Oct 30, 2023

Bankman-Fried Trial Renews Conjecture About Alameda’s $40 Billion Tether Stablecoin Pile

Emily Nicolle, Bloomberg News

Sam Bankman-Fried, co-founder of FTX Cryptocurrency Derivatives Exchange, leaves court in New York, US, on Wednesday, July 26, 2023. Bankman-Fried faces a total of 13 counts ranging from conspiracy to commit wire fraud to conspiracy to violate the anti-bribery provisions of the Foreign Corrupt Practices Act, and faces more than 155 years in prison if convicted of all of them - although any sentence is likely to be much lower if he is found guilty. , Bloomberg

(Bloomberg) -- As the trial of FTX co-founder Sam Bankman-Fried unfolds, the relationship between his exchange’s trading outfit Alameda Research and stablecoin issuer Tether is under the microscope of crypto sleuths.

Alameda was Tether’s largest non-exchange customer between 2020 and 2022, with blockchain data showing it received almost $40 billion in transfers of its stablecoin USDT directly from the company — equal to roughly 20% of all USDT tokens ever issued.

The vast amount has raised questions about where Alameda got the money to fund the issuance of the stablecoin, which is typically used as a dollar proxy and is the world’s most traded cryptocurrency. That even led to speculation Alameda might have used other means to help fund the purchases, similar to its bets on startups or dealings with lenders.

Tether’s incoming chief executive Paolo Ardoino appeared to clear up the mystery in a social media post this month, reiterating an earlier statement that the hedge fund wired dollars to Tether in exchange for the cryptocurrency. Still unclear, though, was exactly how Alameda sought to use those holdings.

Posts from former Alameda and FTX executives including Bankman-Fried suggest the hedge fund was procuring large amounts of USDT in order to benefit from price differences in the token on exchanges, or facilitate buying for other traders and companies. Where banks are often wary of large crypto-related transactions, traders and companies may instead seek alternative routes to getting their dollars onto blockchain networks.

“This was one major on-ramp, maybe the major on-ramp” for traders seeking access to USDT, said Jonathan Reiter, CEO of blockchain analytics firm ChainArgos. “It is certainly peculiar that FTX, which is now alleged to have run an essentially fraudulent exchange, still somehow managed to intermediate tens of billions in one-way flow from USD into USDT.”

FTX was one of the world’s most prominent crypto exchanges prior to its collapse into bankruptcy in November last year. As its chief executive, Bankman-Fried stands accused of orchestrating a years-long scheme to defraud its customers and investors — allegations which he denies. Past claims by Bankman-Fried that the exchange and Alameda operated as separate companies have unraveled during the trial, with former co-chief executive Caroline Ellison testifying that Alameda had borrowed around $13 billion in customer assets from FTX by June 2022.

Read more: The Mystery of FTX’s Missing $9 Billion Unraveled at SBF Trial

Alameda’s holdings of USDT and its relationship with Tether have not been covered in detail in Bankman-Fried’s trial. Neither Bankman-Fried, Ellison nor any other FTX or Alameda executive have been charged with anything related to these holdings.

As FTX began to collapse in November last year, Ardoino said Tether had no exposure to FTX or Alameda. Tether representatives didn’t respond to a request for comment on the data and its relationships with both companies.

Mints and Redemptions

Minting is the process of creating tokens on a blockchain, whereby a trader will send funds to an issuer and receive the corresponding amount in return. Alameda received around $39.6 billion in USDT tokens from Tether’s treasury wallet, according to on-chain data tracking its wallets, as labeled by the Arkham Intelligence platform.

Meanwhile wallets connected to FTX sent $3.9 billion in USDT tokens back to Tether, all during the crash of TerraUSD and Luna in May 2022 — meaning that Alameda largely transferred the tokens it received to other entities, rather than cashing it out for dollars with Tether directly. It’s worth noting that this may not record all of FTX or Alameda’s redeemed tokens due to the way Tether swaps its coins between different blockchains, according to Coinbase’s Conor Grogan, who updated Alameda’s USDT total after most of its transactions were first reported by Protos in 2021.

Right now, Tether has around $84 billion in USDT in circulation — making Alameda’s chunk worth about 47% of that pile. But in order to get a more accurate perception, it’s important to consider that figure in the context of how many tokens have been minted to date.

Finding that data reliably is tricky due to the frequency with which Tether swaps USDT across blockchains. A rough estimate using transactional data for USDT’s main two networks — Ethereum and Tron, which support about 98% of USDT’s current circulation — shows Tether has issued about $190 billion in USDT between its inception and Oct. 20, according to analysis by ChainArgos.

Conversely, Tether has redeemed about $108 billion in its lifetime. The difference is about $82 billion, compared with around $84 billion in circulation. The discrepancy can be attributed to the amount of USDT trading on other blockchains, according to ChainArgos.

Relationship with Tether

Alameda only ever sent funds to Tether in dollars, Ardoino said. This means its relationship with the issuer was slightly different to how Alameda tended to handle other transactions like venture capital deals, where it relied heavily on cryptocurrencies that either Alameda, FTX or Bankman-Fried had a major hand in establishing, like Serum or FTX’s own FTT token.

To mint or redeem USDT, FTX would transfer funds via its own accounts at Tether’s Bahamas-based bank Deltec Bank or a US-based correspondent bank, Bankman-Fried said in a series of social media posts in 2021. A popular solution utilized by Tether and other crypto firms were banking networks established by Signature Bank and Silvergate Bank, both of which collapsed earlier this year.

Read more: Why Crypto Needs Banks to ‘On-Ramp’ Client Funds: QuickTake

The reason why Alameda minted so much USDT may never be fully known due to the firm’s subsequent collapse, but social media posts from a former executive can provide some guidance.

One of the most popular suggestions is that like many other trading firms, Alameda was seeking to profit off the difference in USDT’s value on various exchanges — a process known as arbitrage. In this situation, Alameda would buy USDT for $1 directly from Tether and then sell it on exchanges where USDT was worth slightly more than $1 due to market demand on that particular platform.

According to Alameda’s former co-chief executive Sam Trabucco, the firm did this “a lot,” and as a result worked closely with Tether’s staff during this time. Ardoino also suggested in his post that arbitrage trading was Alameda’s main purpose.

Unlike his former colleague Ellison, Trabucco has not been charged in connection to Bankman-Fried’s trial, nor has he been named by lawyers as a planned witness for either side of the case.

But blockchain data perhaps paints a different picture than Trabucco suggests. “This does not really look like a market-maker or trading firm as those terms are normally used. It looks more like a money changer,” said Reiter.

Inflows and outflows from Alameda’s main wallet each month were almost equal, Reiter said, indicating that the main purpose for the mints was most likely to facilitate USDT purchases on behalf of FTX and its customers. This is supported by Bankman-Fried’s statements that FTX would transfer funds via bank accounts to Tether, in addition to evidence submitted to his trial which alleged that FTX often relied on Alameda’s bank accounts for exchange purposes.

“These guys were running a one-way USD to USDT bureau de change,” said Reiter, adding that any USDT that Alameda actually held on to was never in large size relative to its minting activity.