The New York Attorney General’s recent $18.5 million settlement with cryptocurrency companies Bitfinex and Tether is hardly the attack on the fledgling sector’s fundamentals some people think it is, Ashley Ebersole suggests.
Mr. Ebersole is a former SEC regulatory and enforcement attorney who is now a partner with the Washington law firm Bryan Cave Leighton Paisner. We recently spoke about the settlement, which concluded an inquiry into an alleged coverup of $850 million in losses of funds held by a payment processor.
In a 2019 filing, the attorney general’s office alleged Bitfinex handed $850 million to the Panamanian entity Crypto Capital without disclosing it to investors. Bitfinex and Tether executives then allegedly engaged in a series of transactions that opened up Tether’s cash reserves to Bitfinex.
“Bitfinex and Tether recklessly and unlawfully covered-up massive financial losses to keep their scheme going and protect their bottom lines,” Attorney General Letitia James said in a statement. “Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie.”
While with the SEC Mr. Ebersole worked in cross-division working groups which were responsible for shaping the agency’s response to emerging technologies, including the Dark Web Working Group and Distributed Ledger Technology Working Group. Earlier in his career Mr. Ebersole was an investment banker.
“This case was never about cryptocurrency fundamentals, though it might implicate the status of Tether (USDT) as a security,” Mr. Ebersole began.
He conceded the inquiry fed the inherent distrust some people have for cryptocurrencies, that there are undisclosed relationships and that some stablecoins are not as fiat-backed as they claim. The timing for the industry wasn’t great, as the action was against an early and well-known stablecoin but the longer-term effect should be minimal.
“Could controversy connected to one of the first stablecoins – and a sizable one at that – have a price effect on other cryptos?” Mr. Ebersole asked. “Sure, but that doesn’t necessarily mean that the issues underlying the Bitfinex-Tether settlement have any broader implications for the larger space.”
One thing the decision won’t do is deter institutional investors and larger players whose recent entry have increased public awareness of cryptocurrencies in general, Mr. Ebersole said. Their normal due diligence should turn up much of this information. Transaction disclosures along with roles in regulatory investigations, are standard in the developing of corporate partnerships.
And while Tether comes out of this with some mud on its face, the resolution removes the cloud of further regulatory action at this time, Mr. Ebersole added.
The common factors detractors cite about cryptocurrencies such as secrecy and hiding assets from authorities are not an issue for banks who have to abide by strong anti-money laundering standards already, Mr. Ebersole explained. This case was an issue specific to Bitfinex and Tether.
“Unless it occurs regularly,” Mr. Ebersole said. “Then it’s a warning shot.”
It is still uncertain how this whole process will affect regulator’s views of Tether, Mr. Ebersole said. Some at the SEC do not see fiat-backed stablecoins as securities, but for those reliant on other methods to stabilize prices such as proprietary algorithms it could be another story.
“That could implicate cryptocurrencies being a security if they are not relying on a one-to-one peg backed by the US dollar,” Mr. Ebersole said.
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