New York court allowed the Bitfinex-Tether investigation to continue

A New York appellate court ruled on July 9, 2020 that the state attorney general could continue investigating Bitfinex, Tether and their related entities under the Martin Act.

The Appellate Division, First Department affirmed an August 19, 2019 order denying the companies’ attempt to dismiss the matter. It rejected challenges to the court’s subject-matter and personal jurisdiction and concluded that the Martin Act’s broad definition of a commodity was sufficient to encompass tether, the dollar-linked token commonly identified as USDT.

The ruling mattered because it preserved New York’s ability to examine an offshore cryptocurrency exchange and stablecoin issuer whose products and banking relationships extended into the state. It did not find that Bitfinex or Tether committed fraud, determine that customer money was permanently lost or impose a penalty.

The investigation behind the appeal

The attorney general began investigating the companies in November 2018 over concerns about Tether’s liquidity and its ability to honor redemption requests. The appellate opinion states that the office sought documents dating from January 1, 2015.

According to the court’s account of the investigative record, a third-party payment processor had refused since mid-2018 to return close to $1 billion in commingled client and corporate funds belonging to iFinex, Bitfinex’s operator. The attorney general’s April 25, 2019 announcement characterized the inaccessible amount as more than $850 million and alleged that Bitfinex had not disclosed the problem to investors.

The court also recorded that Tether transferred $625 million to iFinex in November 2018 and that iFinex planned to obtain a $900 million credit line from Tether. The attorney general alleged that these arrangements placed assets supporting tether at risk. Those figures and characterizations came from the investigation and related court papers; the July 9 opinion did not adjudicate the underlying allegations.

Bitfinex and Tether disputed the state’s account. In their December 13, 2019 appeal statement, they described the loan as fully secured and commercially reasonable, said Bitfinex had repaid $100 million with interest, and maintained that no redemption customer had been harmed. On July 9, Bitfinex’s general counsel told CoinDesk that the company would respect the ruling.

Why the jurisdiction findings mattered

The companies argued that tether was neither a security nor a commodity under the Martin Act. The appellate court concluded that tether fit within the statute’s commodity definition and therefore did not need to decide whether the token could also qualify as a security.

The court separately found a sufficient New York connection for the investigative stage. Its opinion noted that iFinex admitted permitting New York customers to trade tether on Bitfinex until January 30, 2017. Tether did not expressly prohibit redemptions by New York customers until November 27, 2018, while the attorney general presented evidence indicating continued activity involving New York customers as recently as May 14, 2019.

Additional connections included an executive who conducted company business from New York until at least early 2018, active accounts at New York banks until at least October 2018 and the use of New York professional firms to review reserves and make public statements.

The court emphasized that the proceeding concerned investigatory authority, where the state’s jurisdictional showing was lighter than it would be in a completed enforcement lawsuit. The decision therefore expanded no blanket rule that every cryptocurrency business was automatically subject to New York law.

What remained unresolved on July 9

The verified development was procedural: the appellate court affirmed the lower order and allowed document production and the attorney general’s investigation to proceed. The opinion did not establish the final location or recoverability of the disputed funds, independently verify Tether’s reserves, resolve customer-loss claims or determine liability.

Those distinctions were especially important for a stablecoin used as a trading and settlement instrument across cryptocurrency markets. The July 9 ruling preserved regulatory scrutiny of the issuer and its affiliated exchange without supplying the investigation’s final answer.