A growing number of virtual currency investors are worried that the prices of Bitcoin and other digital tokens have been artificially propped up by a widely used exchange called Bitfinex, which has a checkered history of hacks and opaque business practices.
In December, Bitfinex was subpoenaed by the Commodity Futures Trading Commission, a United States regulatory agency. The news, first reported by Bloomberg on Tuesday and confirmed by a source familiar with the subpoena but not allowed to publicly discuss an ongoing investigation, led to a sell-off in most virtual currencies.
The people behind Bitfinex issue a virtual currency called Tether. Unlike most digitals tokens, every Tether is supposed to be backed by traditional money — the United States dollar. New Tether tokens are issued when investors give them dollars. One dollar is worth one token.
Because of the credibility that comes with that tie to the dollar, Tether are often used to buy other virtual currencies like Bitcoin.
In recent months, however, many investors have been raising alarm bells about Tether. Hundreds of millions of dollars worth of new Tether were created; almost always when the prices of other virtual currencies were heading down. The Tether were used on the Bitfinex exchange to make big purchases of Bitcoin and other tokens, helping push their prices back up, according to multiple analyses of data from Bitfinex.
“This became more and more concerning, because every time the markets went down, you have seen the same thing happen,” said Joey Krug, the co-chief investment officer at Pantera Capital, which runs several virtual currency hedge funds. “It could mean that a lot of the rally over December and January might not have been real.”
Long before news of the subpoena, Bitfinex, which is believed to host more trading than any other Bitcoin exchange in the world, had gained a reputation for a lack of transparency and a confusing structure, with European executives, offices in Asia and registration in the Caribbean.
It is not yet clear what information the regulators are seeking. Technically, the Tether tokens are issued by a separate company (called Tether) that is owned and operated by the same people who run Bitfinex. The C.F.T.C. subpoenaed that company at the same time that it subpoenaed Bitfinex, according to a person familiar with the matter.
Bitfinex has not commented on the subpoena or recent reports about Tether, and company officials did not respond to repeated requests for comment. In the past, the exchange’s executives and spokesman have said that its customers are simply using Tether to buy virtual currencies as they might otherwise use United States dollars.
Bitfinex had contracted with an American firm, Friedman, to audit its records and prove that its operation of Tether is above board. But last week, Bitfinex said it was cutting ties with Friedman, after waiting months for it to finish the audit. That news generated more suspicion.
“It’s a signal to the market of what those who have scrutinized the situation already believe: There is a problem here,” said Jill Carlson, a former trader at Goldman Sachs who now consults with a variety of virtual currency companies. “The dissolution of a relationship between an auditor and a company is very rarely a good sign that the company is behaving in accordance with market best practices.”
The concern about Bitfinex is one of several issues that have helped depress the value of virtual currencies over the last month, after a roaring, yearlong rally. Regulators in several countries, like South Korea and the United States, have expressed concerns about manipulation and fraud, and hinted at a crackdown.
In Japan, a large virtual currency exchange, Coincheck, was hacked in late January and lost nearly $500 million worth of a virtual currency known as NEM, raising questions about the relatively untested security practices of virtual currency exchanges.
Still, Japan is one of the few places where virtual currency exchanges are overseen by regulators. Many of the largest virtual currency exchanges, including Bitfinex, operate with essentially no regulatory oversight.
Bitfinex was hacked in 2015 and again in 2016, and Tether was hacked at the end of last year — with the combined losses totaling more than $100 million.
The company shared few details about these hacks. But after the biggest theft, in 2016, it was cut off by Wells Fargo and its banks in Taiwan.
The banking problems have made it hard for customers to get money in and out of Bitfinex, but traders have continued to use the exchange, in part because of Tether.
Tether offered a preliminary report last year from Friedman, the accounting firm, suggesting that it had bank accounts with dollars corresponding to all the Tether that had been issued. But the report was far from conclusive and Tether has never produced a real audit, leading to suspicions that Bitfinex may be printing virtual money backed by nothing.