FTX’s Mysterious Transfers and Tether

One of the most interesting pieces of news to come out from FTX’s collapse in recent days is the exchange’s transfer of $250 million – one-fourth of its total revenue figure for last year – to an “unnamed related party” for “software royalties”. That party, according to the Wall Street Journal, is the primary shareholder in “several related entities who do business with the exchange” at the same time. The company also has a “related party receivable” of $1.2 billion and a liability of $362 million payable to a “related party” again.

It is already clear that the numbers in FTX’s public balance sheet don’t match up and that there is a big accounting hole. Money seems to have vanished from its balance sheet. News of transactions with related parties adds further mystery, and a possible resolution, to the case of missing cash.

Who Is the Related Party?

Considering how small the crypto ecosystem already is, there are two possible candidates who fit the bill of FTX’s related party and satisfy the condition of being primary shareholders in many crypto entities.

The first, and most obvious, choice is the Digital Currency Group (DCG) . Its operations in crypto span the gamut – trading to lending to media. It is also a prolific investor in crypto-related startups and participated in FTX’s early funding rounds.

The extent of FTX’s relations with DCG, beyond the initial investments, are not clear. Genesis is, possibly, the biggest market maker in crypto but Alameda Research made markets at FTX.

Another not-so-obvious candidate is Tether. The world’s biggest stablecoin is the most liquid ramp to trade cryptocurrencies, especially thinly traded altcoins that inflate trading volumes at exchanges. Through periodic disbursements of its stablecoin, Tether has become an important part of operations at many exchanges.

The Tether Connection to FTX

A report in online publication Protos last year stated that Alameda purchased Tether worth $36.7 billion, or roughly 37% of the overall Tether numbers issued in 2021, making it the stablecoin’s biggest buyer. Tether, of course, has refuted the suggestion it has exposure to the FTX contagion through the sale.

On a blog on its site, the company stated that “Tether has no outstanding loans of USDT, of Tether’s reserves, or of any other funds whatsoever.” But its assertions must be taken with a grain of salt because it has lied about its reserves in the past. It has also refused to submit itself to a comprehensive audit, meaning any holes in its balance sheet or reserves are not public knowledge.

One could very say that a $250 million transfer is hardly adequate payment for stablecoins worth billions of dollars. As with most figures in crypto, however, the Tether issuance numbers are also suspect.

For one, it is hard to see how Sam Bankman-Fried’s companies could have scrounged up enough cash for $36 billion worth of Tether tokens. FTX had revenues of $1.02 billion in 2021 while Alameda had net assets worth $14.6 billion in June, according to Coindesk, and most of it consisted of the FTT tokens. [The research firm became a willing participant to the charade, when its executives refused to disclose the identity of the bank used to process transfer of USD, as payment for Tether’s US dollar-denominated stablecoin USDT, to the company]. In other words, the only plausible scenario in which the transaction could have taken place would be when the publicly stated numbers mentioned are significantly lower.       

Tether’s Exposure

What does all of this mean?

It could possibly be a denouement to the story about crypto’s excesses. As I mentioned earlier, Tether has a massive sprawl across the crypto ecosystem because it is the main provider of liquidity for altcoins. Revelations about its exposure to the current crisis will dry up remaining trading appetite for them and wipe out billions of dollars from crypto’s perceived market cap.

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