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AI is the hottest thing in 2024. Nvidia GPU chips are in high demand and shortages are common, so many AI startups rent computation from cloud providers instead of buying their own chips.
If you’re an AI cloud provider, you could stand to make a lot of money.
CoreWeave, once a little-known bitcoin miner, is now a $19 billion purported value unicorn that provides GPU access to AI startups. Other crypto miners, Hut8, Core Scientific, Hive, and Riot, are trying to tap into the AI gold rush by converting their data centers to AI. [FT, archive]
Northern Data also wants to get in on the gold rush, so it devised a cunning plan: pivot to AI and get rich in an IPO.
But Nvidia won’t take diluted shares of company stock for its cards. So Northern Data needed a partner with lots of cash. They found one in Tether, everyone’s favorite stablecoin issuer.
And in Northern Data, Tether found … a banker of sorts.
We talked about the history of Northern Data in part I of our series. Here, we’ll discuss their partnership with Tether and plans to strike it rich in an IPO. In part III, we’ll dig into the lawsuit against Northern Data by its former directors.
A perfect backer
Northern Data had a plan: pivot to “AI” and IPO for billions.
But first, they needed Nvidia cards to grow their cloud computing business — and convince investors that their money-losing operation had profit potential if they spun it off.
If you believe their unaudited claims, Tether is sitting on piles of cash. They’ve been boasting about huge profits from interest earned on US Treasury holdings and market gains on bitcoin and gold. They claim to be so loaded up now that they’re looking for investments.
In June 2024, Tether said they planned to put $1 billion into investments over the next twelve months. In the last two years, they’ve invested $2 billion, with Northern Data as their single largest beneficiary. [Bloomberg, archive]
What is Tether getting in return? Northern Data wants to combine its cloud business and its data center business. If they can IPO the new entity, the stock could be worth multiples of the current value of the two divisions.
Tether also has the prospect of gaining access to the bank accounts of a publicly traded company with businesses in Europe and the US. (Northern Data AG is listed on the Munich Stock Exchange.)
Tether’s banking dilemma
Tether has 112 billion tethers (USDT) sloshing around in the crypto markets, allegedly backed 1:1 with US dollars and also with squirrels and confetti. But quite a bit is Treasury bills and things very close to actual cash.
US banks really, really hate Tether — they’re not happy with all the crime, money laundering, and sanctions evasion. Even if Tether has the cash they claim, they still have the problem of moving money to and from customers without banks freezing their accounts.
Tether was cut off from the US banking system in 2017. This has left Tether resorting to clown banks like Deltec and playing cat-and-mouse games to keep banking access. If Tether wants to stay afloat, they need to find ways to move large sums of money from parts of the world where they don’t need it to low money laundering risk countries, like the US, where they can more easily wire funds to other jurisdictions.
After a few years of problems (that lost them $850 million), Tether made very good friends with Sam Bankman-Fried, who founded crypto exchange FTX and its trading arm Alameda Research. Bankman-Fried and Tether formed a partnership that fueled a new bitcoin bubble. In 2021 alone, Tether printed $60 billion worth of tethers, pushing bitcoin to new all-time highs. FTX grew to become the third-largest crypto exchange in the world.
Before it collapsed like a clown car, FTX served as Tether’s main financial launderette. Alameda Research was one of Tether’s largest non-exchange customers. Between 2020 and 2022, Alameda received almost 40 billion tethers directly from Tether. [Bloomberg, archive]
“These guys were running a one-way USD to USDT bureau de change,” Jonathan Reiter (Data Finnovation) of ChainArgos told Bloomberg.
FTX and Tether used the same money launderers and they all worked together to prop each other up. Their shared bank, Deltec, is also alleged to have falsified invoices on behalf of FTX and Alameda to other banks.
FTX was functionally Tether’s banker. But in November 2022, FTX blew up. Tether needed something new.
Tether pivots to AI
Tether announced a “strategic investment” in Northern Data in September 2023 — in what turned out to be a convoluted capital raise. (Tether swears they didn’t dip into the alleged reserves for Tether, which would have been abusing customer money.) [Tether, archive]
In June 2023, Tether set up a subsidiary in Ireland, Damoon Designated Activity Company, and funded it with “the equivalent of 10,000 Nvidia H100 GPUs,” worth 400 million euros. The key word here is “equivalent,” so potentially neither GPUs nor actual money.
A few weeks later, Tether and Northern Data announced they had entered a formal agreement. Northern Data would buy Damoon and Tether would get Northern Data stock — valued at 400 million euros. Before the sale closed, Damoon would acquire the “equivalent” in Nvidia chips: [Press release]
The valuation of EUR 400 million for 100% of Damoon is equivalent to the purchase value of the associated hardware without any up-writing. In essence, on completion of the transaction, Northern Data will have acquired latest-generation GPU hardware for a value of EUR 400 million.
In November, Northern Data also secured a 575 million euros ($610 million) debt-financing facility from Tether — a line of credit — “to drive further investments across its three business lines.” The debt facility is unsecured and has a term until January 1, 2030, meaning Northern Data had six years to draw on the funds. [Press release]
We know little else about the terms of the loan. Does Northern Data even have to pay interest on this?
Northern Data completed its stock-for-stock acquisition of Damoon in January 2024, bringing Tether’s total exposure to Northern Data to 1.1 billion euros — or the “equivalent” of that. [Press release, archive, Bloomberg, archive]
In an interview with Benzinga, Northern Data CEO Aroosh Thillainathan explained the transaction: [Benzinga, 2023]
Through our acquisition of a company called Damoon, a special-purpose investment vehicle owned by crypto giant Tether, we have acquired 20 NVIDIA Pods, each with 512 H100 GPUs. The transaction has been done as a contribution in kind, in return for issuing new shares, at exactly the valuation that these pods would have cost us if we had bought them directly from NVIDIA.
That is: yet again, Northern Data spun up the stock printer to buy a company.
Tether now owns 51% of Northern Data’s stock. So they now have majority control of a German-listed public company.
How the money, if any, flows
We can’t find third-party evidence that Northern Data has acquired or installed the 10,240 GPUs that it says Damoon purchased. Press releases state that Northern Data now have the GPUs — but it’s utterly unclear how Tether, of all the companies, could have even paid for them.
We wondered how Tether got banking in Ireland when most banks hate Tether, and realized: well, maybe they didn’t.
Let’s run a pure hypothetical on how you might buy GPUs without moving money.
Tether could have placed an order for Nvidia chips — without paying for them. Companies do this all of the time.
They would have just needed to show that Damoon was creditworthy. Tether would then negotiate the purchase, issue a purchase order to get in the queue for delivery, and then, before Nvidia delivered the chips, sell Damoon for diluted Northern Data stock. This would release Tether from needing to underwrite the purchase or take delivery.
In this scheme, no money has flowed from Tether or Northern Data to any account in Ireland or to Nvidia, but now Tether has $400 million in clean receivables in Ireland.
That is: Northern Data bought a company with no assets or operations other than an incoming Nvidia delivery.
This is a scenario that could have happened. Certainly, third-party evidence could exist to the contrary.
Northern Data said in January that they now “own” 18,000 Nvidia H100 GPUs and had started deploying them in December. The move “strengthens Taiga Cloud’s position as Europe’s first and largest dedicated Generative AI Cloud Service Provider.” [Press release, archive]
It’s possible Northern Data actually do own 18,000 Nvidia GPUs! From somewhere. It would be a big deal for a public company to flat-out lie in a press release, especially a company that’s already had run-ins with BaFin.
But there’s good reason to doubt the GPUs were paid for using dollars from Tether.
Get rich quick
Now that Northern Data has acquired its AI chips — or at least the “equivalent” as part of a Tether subsidiary — they can move to the next phase of their plan.
Northern Data wants to combine two of its divisions — its Taiga cloud computing division and its Ardent data center division — and list the resulting company on the Nasdaq in the first half of 2025. (A third business division, Peak, still focuses on bitcoin mining.) [Bloomberg, archive]
The hope is that an IPO in the current AI bubble will lure in enough suckers to pull in a massive pile of cash. The new company wants to IPO for $10 billion to $16 billion — even though Northern Data’s entire market cap is only $1.4 billion.
The immediate beneficiaries will be Northern Data CEO Aroosh Thillainathan, the largest employee shareholder, and Tether, who now owns 51% of Northern Data.
Reuters columnist Yawen Chen says the IPO “sounds more like valuation voodoo than financial reality.” [Breaking Views, paywalled, archive]
I’m totally good for it, bro
It also could be that Tether really do need the cash — if there were some sort of issues with the heaps of money they claim to have.
If Tether have $112 billion backing their USDT, they could make literally billions in the current high interest rate environment just from Treasury notes and similar. They don’t need to make risky investments.
So why is Tether even making these investments?
In “Lying for Money,” Dan Davies describes how financial frauds tend to grow exponentially over time as the gap between real dollars and fake dollars in the system widens. That’s because compound interest is the enemy of fraud.
In a legitimate business, money increases, gets invested back into the business, and grows over time. In a fraudulent business, that process works in reverse:
The reason for this is that unlike a genuine business, a fraud does not generate enough real returns to support itself, particularly as money is extracted by the criminal. Because of this, at every date when repayment is expected, the fraudster has to make the choice whether to shut the fraud down and try to make an escape, or to increase its size; more and more money has to be defrauded in order to keep the scheme going as time progresses.
Riding a spiral of fraud is a tempting explanation for Tether’s rapid growth, especially since 2020 when Tether put the tether printer into overdrive.
Fraudsters also often turn to get-rich-quick schemes in the hope that they can miraculously dig themselves out of their ever-deepening money pit.
So we suspect Tether is short on actual cash dollars. They think they can turn $1 billion into $10 billion by entering a deal with cash-strapped Northern Data.
And when Tether needs to move dollars around, despite their limited access to proper banking, they’ll have their very good friends at Northern Data to help them.
We see an interesting future for Northern Data and its CEO Aroosh Thillainathan. We’re just not sure what that will look like.
Image: “A rendering provided Wednesday, March 9, 2022, by technology company Northern Data, MidAmerica Industrial Park, Grand River Dam Authority and the Oklahoma Commerce Department shows plans for Northern Data’s planned data center and North American operations headquarters at the industrial park in Pryor, Okla.” [KTUL]
Read more:
Tether and Northern Data. Part III: the whistleblowers
Amy Castor 