Bitfinex, like Alameda Research, allegedly permitted special customers to trade with negative account balances, according to a second amended consolidated class action complaint in the Southern District of New York.
However, before comparing the negative balance override features of Bitfinex and Alameda, it’s important to contextualize this allegation.
Details about Bitfinex’s negative balance override comes from a lawsuit alleging a scheme involving the use of tether (USDT) to persist a price premium of bitcoin (BTC) on Bitfinex. Specifically, a class of harmed investors residing in the US claim that Bitfinex and Tether executives fraudulently inflated the price of bitcoin and other crypto assets by billions of dollars on the Bitfinex exchange for two years.
Class members who bought bitcoin on Bitfinex at artificially inflated prices and later sold bitcoin at natural market prices “were injured by the amount of the difference,” according to their complaint. As a class, they are seeking “actual damages, treble damages, injunctive relief, interest, reasonable expenses, and attorneys’ fees.”
From 2017 to 2019, it’s widely known that the price of bitcoin was curiously and consistently higher on Bitfinex relative to other exchanges. The class action alleges that this price premium was purposeful, incentivizing the dissemination of USDT around the world.
Specifically, plaintiffs claim, “Defendants had motive to inflate cryptocommodity prices — it inflated the value of their cryptocommodity holding, encouraged more trades on their Bitfinex exchange, and promoted the widespread adoption of USDT as a dollar-pegged stablecoin.”
Negative balance override
Given this context, Bitfinex’s ability to grant special privileges to traders on its exchange makes more sense.
According to plaintiffs’ complaints, Tether and Bitfinex executives were orchestrating an elaborate scheme to advertise Bitfinex by persisting irrationally high prices of bitcoin on Bitfinex while simultaneously promoting the dissemination of USDT onto third-party exchanges.
To accomplish the discrete series of market incentives for these flows of funds, modifying a special Bitfinex account to allow negative balances might have been a necessary tool in executives’ toolkits.
If true, the feature would have been similar to the negative balance override feature granted to Alameda’s accounts on FTX. From July 2019 through its bankruptcy in November 2022, Alameda traders like Caroline Ellison enjoyed a unique privilege — software code ’allow_negative’ — granted to no other account holders.
Alameda availed itself of this privilege to the tune of billions of ‘negative’ dollars. Its losses, in addition to the money Alameda Research stole from customers, ultimately led to the collapse and bankruptcy of the entire FTX ecosystem.
Read more: US authorities charge Sam Bankman-Fried with ‘massive’ fraud
Plaintiffs in the New York class action lawsuit allege that Bitfinex similarly extended special override privileges to a special account that traded a lot of bitcoin and USDT.
According to the complaint, Bitfinex, like FTX, used other customers’ coins to facilitate credit. Moreover, Bitfinex allegedly “placed accounts that were allowed to trade on credit on ‘safe liquidation mode’ so that they would not be liquidated even when they incurred a negative balance.”
It’s possible that FTX’s ‘allow_negative’ software code had equal power to Bitfinex’s ‘safe liquidation mode.’
Bitfinex, Tether, and the presumption of innocence
Of course, these allegations are only complaints from investors who have lost money. No court in the Southern District of New York has issued a final ruling on this lawsuit.
Even though this lawsuit is merely a non-criminal complaint seeking money and injunctions, the US court system generally emphasizes the presumption of innocence.
The presumption of innocence is a basic requirement of fair trials. It forces jurors to assume defendants are innocent unless prosecutors prove beyond a reasonable doubt that defendants violated the law.
Because anyone may file a lawsuit containing any complaint, it’s irresponsible to assume any complaint is true merely because it appears in a court filing. It’s responsible to wait for rulings by a judge or jury before accepting any allegations as true.
Protos reached out to Bitfinex for comment but had not received a response prior to publication time.
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