EXCLUSIVE How FTX Bought Its Way to Become the ‘Most Regulated’ Crypto Exchange

EXCLUSIVE How FTX Bought Its Way to Become the ‘Most Regulated’ Crypto Exchange

EXCLUSIVE How FTX Bought Its Way to Become the ‘Most Regulated’ Crypto Exchange

  • FTX bought a 10% stake in IEX with an option to buy 100%
  • FTX spent $2 billion on ‘acquisitions for regulatory purposes’
  • The documents show that FTX saw its regulatory status as a way to attract new capital from large investors

Nov 18 (Reuters) – Before it collapsed this month, FTX set itself apart from many rivals in the largely unregulated crypto industry by boasting it was the “most regulated” exchange on the planet and calling for closer controls by authorities.

Now, company documents seen by Reuters reveal the strategy and tactics behind founder Sam Bankman-Fried’s regulatory agenda, including the previously undisclosed terms of a deal announced earlier this year with IEX Group, the U.S. stock trading platform featured in Michael Lewis’ book “Flash Boys” about the fast , computer-driven trading.

As part of that deal, Bankman-Fried bought a 10% stake in IEX, with an option to buy it out in full over the next two and a half years, according to a June 7 filing. The partnership gave the 30-year-old executive an opportunity to lobby IEX’s regulator, the US Securities and Exchange Commission, for cryptocurrency regulation.

That deal and others mentioned in the documents, which include business updates, meeting minutes and strategy documents, shine a light on one of FTX’s broader goals: quickly creating a favorable regulatory framework for itself by acquiring stakes in companies that already had licenses from the authorities. , a shortcut to the often time-consuming approval process.

FTX spent about $2 billion on “acquisitions for regulatory purposes,” according to FTX documents seen by Reuters from the Sept. 19 meeting. Last year, for example, it bought LedgerX LLC, a futures exchange, which gave it three Commodity Futures Trading Commission licenses in one go. The licenses gave FTX access to the derivatives markets in the US as a regulated exchange. Derivatives are securities that derive their value from other assets.

FTX also saw its regulatory status as a way to attract new capital from large investors, the documents show. In documents supporting his claim for hundreds of millions of dollars in funding, he cited his licenses as a key competitive advantage. “Regulatory moats,” it said, create barriers for rivals and give them access to lucrative new markets and partnerships beyond the reach of unregulated entities.

“FTX has the cleanest brand in crypto,” the exchange said in a June document presented to investors.

Bankman-Fried did not respond to a request for comment on questions about FTX’s regulatory strategy. FTX did not respond to requests for comment.

An SEC spokesman declined to comment for this article. The CFTC also declined to comment.

In a text exchange this week with Vox, Bankman-Fried addressed regulatory issues. Asked if his previous praise of the regulations was “just PR,” he said in a series of texts: “Yeah, just PR… screw the regulators… they make everything worse… they don’t protect customers at all. ”

An IEX spokesman declined to confirm the details of the transaction with FTX, except to say that FTX’s “small minority stake” in IEX cannot be sold to a third party without its consent. “We are currently evaluating our legal options in relation to the previous transaction,” the spokesman said.


FTX crashed last week after that a futile bid by Bankman-Fried to raise emergency funds. It has come under some regulatory scrutiny through the dozens of licenses it has picked up through its many acquisitions. But that didn’t protect its customers and investors, who now face losses totaling billions of dollars. As reported by Reuters, FTX secretly took risks with client funds, using $10 billion in deposits to support the trading firm owned by Bankman-Fried.

The four attorneys said the fact that Bankman-Fried courted regulators while taking huge risks with client funds without anyone noticing exposed a gaping regulatory gap in the cryptocurrency industry. “It’s a patchwork of global regulators — and even at the domestic level there are huge gaps,” said Aitan Goelman, a lawyer for Zuckerman Spaeder and a former CFTC prosecutor and director. “That’s the fault of the regulatory system that took too long to adjust to the advent of cryptocurrency.”

A person familiar with the SEC’s thinking on crypto regulation said the agency believes crypto firms operate illegally outside of US securities laws and instead rely on other licenses that provide minimal consumer protection. “Those representations, while nominally true, do not cover their activity,” the person said.

Reuters Graphics Reuters Graphics


Bankman-Fried had big ambitions for FTX, which by this year had grown to more than $1 billion in revenue and accounted for about 10% of global crypto market trading since the start of 2019. He wanted to create a financial app, where users could trade shares and tokens, transfer money and bank, according to an undated document titled “FTX Roadmap 2022.”

“Step 1” towards that goal, says the “Road Map” document, “is to become as sensibly licensed as possible.”

“Partly this is to make sure we are regulated and compliant; in part, this is so that we can expand our product offering,” the document states.

This is where FTX’s acquisition took place, according to the documents. Instead of applying for each permit, which can take years and sometimes embarrassing questions, Bankman-Fried decided to buy them.

But the strategy also had its limitations: At times, the companies he acquired didn’t have the precise licenses they needed, the documents show.

One of FTX’s goals, according to the documents, was to open up the U.S. derivatives market to its clients in the country. The market is estimated to bring in an additional $50 billion in trading volume per day, generating millions of dollars in revenue. To do that, he needed to convince the CFTC to amend one of the licenses held by LedgerX, FTX’s newly acquired futures exchange.

The application process took months, and FTX had to raise $250 million for the insurance fund, which is a standard requirement. FTX expected the CFTC might ask it to increase the fund to $1 billion, according to minutes from an advisory board meeting in March.

FTX failed before it could get approval, and has now withdrawn its application.

Buying the licensing companies had other advantages, documents reviewed by Reuters show: It could give Bankman-Fried the desired access to regulators.

The best example is the IEX contract, which was announced in April. In a joint interview with CNBC, Bankman-Fried and IEX CEO Brad Katsuyama said they want to “shape regulation that ultimately protects investors.” What is most important here, added Bankman-Fried, is that “there is transparency and fraud protection”.

Reuters could not determine how much FTX paid for the stake.

Bankman-Fried was invited to meet with SEC Chairman Gary Gensler and other SEC officials along with Katsuyama in March.

A source close to IEX said the purpose of the meeting was to give the SEC advance notice of its deal with FTX, which was not publicly disclosed at the time, and to discuss the possibility of IEX creating a digital asset trading venue, such as is bitcoin. FTX’s role was to provide infrastructure for crypto trading, the source said.

SEC officials rejected their original plan entirely because it would have involved creating a more lightly regulated over-the-counter trading venue, which the agency opposes for cryptocurrencies, a source familiar with the SEC’s thinking said.

Reuters could not determine the extent of Bankman-Fried’s involvement in subsequent discussions with the SEC. In their view, SEC officials agreed to meet with Katsuyama in March, and Bankman-Fried merely followed along, said a source familiar with the SEC’s thinking. He was mostly silent during the meeting, with Katsuyama in the “driving seat,” the source added.

Regardless of his involvement, FTX has been talking to its investors. At a September meeting of its advisory board, FTX said discussions with the SEC had been “extremely constructive.”

“We will probably have pole position there,” according to the minutes of the meeting.

A person familiar with the SEC’s thinking said it will dispute that FTX is in a “pole position.” Anything the SEC did to regulate cryptocurrency trading would be open to all market participants, the source said.

A source close to IEX said the exchange never entered into any operating agreements with FTX, adding that it never got to that point.

The May FTX document provides an overview of FTX’s contacts with individual regulators. The document, which has not been published before, shows how in most cases FTX managed to solve the problems that arose.

In February, for example, South African authorities issued a warning to consumers that FTX and other crypto exchanges were not authorized to operate there. So FTX entered into a commercial agreement with the local stock exchange to continue providing services. “FTX is now fully regulated in respect of its current activities in South Africa,” FTX said.

The regulator, the South African Financial Conduct Authority, did not respond to a request for comment.

The May document also shows that FTX has had a brush with the SEC. Earlier this year, the SEC conducted an investigation into how crypto companies handle customer deposits. Some firms offered interest on deposits, which the SEC said could make them securities and should be registered under its rules. In listing its regulatory interactions, FTX noted that the investigation is looking into whether those assets are “lent or otherwise used for operational purposes.”

This month, as reported by Reutersit turns out that FTX did just that, moving billions of dollars of client funds to Bankman-Fried’s trading firm, Alameda Research.

In a May filing, FTX said that the SEC’s investigative staff, which is probing market practices that could pose a risk to investors, was concerned about another issue: a rewards program it offered to clients, under which it paid interest on crypto deposits.

According to the document, FTX told the regulator that it did not have the same problems as products from other providers the agency investigated.

“We have confirmed that these are rewards only and do not include lending (or other use) of deposited cryptocurrency,” FTX wrote. The SEC responded, saying it had completed its “informal investigation” and did not need additional information “at this time.”

SEC did not comment on the investigation. In an email to Reuters, Bankman-Fried wrote: “FTX’s response was correct; the US FTX reward program did not involve giving away any assets.”

Reporting by Chris Prentice and Hannah Lang in Washington, Angus Berwick in London; editing by Megan Davies, Paritosh Bansal and Chris Sanders

Our standards: Thomson Reuters Trust Principles.

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