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Bitfinex scandal The dark side of Zug’s Crypto Valley

Fireworks over Zug

The fireworks over Zug's Crypto Valley have so far been celebratory, but might something more explosive be brewing? 

(© Keystone / Alexandra Wey)

Canton Zug has been positioning itself as the global capital of cryptocurrencies, but accusations of fraud engulfing cryptocurrency markets could curb its ambitions. 

In the United States, legal proceedings implicating cryptocurrency exchange platform Bitfinex in a $850 million (CHF841 million) fraud scandal are forcing Zug’s so-called “Crypto Valley” to examine its dark side. 

On April 24, 2019, New York state public prosecutor Letitia James opened proceedings against cyrptocurrency exchange platform Bitfinex, which is accused of having hidden some $850 million belonging to its clients. 

Bitfinex is one of the few exchange platforms to invest in the Tether cryptocurrency, which was supposed to guarantee parity with the dollar through a cash reserve of greenbacks equal to the amount of Tether issued.

 And there’s the rub: $850 million has disappeared from the reserve managed by Bitfinex. At the centre of suspicions is Panama company Crypto Capital, which had been tasked with managing the dollar payments of the exchange platform, but which apparently ceased doing so during 2018.

The New York prosecutor has ordered Bitfinix to hand over all documents relating to the transfer of funds to Crypto Capital. 
The problem, however, is that the structure of Crypto Capital is particularly opaque. 

The company’s website simply mentions an address in Zug and claims to be part of Swiss company Global Trade Solutions AG. The commercial register indicates that the company, previously called Semacon AG Software Engineering, changed its name in 2016, registering an address belonging to Zug law firm Goldblum & Partners and then with trustee STAX AG.

US businessman detained

To trace the path of the lost money, perhaps one should turn towards Reginald Fowler. The American businessman, known for his activism in the football world, was accused of fraud and placed in preventative detention in April 2019. 

The indictment, which also targets Israeli Ravid Yosef (currently on the run), has some strange similarities to the Bitfinex case. Notably, Fowler is accused of having set up “an illegal bank for the benefit of cryptocurrency trading platforms” and of having misappropriated $850 million in 2018.

The court also seized funds held in five US-based HSBC accounts in the name of Reginald Fowler and the company Global Trading Solutions LLC – a name which echoes that of Global Trade Solutions AG. Another troubling coincidence: the Swiss commercial register names Reginald Fowler as administrator of Zug-based company Spiral Global Trade Solutions AG. 

According to American authorities, Reginald Fowler is still in possession of several million dollars linked to the fraud. The funds are believed to be hidden in some 60 foreign accounts. The indictment also mentions other conspirators, the identities of whom have not been released, based in Canada, Israel and Switzerland. 

FINMA slow to react

In Switzerland, it was a month before the Swiss Financial Market Supervisory Authority (Finma) acted on the information revealed by the New York prosecutor’s office and placed Global Trade Solutions on its blacklist, on May 27, 2019.

Blacklisting occurs when “Finma investigations lead to the belief that the provider presents an imminent and important danger to its investors”. 

Gotham City

Founded by investigative journalists Marie Maurisse and François Pilet, Gotham City is a weekly subscriber-based judicial newsletter that specialises in economic crime. Each week it reports on Swiss legal cases involving fraud, corruption and money laundering connected to the Swiss financial industry.

Each month, Gotham City selects one of its articles and offers it free to the readers of swissinfo.ch.

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Spiral Global Trade Solutions AG has not yet been subjected to the same treatment. The company is administered by Reginald Fowler and can still legally operate. 

Finma declined to comment. The Public Prosecutor’s Office indicates it has not “at this stage opened any criminal procedure” in the case. 

It’s also worth noting that aside from Global Trade Solutions AG, three other businesses active in the cryptocurrency market - Coin Chambers, Crypto de Suisse and Lapo BCAG - were blacklisted between May 27-29, 2019. However, there is no evidence that these companies are connected to the Bitfinex/Tether case.

Embarrassment for Crypto Valley

This case of fraud comes at a moment when Switzerland is trying to position itself as a global leader in cryptocurrencies with its “Crypto Valley” in Zug. A report published in February 2019 in French daily newspaper Les Echos and titled “How Switzerland wants to become the crypto nation”, discusses the country’s willingness to specialise in crypto industries as a means of “find[ing] new sources of growth” for the future “beyond managing the fortunes of the ultra-rich”. 

Canton Zug offers businesses active in the sector attractive tax rates, with a corporate tax rate of around 12%. Recently Facebook also announced it would launch its cryptocurrency Libra via a Swiss foundation.

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