Notes 11/24: FTX and Tether, Entrepreneurs Who Lunch (with FT)

Up until now, the fallout from FTX’s bankruptcy has largely remained manageable. Its casualties have been limited inside crypto and outside it. But a story in the New York Times yesterday is an omen that the exchange’s collapse will bring down bigger players.

According to The Times, Alameda Research – the crypto trading firm cofounded by FTX CEO Sam Bankman-Fried, invested in Farmington State Bank, a small bank in rural Washington in March this year. The bank shares management with Tether, crypto’s biggest stablecoin.

A financial connection between Tether, already a controversial stablecoin, and FTX could lasso the former into the latter’s messy bankruptcy process and force disclosures. Tether’s finances have been under suspicion for many years, and it has consistently refused to submit them to an audit.

To repeat, Tether is the world’s biggest stablecoin. If Tether falls, most of the crypto ecosystem will unravel.   

A Small and Conservative Bank

But back to Farmington bank.

Based in a rural community in Washington state, the bank has just one branch and three employees. Its customers consisted of farmers and, not surprisingly, it was a conservative bank, eschewing risky plays to grow profits.

According to a 2010 profile, it had deposits of $6.6 million and $5.7 million in loans. Three-quarters of loans on its books were agricultural loans, made to the surrounding community. Its books did not change much in the following decade: The Times writes that it had a balance of $10 million for most of the last decade.

FBH, Framington’s parent company, received an infusion of $11.5 million from Alameda Research in March this year and its deposits bulked up to $84 million in the third quarter. Out of that figure, $71 million came from just four accounts. We don’t know the details of those accounts.

The connection with Tether is through FBH’s chairman Jean Chalopin, who is also chairman of Deltec Bank, which services Tether. FTX, as I mentioned in an earlier post, was the biggest buyer of Tether’s USDT stablecoin last year.

Questions, Questions, Questions

There are, of course, many questions. How did Alameda Research, a crypto trading firm, manage to make an investment in an FDIC-insured company? What is the relationship between FBH and Deltec? In light of Alameda’s massive purchase last year, how are FTX and Tether related?

A regulated crypto ecosystem with public filings might have provided proof of a possible connection. But there is very little public information available in crypto. What’s more, its numbers are also suspect and do not add up.

But there are clues in Tether’s history of operations. Specifically, a 2018 research paper outlined how the stablecoin, which accounted for more than 70 percent of all crypto transactions back then, instigates bull markets in crypto by printing and distributing its stablecoins to exchanges. These transfers enable Tether’s management to convert its pretend stablecoin, with unverified reserves, into actual fiat currency.

The exact method of conversion, and the figures associated with it, are still unclear. Breadcrumbs from FTX’s filing could establish a trail between Tether and its associated entities.  

Brian Armstrong’s Lunch with FT

The account of Coinbase CEO Brian Armstrong’s recent lunch with the Financial Times is worth a read.

A former Coinbase employee told Hannah Murphy, FT’s San Francisco correspondent, that Armstrong is “like a guy riding a magic carpet, who thinks he’s magic and not the carpet.” So, she was already on guard. The paper’s Alphaville column has been a crypto critic for a long time and that makes him wary of her.

Armstrong doesn’t exactly come off as a self-absorbed magician in the interview. But he does tie himself in knots when making the philosophical and societal case for crypto.

What Economic Freedom?

The heart of his argument for cryptocurrencies is “economic freedom” for the masses. He says that that freedom is about challenging centralized government power and improving financial infrastructure. Then he says economic freedom and crypto are also important to reduce war and corruption and bringing about greater happiness. “They (citizens) can engage in free trade because crypto is inherently global,” he says.

That is quite some list and ranks up there with Twitter co-founder Jack Dorsey’s goal of bringing world peace using Bitcoin. The problem is that economic freedom is vague enough to allow for many interpretations.

Does it mean freedom from government? [Then why is Coinbase actively lobbying for regulation of the industry].

Is it the right to ‘own’ your money? [Then why do most Coinbase users forfeit custody of their crypto to the exchange?]

Is it freedom from the financial services industry’s centralized infrastructure? [Then why is Coinbase a centralized operation in a fast-decentralizing ecosystem?]

There are many more questions, of course, but the point I am trying to make here is that Armstrong’s argument for crypto seems meaningless and hollow. Murphy is astute enough to let him talk. She simply relays his words to us, knowing well that they don’t really make much sense.

A Billionaire’s Ambition

That said, Coinbase has been good for crypto. It has simplified access to an asset class that remains cloaked in technical jargon after more than a decade of introduction.

And Armstrong has been rewarded handsomely for his efforts. After his company listed in public markets last year, he reportedly purchased a mansion in Bel Air, a tony suburb of Los Angeles. His company is valued at $11.93 billion in public markets, as of this writing, despite reporting losses.

Coinbase’s public listing has also allowed easy access to money for it to grow and invest in startups. The company has lofty ambitions of becoming a Google for crypto by growing crypto use and development.

Through his company’s public listing, Armstrong told FT, he is helping the market “kind of understand crypto cycles better.” Becoming a billionaire and maximizing crypto reach to spread the gospel of “economic freedom”. How is that for effective altruism, Mr. Bankman-Fried?

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