A closely watched legal case involving Bitfinex and Tether, with major implications for the cryptocurrency industry, has been resolved.

The New York Attorney General’s office (NYAG) has settled with Bitfinex over a 22-month inquiry into whether the cryptocurrency exchange sought to cover up the loss of $850 million in customer and corporate funds held by a payment processor.

The NYAG’s office announced the settlement Tuesday, formally ending the inquiry that kicked off in April 2019. Under the terms of the settlement, Bitfinex and Tether will admit no wrongdoing but will pay $18.5 million and provide quarterly reports describing the composition of Tether’s reserves for the next two years. More significantly, these reports will match information Tether already provided the NYAG about its reserves. The NYAG will bring no charges as part of the settlement.

In a statement, New York Attorney General Letitia James said, "Bitfinex and Tether recklessly and unlawfully covered up massive financial losses to keep their scheme going and protect their bottom lines. Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie."

The settlement may help resolve, one way or another, a question that has long bedeviled the entire $1.6 trillion global cryptocurrency market. By requiring Tether to provide a greater level of transparency than ever about the backing of its USDT stablecoin – a foundational piece of crypto’s plumbing – the arrangement could replace whispers and conjecture with regular data. Depending on the level of detail provided, investors could have better tools to evaluate the claim that the company has been printing unbacked tokens to artificially drive up the price of bitcoin, the market’s bellwether.

According to the settlement, the NYAG claims Bitfinex and Tether held a portion of Tether’s reserves in trust for several months in 2017 and failed to disclose its troubles with Crypto Capital Corp. in a timely manner in its findings of fact. The NYAG also found fault with a blog post Bitfinex published after the inquiry was first announced, where the exchange said the funds held by Crypto Capital have been “seized and safeguarded.”

Charles Michael, a partner at law firm Steptoe & Johnson LLC who represented the companies in the inquiry, said the settlement “resolves allegations about public disclosures” around Tether’s loan to Bitfinex.

"To the Attorney General's office's credit, after two and a half years of investigation, [its] findings are limited only to the nature and timing of certain disclosures," Michael said. "And contrary to online speculation, there was no finding that Tether ever issued tethers without backing or to manipulate crypto prices."

However, the settlement said, "As of Nov. 2, 2018, tethers were again no longer backed 1-to-1 by U.S. dollars in a Tether bank account, because a substantial portion of the backing in the Deltec account had been transferred to Bitfinex to make up for the funds taken by Crypto Capital, while the corresponding funds transferred from Bitfinex’s Crypto Capital account to Tether’s Crypto Capital account were impaired by Crypto Capital’s actions."

The $18.5 million that the companies are paying as part of the settlement “should be viewed as a measure of our desire to put this matter behind us and focus on our business,” Bitfinex and Tether General Counsel Stuart Hoegner said in a statement.

He said Tether “voluntarily” provided the NYAG with information about Tether’s reserves, and will continue to do so for two years.

“We proposed that as part of the settlement agreement, we would disclose – both to the Attorney General’s Office and to the public – additional information about Tether’s reserves on a quarterly basis,” Hoegner said.

The disclosures will include the breakdown of cash and cash equivalents that are in the reserves. It’s unclear whether this will take the form of attestations or some other type of update, or whether a third-party auditor or law firm will write the reports. The settlement only said the disclosures will "substantially" match what the companies provided the NYAG during its investigation. Bitfinex and Tether must also disclose any information about fund transfers between themselves.

“Putting aside the Attorney General’s characterization of these disclosure issues as misrepresentations or violations of any legal obligation, the Attorney General’s Office concluded, in essence, that Bitfinex and Tether could have done better in publicly disclosing these events,” Michael said.

New York Attorney General Letitia James announced the legal inquiry in the spring of 2019, revealing that Bitfinex had lost access to nearly $1 billion and covered up the losses using funds from its sister firm Tether. Tether, which shares ownership and key executives with the exchange, loaned Bitfinex $550 million and extended a line of credit. 

The NYAG inquiry secured an injunction to freeze this line of credit, prevent any further fund transfers and force the companies to turn over any documentation about the deal, which both firms objected to in court. A judge ruled in favor of the NYAG, which subsequently won an appeal as well. 

Ultimately, the companies turned over more than 2.5 million documents, Hoegner said.

“The loan was made to ensure continuity for Bitfinex’s customers. It has since been repaid early and in full, including interest. At no point did the loan impact customers, or Tether’s ability to process redemptions,” Michael said.

The NYAG inquiry did not lessen demand for USDT, the dollar-pegged stablecoin issued by Tether. Since the case began the value of the dollar-pegged tokens in circulation has grown from $2 billion to over $34 billion, according to Tether’s transparency page. 

The price of bitcoin has more recently gone on a tear, rising to a new all-time high over $58,000. 

“We are pleased that our customers have shown loyalty and commitment to our businesses over the past two years, while this investigation was ongoing. ... We look forward to both companies continuing to lead the industry and serve our customers,” Hoegner said.

Since the case entered the public sphere, Bitfinex has tried to recover the funds held by Crypto Capital held by law enforcement officials in Portugal, Poland and the U.S. It’s unclear how long it might take for these cases to resolve, given the different jurisdictions and the ongoing cases against Crypto Capital’s operators. 

Last year, Bitfinex filed for subpoenas in three different states, seeking to depose banks that may have held funds for the payment processor. 

At the time, Hoegner told CoinDesk through a spokesperson that the efforts were “aimed squarely at obtaining further information” about Crypto Capital and its funds. “Bitfinex is the victim of a fraud and is asserting its rights to funds taken by Crypto Capital through legal measures initiated in various countries.”

The exchange has been granted some of these subpoenas. The Bitfinex settlement is among the largest in crypto history. EOS builder Block.one settled with the SEC for $24 million in 2019 on allegations its $4 billion token sale was an unregistered securities offering. Telegram, at the time an aspiring digital currency issuer, also settled with the SEC for $18.5 million after raising $1.2 billion for the TON network, which was ultimately scrapped.

UPDATE (Feb. 23, 2021, 13:15 UTC): Updated with additional context.