Exclusive: How FTX Became the ‘Most Regulated’ Cryptocurrency Exchange

  • FTX acquired a 10% stake in IEX with an option to acquire 100%
  • The FTX spent $2 billion on “regulatory acquisitions.”
  • The documents show that FTX saw its regulatory status as a way to attract new capital from large investors

Nov 18 (Reuters) – Before its collapse this month, FTX distinguished itself from many rivals in the largely unregulated cryptocurrency industry by boasting it was the planet’s “most regulated” exchange and inviting closer scrutiny from authorities.

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

As part of that deal, Bankman-Fried took a 10% stake in IEX, giving it the option to buy it outright over the next two and a half years, according to a June 7 filing. The partnership allowed the 30-year-old executive to lobby the US Securities and Exchange Commission, IEX’s regulator, on crypto regulation.

The deal, and others cited in documents including business updates, meeting minutes and strategy papers, illuminate one of FTX’s broader goals: to quickly create a regulatory framework that suits itself by acquiring stakes in companies that already have licenses from authorities, a streamlined approval process.

FTX spent about $2 billion on “acquisitions for regulatory purposes,” FTX documents showed at a Reuters meeting on September 19. Last year, for example, it bought futures exchange LedgerX LLC, giving it three Commodity Futures Trading Commission licenses in one move. The licenses gave FTX access to US commodity derivatives markets as a regulated exchange. Derivatives are securities that derive their value from another asset.

The documents show that FTX also saw its regulatory status as a way to attract new capital from large investors. In documents supporting its request for hundreds of millions of dollars in funding, it cited its licenses as a key competitive advantage. The “regulatory moats,” he said, would create barriers for competitors and give it access to lucrative new markets and partnerships that are inaccessible to unregulated entities.

“FTX has the cleanest brand in cryptocurrency,” the exchange said in a June filing with 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 with Vox this week, Bankman-Fried talked about regulatory issues. When asked if his previous definition of the regulations was “just PR,” he said in a series of texts: “Yeah, just PR… they’re screwing up the regulators… they’re making things worse… they’re not protecting customers at all. “

An IEX spokesman declined to confirm details of the transaction with FTX, other than to say that FTX’s “small minority interest” in IEX could not be sold to a third party without its approval. “We are currently evaluating our legal options regarding the previous transaction,” the spokesperson said.


FTX collapsed last week after Bankman-Fried’s failed bid to raise emergency funds. It has come under some regulatory scrutiny through the dozens of licenses it acquired through its many acquisitions. But it failed to protect its customers and investors, who are now facing billions of dollars in losses. As Reuters reported, FTX secretly risked client funds, using $10 billion in deposits to support a trading firm owned by Bankman-Fried.

Bankman-Fried’s courtship of regulators while taking huge risks with client funds without anyone noticing reveals regulatory loopholes in the cryptocurrency industry, four lawyers said. “It’s a patchwork of global regulators — and there are big gaps even domestically,” said Aitan Goelman, an attorney at Zuckerman Spaeder and a former prosecutor and CFTC executive director. “This is the fault of a regulatory system that took too long to adapt to the emergence of cryptocurrency.”

A person familiar with the SEC’s thinking on cryptocurrency regulation said the agency believes crypto firms are operating illegally outside of U.S. securities laws and instead rely on other licenses that provide minimal consumer protections. “While those representations are nominally true, they do not cover their performance,” he said.

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Bankman-Fried had big ambitions for FTX, which as of 2019 had more than $1 billion in revenue and accounted for about 10% of trading in the global cryptocurrency market. He wanted to create a financial program. , according to an undated document titled “FTX Roadmap 2022,” users can trade shares and tokens, transfer money and bank.

The Roadmap document states that “Step 1” towards this goal is to be as licensed as possible.

“Partly it’s to make sure we’re regulated and compliant; in part, this is to be able to expand our product offering,” the document says.

According to the documents, this is where FTX’s buying spree started. Instead of applying for every license, which can take years and sometimes answer vexing questions, Bankman-Fried decided to buy them.

But the strategy also had its limits: the documents show that sometimes the companies it acquired did not have the necessary precise licenses.

According to the documents, one of FTX’s goals was to open the U.S. derivatives markets to its clients in the country. He estimated that the market would increase the additional trading volume to 50 billion dollars per day and bring in millions of dollars in revenue. To do so, he had to convince the CFTC to amend one of the licenses held by FTX’s newly acquired futures exchange, LedgerX.

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

The FTX collapsed before it could get approval and has now withdrawn its application.

There were other advantages to buying the companies to get the license, documents reviewed by Reuters show, which could give Bankman-Fried the access it wants to regulators.

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

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 in March along with Katsuyama.

A source close to IEX said the purpose of the meeting was to give the SEC advance notice of its then-undisclosed deal with FTX and to discuss the possibility of IEX establishing a trading venue in digital assets. like bitcoin. The source said that FTX’s role was to provide crypto-trading infrastructure.

According to a source familiar with the SEC’s thinking, SEC officials publicly rejected their initial plan because it would have involved creating a more lightly regulated, over-the-counter trading space where the agency opposes cryptocurrencies.

Reuters could not determine the extent of Bankman-Fried’s involvement in subsequent negotiations with the SEC. In their view, SEC officials agreed to meet with Katsuyama in March, and Bankman-Fried was simply tagged along, said a source familiar with the SEC’s thinking. The source added that Katsuyama was mostly silent during the meeting, where he was “in the driver’s seat”.

Regardless of his involvement, FTX told its investors of its deliberations. At the advisory board’s September meeting, FTX said talks with the SEC had been “extremely constructive.”

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

A person familiar with the SEC’s thinking said they would argue that FTX is in “pole position.” Whatever the SEC does to regulate cryptocurrency trading will be open to all market participants, the source said.

A source close to IEX said the exchange has not entered into any transaction agreement with FTX and never got to that point.

The May FTX document provides a summary of the FTX’s relationships with individual regulators. A previously unreported paper shows how, in most cases, FTX is able to solve the problems that arise.

For example, in February, South African authorities issued a warning to consumers that FTX and other cryptocurrency exchanges are not allowed to operate there. Thus, FTX entered into a commercial agreement with the local exchange to continue providing services. “The FTX is now fully regulated in relation to its current activities in South Africa,” the FTX said.

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

The May filing also reveals that FTX has had a brush with the SEC. The SEC made inquiries earlier this year into how crypto companies handle customer deposits. Some firms offered interest on deposits, which the SEC could convert into securities and must be registered under its rules. In its list of regulatory interactions, the FTC noted that the request looked at whether those assets were “leased or otherwise used for operational purposes.”

This month, as Reuters reported, it emerged that FTX had transferred billions of dollars of client funds to Bankman-Fried’s trading firm Alameda Research.

In a May filing, FTX said the SEC’s examination panel, which is investigating market practices that could pose risks to investors, is concerned about a different issue: a rewards program it offers customers and pays interest on crypto deposits.

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

“We have confirmed that these are based on rewards only and do not involve borrowing (or other use of) deposited cryptocurrency,” FTX said. The SEC said it had completed its “informal investigation” and that no further information was needed “at this time.”

The SEC had no comment on the request. Bankman-Fried wrote in an email to Reuters: “FTX’s response there was accurate; the FTX US award program did not involve lending any assets.”

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

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