Is Tether's business model just smoke and mirrors? Was Alameda Research just built on nothing?
There have been a lot of things that have been revealed and looked at in the wake of the FTX crash. And I think this one might have snuck under the radar of most people. What I am talking about is a report that recently came out where they looked at who has been issued the Tether issued. And it was an interesting read in and of itself. But I did not think much of it until a second puzzle piece sort of clicked into place.
Who has gotten all the Tether
There have been a total of $108.5 billion Tether issued. And of these, the absolute vast majority have been sent to what they call "market makers". Their share of the Tether cake is a staggering $96.98 billion. In the report, the term "market makers" is defined as "entities that have received multiple individual transactions from Tether Treasuries of $100 million USDT or more."
They go on to say that traditionally the term market maker is used to describe an entity that "profit on the spread of assets (the difference in price between buy and sell orders). Since it’s unclear which entities in the crypto ecosystem are strictly market making and which also utilize high frequency trading, proprietary trading desks, or operate venture capital funds, this is our attempt to delineate between them (albeit with a broad definition)".
When we look at the entities that have gotten the largest share of the Tethers there are two that stand head and shoulders above the rest. These two are Alameda Research and Cumberland Global. They have gotten almost $36.7 billion respectively $23.7 billion. The third largest is iFinex and they have been sent at least $4.5 billion. Meaning it is almost a 5x up to Cumberland.
What is the issue?
Now that we know who has gotten the tether. What seems to be the issue? I am going to focus solely on Alameda Research here. This is because both they and Cumberland Global have the same type of pattern. I will assume they are doing business in the same way.
As we know from the leaked financial documents from Alameda, the one that started the crash. We know they were pretty much insolvent and while they showed assets totaling $14.6 billion most of this was either loans, $7.4 billion, $FTT tokens or Crypto in other of SBFs pet projects. This means that there was nothing really with any value to it. There was no large chunk of Tether, or other stablecoins, just sitting there. In fact, in the reports, I read I did not find any mention of Tether at all. Neither was any large amount of USD.
Reenactment of what was happening at Alameda Research HQ during 2021
But if we look at the Tether report. Alameda was sent almost $36.7 billion in Tether. And what is even more strange is that $31.7 billion (86%) was received in the past year, 2021. This leads me to one question, where has all this money gone? Even if all they did was buy $FTT tokens at the peak price of $80 it would mean that they still should have almost $21 billion in pure $FTT tokens.
If we look at Bitcoin it has also lost 70% in value from its peak. Very similar numbers to the $FTT token. But Alameda had only $14.6 billion, and of that almost $8 billion in loans. So now the question becomes where has all the money gone? Have Alameda been doing deals that have been so subpar that instead of having assets worth $21 billion they have assets worth only $7 billion. Can they have been that bad at trading or making deals? Mind you that this is during a bull market as well.
How is Alameda getting their Tether?
This appears now to be the question. How is Alameda getting their Tether? What are they using as collateral? Because if we are to believe Tether, the only way to get 1 $USDT is to send them 1 USD worth of cash or "financial peppers", a type of short-term debt. In December Tether was backed by 83.74% of commercial papers. And has spent most of 2022 trying to slash its holding of commercial peppers. It is very much likely that it was this that was used by Alameda to secure their Tether payments or transactions.
https://twitter.com/CasPiancey/status/1594471917012254720
This is what Sam Trabucco former co-CEO of Alameda had to say when he was asked bout this very question in an interview. At the time there was outrage from SBF and other for Coindesk ambushing Sam with this question. Now in retrospect. I would say this speaks volumes.
By the looks of things they were more than right to ask
In October 2021 it was also confirmed that Tether in fact issues loans with Bitcoin as collateral. And have done so to Celsius. It was later reported that Tether suffered no losses when Celsius collapsed as at the time the loans were overcollateralized to the tune of 130%. Meaning the Bitcoin was worth more than the amount of Tether they lent to Celsius.
I read that Tether do give these type of loans but at a 2:1 security in Bitcoin. But I have not been able to verify this in my research. But if we use that number or the 1.3:1 it would mean that Alameda has had to put up between $41-63.4 billion in Bitcoin as security for all the Tether they received.
Well, that is only if they kept all the Tether. Maybe they sent some back, borrowed, send it back, and so on. Good point, in the report they say that due to the fact that most Tether that was sent back, got sent back through exchanges. It makes it trickier to see who is sending what. More than 80% of the returned Tether was sent in this way. But they have applied the same division with market makers as they did initially. And then the date shows this.
$23 billion in USDT (62%) was returned in lots over $100 million (market makers).
$12.7 billion (34%) was sent in batches between $10 million and $100 million (funds and companies).
$1.5 billion (4%) flowed into Treasuries in sums under $10 million (individual traders).
The amount of Tether that has flown back to Tether amounts to $37.2 billion. If we disregard the fact that it is most likely that a market maker would pay back loans in a similar fashion as how they revived them. And just assume that Alameda has repaired a share that is equal to their share of Tether issued. Then we get that 33.8% of the repaid Tether would come from Alameda. That gives us just over $12.5 billion. Where has the rest of the $24 billion disappeared to? It is definitely not among the Alameda assets, that is for sure. And it is not in FTS either because all that is there is an $8-10 billion black hole. Even if all Tether that has flown back was repayments from Alameda it just barely breaks even.
There is one part of the report that can add a bit of uncertainty to these numbers. And that is "While Protos has identified more than 70% worth of USDT ever issued". This is in the "Tether returned to Treasuries (inflows)" section of the report, at the end. And I have to admit I am not sure if this is in regards to all Tether issued, or if they only have been able to identify 70% of the returned Tether.
If it is the latter, it would mean that the total amount of Tether returned is $53 billion. And that would put Alameda´s share at just shy of $18 billion instead. This still does not paint Alameda or Tether in a good light. But I do find this unlikely given that the amount of Tether in circulation currently is $65.5 billion.
Ladies and gentlemen, get your Tether snake oil right here, special price just for you. Pay for two and get one.
But it is looking more and more to me that Tether's business practices at best questionable and at worst look like a snake oil sailseman. And it raises so many more questions surrounding Alameda Research and FTX. What exactly was going on over there and where have all the money gone?
Are you able to make more sense of this than I am? Because to me, it is looking pretty bad. But I might have made some faulty assumptions. If you find any please let me know. And please sound off with you're thoughts on this in the comment section down below. I would love to hear your thoughts on this. If you would like to support me and the content I make, please consider following me, reading my other posts, or why not do both instead.
See you on the interwebs!
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Resources
https://protos.com/tether-papers-crypto-stablecoin-usdt-investigation-analysis/
https://decrypt.co/100289/tether-has-reduced-commercial-paper-stablecoin-backing-last-6-months-cto
