Distributed Counsel 2: Bitfinex and Tether Hit the Mainstream Media

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It’s A Good Thing None of My Friends Read Your Little Time Magazine . . .

No less than New York Times and Bloomberg have published articles on Tether and its possible connection to Bitfinex, the largest cryptocurrency exchange by volume in the world. Tether is a token that claims to be pegged and backed 1-to-1 by the dollar. Some, especially an anonymous blogger named Bitfinex’ed, have alleged that the Tethers are backed by nothing, and that Bitfinex is essentially printing money, manipulating markets, and buying Bitcoin and other tokens for its own account (or pumping the value of coins it already holds).  The connection between Bitfinex is complicated and obscure,1 but the bottom line is that a lot of tether is sent to Bitfinex for trading.

Tether claims it receives funds from institutional investors and is fully backed, yet there is no obligation to repay tethers (this, according to Tether’s Terms of Service). No audit has yet been produced, but there is a chart (market cap is in blue):

 

This shows that Tether has issued about $800M in coins in one year. So, according to Tether, “institutional investors” just said to this Hong Kong issuer (which is run by, oh yea doesn’t say): “here, hold this dollar for me and ship me a token,” approximately eight hundred million times.  Keep that in mind when you understand that these coins are traded for Bitcoin and other cryptocurrencies, on multiple exchanges, as if they are dollars, with literally zero risk premium.  Tether, it would appear, is a safer bet than Uncle Sam.  Remarkable.  All the more so when you realize that, again according to the above chart, it appears nobody has thought to redeem them for their dollars.  The amount outstanding just keeps rising.

Bitfinex’ed has been writing about this issue since April, which is about $500 million ago. Recently, his commentary has been gaining traction on Twitter and on December 4, Bitfinex responded by announcing that it had hired Steptoe and Johnson to pursue libel and defamation claims against the blogger.

This does not make sense at first blush (I’m assuming US law applies here,  which seems safe because they hired US counsel).  First, it’s likely a hollow threat. The blogger would have to know or be recklessly indifferent to the truth or falsity of the allegations (or at least be negligent), and given the silence from Bitfinex, that seems like a tough case.  Second, the allegations would have to, you know, actually be false. Truth is an absolute defense, 2 and that means Bitfinex (and implicitly Tether) would be volunteering for extremely invasive discovery concerning every aspect of their operations. What is easier? Protracted discovery and motion practice with legal fees at a blended rate of about $700/hr or simply producing an audit showing that Tether is backed.  Third, damages would be very difficult to prove.3 How do you prove you lost trading revenue because of these allegations, and which allegation in particular did the most damage?  Surely not all of them are false. Moreover, during this same period, Tether has been hacked and Bitfinex has been repeatedly taken offline by DDOS attacks. If twitter is any indication, withdrawals are lagging badly. Not saying it is impossible, but it is harder than you would think to prove that Bitfinex’ed’s claims were the problem, if you can prove they were false in the first place.

Finally, Bitfinex may have a duty to mitigate depending on the jurisdiction. Merely threatening suit without any attempt to factually repudiate the claims does not look like mitigation.The real audience here is not Bitfinex’ed. It’s the mainstream media. The goal is to make journalists think twice. Let’s see if it works.

In Other News . . . .

The Ninth Circuit limited the definition of “personally identifiable information” or “PII” under
the Video Privacy Protection Act.  The Court applied an “ordinary person” test to the definition of PII and held that it did not include information like serial numbers that could not easily be attributed to an individual.  This is good but not great for publishers.  Great would been a ruling that the plaintiffs had no “standing,” meaning that they were not harmed.  But the Court said they were harmed, just not in a way that gave them a right of recovery under the statute.  A partial defeat for the plaintiffs’ bar, but only that.

Attack of the Kitties . . .

Blockchains have one sure-fire-no-doubt-killer-app—money.  Payments and stores of value.
Bitcoin, Bitcoin Cash, Litecoin, Dash, Zcash, Monero—all of these are about the transfer or
storage of value. Ethereum is different. It sets out to be a “world computer.” The goal is a
platform for decentralized computation, immutable and unstoppable. So far it has been used for ICOs, primarily. And it has been unstoppable, sometimes to its detriment, until now.  Turns out these little critters are popular . . .

So popular, in fact, that blockchain kitties have seriously slowed the Ethereum network. There is no reason to be embarrassed here—the bright minds at Ethereum are fully aware of the scaling issues and have suggested a number of solutions, including proof of stake and sharding (whatever that is). The broader point here is that it is early days. Bitcoin can’t handle payment like Visa, yet.  Ethereum can’t handle cryptographically-bred kittens like . . . well, that one is really, really new.

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  1. From a pleading Bitfinex filed in April against Wells Fargo, we have “[t]he owners of Tether Holdings Limited are Giancarlo Devasini, J.L. van der Velde, and DigFinex, Inc. DigFinex, Inc. is owned by J.L. van der Velde, Giancarlo Devasini, Paolo Ardoino, Phil Potter, Stu Hoegner, and Perpetual Action Group (Asia) Inc.”
  2. “The sine qua non of recovery for defamation … is the existence of falsehood.” Letter Carriers v. Austin 418 U.S. 264, 283, 94 S.Ct. 2770 (1974).
  3. Bitfinex will likely allege that the blogger’s comments are defamation per se, in this case because the blogger has alleged fraudulent business conduct. See Restatement (Second) of Torts § 570 (2016). Traditionally, there is no need to prove damages for defamation per se. Yet, there is some variation among applicable state laws concerning the need to prove damages in an action for defamation per se. See McGarry v. Univ. of San Diego, 154 Cal. App. 4th 97 (Cal. Ct. App. 2007) (recognizing per se liability); Nazeri v. Missouri Valley College, 860 S.W.2d 303 (Mo. 1993) (requiring proof of damages in all cases). Moreover, the ability of a business entity to rely on such theories may also be limited. See e.g., CMI, Inc. v. Intoximeters, Inc., 918 F. SUpp. 1068, 1084 (W.D. Ky. 1995) (“[b]usinesses do not have personalities that are hurt so intangibly. If a business is damaged, the damage is usually reflected in the loss of revenues or profits. Therefore, courts should be very cautious about labeling as defamation per se comments made about a corporation or its products.”)

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