Dive Brief:

• A New York-based law firm filed a class-action suit Sunday against Tether and its affiliated crypto exchange Bitfinex, accusing them of "propping and popping the largest bubble in history," leading to the disappearance of $265 billion in crypto wealth.
• The suit came a day after the companies published statements indicating they were aware of an "unreleased and non-peer reviewed" paper claiming market manipulation. "Bitfinex vigorously disputes [the paper's] findings and conclusions ... which rely on flawed assumptions, incomplete and cherry-picked data, and faulty methodology," they wrote.
• Tether and Bitfinex have faced legal action before. New York's attorney general in April accused Bitfinex of losing more than $850 million and using Tether funds to secretly cover the shortfall, according to Cointelegraph.

Dive Insight:

In a Twitter post Monday announcing the suit, Kyle Roche, a founding partner of the law firm Roche Freedman, which filed the documents in the U.S. District Court for the Southern District of New York, said Tether and Bitfinex "manipulat[ed] the cryptocurrency market to create the largest bubble in history."

Because Tether's owners also own the Bitfinex exchange, they can execute effectively unbacked Bitcoin buy orders that don't cost them anything with unbacked Tether, the suit claims. Tether claimed to be backed 1:1 by fiat reserves, but Bitfinex revealed this year that it may also use other assets to support its value, according to Bloomberg. The buy orders can artificially boost the crypto market, the complaint said.

Tether and Bitfinex said they anticipated legal action and vowed to defend themselves.

"We fully expect mercenary lawyers to use this deeply flawed paper to solicit plaintiffs for an opportunistic lawsuit, which may have been the true motive of the paper all along," the companies wrote Saturday on their websites. "In advance of any filing, we want to make clear our position that any claims based on these insinuations are meritless, reckless and a shameless attempt at a money grab."

Tether and Bitfinex stood their ground in this spring's New York case. They sought dismissal in May, saying the attorney general doesn't have jurisdiction over them because they "do not allow New Yorkers on their platform." A judge in July extended the AG’s injunction to give himself more time to consider Tether and Bitfinex's argument.