FTX and Alameda: What role does Tether play in the drama surrounding SBF?

In the thriller about FTX, Sam Bankman-Fried and Alameda Research, new developments lead to old acquaintances. What role did Tether (USDT) and Luna play in the whole story?

Sam Bankman-Fried (SBF), FTX, Alameda Research: A love triangle currently struggling. SBF has to go on trial, things are not looking good for him. The way things are developing, he could spend the rest of his life behind bars. But recent evidence suggests that entanglements run much deeper in the crypto sector than previously thought. How are FTX, Alameda, Tether and Luna intertwined? A search for clues.

Connection between Alameda Research and FTX

The connections between Alameda Research and FTX are well documented. Without the generous privileges Alameda enjoyed at FTX, the theft of billions of dollars in customer funds would not have been possible. SBF had stretched a deliberate web over FTX to divert client funds through Alameda and thus enrich itself enormously.

For example, Alameda had immunity from the liquidation of margin calls. According to the latest information, there was even a loophole for Alameda in the FTX code programmed. This would have allowed Alameda to withdraw billions from his FTX account.

According to the latest information, SBF/FTX/Alameda Research was in state To use this non-existent money elsewhere. For example, to buy stablecoins such as USDT.

Digression: how Tether works

Tether (USDT) is the third-largest cryptocurrency by market capitalization and is a stablecoin. This means the cryptocurrency's "price" should be stable, unlike conventional coins. The promise: For every Tether issued digitally, one real U.S. dollar is deposited. The token promises value stability. This makes it easier to trade cryptocurrencies on exchanges. You can instantly exchange between cryptocurrencies and U.S. dollars without having to use banks. This benefits not only users of the exchanges, but also the exchanges themselves.

To issue new Tether units, you must transfer money to Tether, which in turn issues new USDT. This process is also known as minting.

But Tether Limited, the company behind stablecoin, is extremely controversial. In the past, there have been repeated suspicions that the company was mining new tokens without adequate coverage. In addition, there are still suspicions that the company manipulated the Bitcoin price in 2017 by printing new Tether units unchecked.

As it stands, stablecoin also plays an important role in the entanglements between FTX, SBF and Alameda.

Tether's role in FTX and Alameda.

As analyzed by crypto news platform Protos.com in 2021, Alameda Research at the time had mined USDT 37.2 billion by November 2021. Alameda Research was considered one of Tether's largest customers at the time.

As Conor Grogan, Head of Product Business Operations at Coinbase, presents in a recent series of tweets, he claims to have found more Alameda wallets that correct the protos.com figure to 39.55 billion USDT. For reference, we're talking about half of Tether's current market cap.

One of the absurdities of the case: Alameda did not have as many assets at that time as it had mined Tether. So where did the money come from?

Also notable is the day of "redemption," i.e., the conversion of USDT back into U.S. dollars. Thus, $3.9 billion was paid out during the same period in which Terra Luna went under.

That Alameda needed a cash infusion just at that moment would not only fit the timing. As the New York Times reported in December 2022 had reported, SBF was by then already suspected of having been largely responsible for Luna's crash. For that, it needed money.

FTX and Terra Luna: what had happened?

TerraUSD, the stablecoin in the Terra universe, was flooded with sell orders shortly before the collapse. But these could not be executed, leading to the cryptocurrency's collapse.

As Grogan's comments and consistent media reports suggest, Alameda was behind all those sales orders, gambling, moreover, on Luna's price drop. But the alleged coup went awry: instead of just dropping in price and giving Alameda a fat profit, the whole system collapsed.

Mysterious billions and entangled crypto companies

Let's recap: According to the latest information, Alameda Research, the company believed to have played a role in the FTX disaster, had issued more tethers than it could have. Alameda had some of these tethers converted into U.S. dollars when the Terra crash occurred. This is another scandal for which Alameda may yet have to answer for.

It is not yet clear how closely Tether was involved in the whole story or how much the stablecoin company knew about it. One thing is clear, though: if Conor Grogan's conclusions are correct, Tether should never have released the USDT in the first place. And according to all the information available so far, it is not entirely out of the realm of possibility that Tether is issuing tokens for which there is no coverage.

This raises the question of where the US dollars are on one side and the USDT on the other. If they, or even just part of the USDT, are still held by Alameda, it could have far-reaching implications for the crypto sector. Especially if Tether would have to repay the USDT. This would not only pull a large amount of liquidity out of the crypto sector. It is quite possible that this would trigger further investigations into Tether. It would not be the first time.