This week, Bloomberg reported that the U.S. Attorney’s Office for the Southern District of New York (SDNY) has assigned U.S. Attorney Damian Williams to kickstart the Department of Justice’s ongoing probe into whether Tether’s parent company iFinex committed bank fraud while it was getting its USDT stablecoin off the ground.
In July 2021, Bloomberg reported that the DoJ was investigating whether Tether executives “concealed from banks that transactions were linked to crypto” during its early years. From its inception, Tether struggled to convince banks to enter into or sustain business relationships, as detailed in the $18.5 million settlement Tether and its affiliated cryptocurrency exchange Bitfinex reached in 2021 with the New York Attorney General (NYAG).
The SDNY are the unquestioned leaders in probing financial malfeasance and, as far as law enforcement goes, Williams is a crypto veteran. Williams has played significant roles in investigating money laundering by senior executives at Bitmex, insider trading at the Coinbase (NASDAQ: COIN) exchange and NFT marketplace OpenSea, as well as crypto tax cheats and numerous other crypto-related shenanigans.
Predictably, Tether released a blog post accusing Bloomberg of being “desperate for attention in an industry that they just do not understand.” Tether insisted that Bloomberg’s reporting “isn’t even factual” and claimed that it was “business as usual” at the unaudited-since-inception firm while sneaking in a promo for an in-house app that aims to combat “the extreme centralization of news.”
Bear in mind that iFinex companies have a history of downplaying bad news while publicly fudging facts agreed to in settlements like the one with the NYAG in 2021. At the time, Bitfinex claimed that “there was no finding that Tether ever issued tethers without backing,” despite the NYAG stating for the record that Tether “for periods of time held no reserves to back tethers in circulation at the rate of one dollar for every tether.”
Short people got… no money
Tether has a history of front-running bad news by minting new USDT tokens and, sure enough, a billion new USDT appeared the same day as the new Bloomberg report. Another billion were minted one week earlier on October 24, and subsequent events have only reinforced Tether’s reputation for providing the suds to wash-trade ‘crypto’ tokens like BTC to inflate their fiat values.
On October 24, BTC was trading around US$19,300, but that value rose to $20,300 on October 25—the first time BTC had topped $20,000 since the month began—and rose again to over $20,800 on October 26. (The sudden gains were even more pronounced on Ethereum’s ETH token.) While this temporarily delighted BTC’s laser-eyed ‘HODL’ hordes, the effect was short, as the token’s value dropped to $20,100 by October 28.
The impact on moon-boys’ moods may have been temporary, but the brief pump had more disastrous results for individuals who held short positions on BTC and ETH. The situation was particularly bad for those who’d shorted tokens on the FTX exchange.
While BTC and ETH were pumping, FTX recorded more than $1 billion in liquidated positions over a two-day span, the largest liquidation event in the exchange’s four-year history. The vast majority of these liquidations punished investors who’d bet against a rise in BTC’s fiat value.
By comparison, Binance—the leading exchange by derivative trading volume – reported barely one-tenth the liquidations over the same span. This, despite Binance accounting for over half of all derivative value wagered, while FTX’s share struggles to exceed single-digits.
If you’re wondering where we’re going with this, remember that FTX’s affiliated market-maker Alameda Research—which is 90% controlled by Sam Bankman-Fried (SBF), who also controls 60% of FTX—is historically among the largest recipients of USDT. As of October 2021, Alameda had been issued nearly $37 billion worth of USDT, of which over $30 billion was immediately forwarded to FTX.
Under any sensible regulatory scheme, no financial institution—let alone one that allegedly reaped $1 billion in profit last year—would be permitted the type of tangled coziness that FTX and Alameda enjoy. Protestations of ‘arms-length’ operations aside, the incestuous relationship between these two entities encourages speculation as to what information Alameda may be privy to regarding how other customers are trading on FTX.
As Doug Henning said, it’s an illusion
In addition to FTX/Alameda’s USDT addiction, it seems both companies have embraced Tether’s capacity to print new ‘money’ out of thin air. On Wednesday, a report emerged based on an internal Alameda financial document indicated that, of the $14.6 billion in assets Alameda held on its balance sheet as of June 30, the single biggest item is $3.66 billion in “unlocked FTT,” a token issued by none other than FTX itself. The third-largest asset is $2.16 billion worth of “FTT collateral.” Other tokens of similarly dubious value make up a good chunk of the rest.
That FTX/Alameda might be a financial Potemkin village may help explain why SBF backed off the “dumb quote” he made this spring that suggested he could spend up to $1 billion in U.S. political contributions through the 2024 presidential election. It could also explain why most of FTX’s much-publicized acquisitions and bailouts of failed crypto companies are later revealed to involve only a tiny portion of actual cash.
It could also explain why SBF is constantly seeking to raise additional money from venture capitalists despite all those billions in profits FTX is supposed to be generating. Finally, it might explain why FTX is the place where derivatives traders go to get rekt.
SBF has long relied on a squeaky-voiced, frizzy-haired, bean-bag-bedded persona to ingratiate himself with U.S. mainstream media, politicians and regulators. He’s also made much of his alleged commitment to ‘effective altruism,’ which basically involves doing whatever it takes to become enormously rich in order to do very big and wonderful charitable projects at some point in the distant future, which has the added benefit of requiring one to do very little in the present.
Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple,
Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.
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