story: “While Crypto Capital’s principals have represented that the unavailable funds have been seized or otherwise restrained by governmental authorities in Poland, Portugal, and the United States. the Companies grew concerned that Crypto Capital’s principals may be engaged in a fraud . . .”

January 2019 to present

Meeting with the NYAG’s office on Feb. 21, counsel for Bitfinex and Tether explained their plan for Bitfinex to receive a line of credit to draw from the dollars backing Tether. The line of credit of up to $900 million was agreed upon between Bitfinex and Tether on March 19, of which around $750 million have been accessed today.

A few days prior to signing the agreement, signed on behalf of Bitfinex and Tether by the same two individuals, Tether updated its collateral breakdown, specifying that its backing could include “other assets or receivables from loans issued by Tether” according to a statement sent to The Block. The statement further says that Tether’s customers were notified directly of this change upon logging into its website. No public statement was ever made, nor was the loan to Bitfinex disclosed prior to the NYAG’s office lawsuit.

The NYAG’s office, in its filing dated April 25, makes clear that it sees the actions of Bitfinex and Tether, both the November 2018 transactions and March 2019 line of credit, as a cover-up for the loss of $850 million in relation to Crypto Capital. A characterization disputed by Bitfinex in a statement, claiming that the dollars are not lost but “seized and safeguarded.”

While we know some of the funds have been seized, whether that accounts for the full $850 million is not yet clear. In a filing in the District of Arizona, the U.S. Attorney writes that “companies associated with Defendant [Fowler] have failed to return $851 million to a client of Defendant’s shadow bank,” which seems to be a direct reference to Bitfinex’s missing funds.

The filing also details how Fowler sent approximately $60 million to his personal bank account in June and July 2018, money the U.S. government believes to be linked to a “10% Fund” mentioned in the U.S. Master Workbook, and that Fowler has around $50 million in overseas accounts. It therefore appears that at least some of the missing millions are either embezzled or otherwise out of reach.

Whether the $850 million is missing, ‘seized and safeguarded’, or a combination of both, the IEO is now confirmed to be Bitfinex’s solution to fill the gap left by the Crypto Capital mess. If successful in raising 1 billion dollars, the IEO would eliminate the necessity for a line of credit from Tether, which is central to the NYAG’s office lawsuit. One of the NYAG’s main points of contention is the “questionable collateral” in the form of shares in DigFinex, the parent company of iFinex. iFinex in turn owns both Bitfinex and Tether, which means that the loan from Tether is collateralized in, at least partly, shares of itself. Presumably, eliminating the line of credit from Tether may be the main objective of the IEO in light of the New York State lawsuit. It may be the reason the plan has been put in motion now. Whether it will solve their problems, and gain the NYAG’s blessing, remains to be seen.