In a surprising turn of events, cryptocurrency exchange Bitfinex has admitted that it borrowed funds from Tether to cover an $850 million loss, meaning that the so-called stablecoin is no longer 100% backed by U.S. dollars.

The current round of drama started April 25 when the New York Attorney General’s office announced that it had filed a lawsuit alleging that the company and its related entities engaged in “undisclosed, conflicted transactions to cover Bitfinex’s losses by transferring money out of Tether reserve funds.” Those losses are said to have come from the theft of funds by Crypto Capital Corp., a Panama-based payment processing firm.

Responding to a court demand that Bitfinex and Tether provide certain documents by May 3, company General Counsel Stuart Hoegner said in an affidavit that as of today, “Tether has cash and cash equivalents (short-term securities) on hand totaling approximately $2.1 billion, representing approximately 74 percent of the current outstanding tethers.”

Stablecoins, of which the Tether USDT has long been the leader in the space, are meant to hold financial reserves equal to the value of the tokens issued — at least, that has been the usual structure of a stablecoin and the expectation of those trading in them.

CoinDesk reported that a different lawyer representing Tether told the court in a memorandum of law in support of the defendants’ order to show cause that Tether does not need legally need to hold $1 for every USDT issued.

“According to the Attorney General, the line of credit needed to be frozen because it improperly impairs the reserves Tether would use for redemptions,” the memorandum stated.” The Attorney General appears to believe that Tether must hold $1 in cash fiat currency for every dollar of Tether. These allegations are wrong on multiple levels.”

This is the first time Bitfinex and Tether have admitted to dipping into Tether’s reserves, but it’s not the first time they’ve been accused of not holding sufficient U.S. dollar reserves.

In January 2018 the U.S. Commodity Futures Trading Commission launched an investigation into whether sufficient reserves were actually held with the U.S. Department of Justice launching its own investigation in November. It’s not clear whether those investigations remain ongoing, but if they are, Bitfinex and Tether’s New York lawsuit may soon become the least of their troubles.

On the New York suit, the company has asked the court to stay the original order and issue an Order of Show Cause that would require the New York Attorney General to prove its case in court unless it vacates or modifies the order.

Whereas the price of bitcoin has previously taken a hit when negative Tether news has made headlines, today’s admission did not follow history because the market had already factored in the allegations. Bitcoin sat at $5,308.11 as of 8:30 p.m. EDT, up 3% over the last 24 hours.

Image: 30478819@N08/Flickr