How FTX Used Hong Kong’s Crypto Market to Turbocharge

For Sam Bankman-Fried’s 29th birthday last March, her closest colleagues and friends wore curly wigs that mimicked her trademark style. But they weren’t in the Bahamas — the scene of his spectacular opening last month — they were in Hong Kong, the birthplace of his FTX exchange.

In a photo obtained by the Financial Times, Bankman-Fried’s one-time romantic partner and head of trading firm Alameda Research, Caroline Ellison, and FTX co-founder Gary Wang smile for the camera at The Crown, an exclusive club created by a company. A Hong Kong celebrity with a private elevator and a seat shaped like US dollar bills.

FTX executives were joined by Genesis Block, a cryptocurrency retail services company owned by Alameda Ventures, an FTX affiliate separate from digital asset trading group Genesis and its parent company Digital Currency Group. At the time, Genesis Block was attracting crowds with its unusual business model; In a world dominated by the Internet, he was exchanging crypto for physical cash.

“People were literally lining up on the corner with bags of cash at Genesis Block, sometimes closing the door saying they ran out of bitcoin,” said a former employee.

But last month, Bankman-Fried’s $32 billion FTX filed for bankruptcy, falling rapidly from grace even by the standards of the liberal cryptocurrency industry. Days later, Genesis Block announced that it was also shutting down its trading portal and would stop accepting deposits.

The collapse left a mark on local investors. “I have lost a fortune, my children’s children will never forgive me,” said one. “I have friends who have filed for personal bankruptcy.”

The apparent failure of the Hong Kong company also underscores the city’s important role in Bankman-Fried’s rise to the top of the digital assets industry. Genesis Block has built networks of bank accounts that provide easier access to hard currency and channels to onboard customers. It acted as an “on-ramp” to get money in and out of cryptocurrency – a difficult task in a space that traditional regulated banks often shy away from.

“Genesis Block has been pretty big as a landing spot over the years. . . A stake will give FTX/Alameda access to banking services and sources of liquidity,” said Carlton Lai, an analyst at Daiwa Capital Markets.

The ratio is important “because Hong Kong, a financial hub, likely has larger volumes given the concentration of high-net-worth individuals and family offices interested in cryptocurrency.”

Moreover, Genesis Block was one of the few cryptocurrency businesses to set up shop in Hong Kong, becoming a hub for the city’s crypto community. When the company opened a new office in Kowloon in March 2021, employees handed out French macarons emblazoned with FTX’s logo.

‘kimchi premium’

Genesis Block started in 2017 and thrived on buying and selling cryptocurrency in Hong Kong and then selling it at a profit in Korea and Japan, dubbed the “kimchi bounty” by former employees. The same arbitrage made Bankman-Fried’s early fortune.

Bankman-Fried met Genesis Block executives in 2018 on a trip to Macau, a city close to Hong Kong that rivals Las Vegas as the world’s largest gambling hub.

The relationship between Genesis Block and FTX deepened. Alameda Ventures, a subsidiary of the trading firm of the same name, bought a stake in 2020. At the time of FTX’s crash, the companies shared the same Hong Kong office block. Cottonwood Grove, a wholly owned subsidiary of Alameda Research, is registered one floor below Genesis Block’s Wan Chai offices.

Genesis Block co-founder Clement Ip was director of FTX’s Hong Kong business, while Charles Yang’s LinkedIn lists him as a partner at Genesis Block, and he attended events this year as the “principal” of Alameda Research.

Two people familiar with Genesis Block’s operations described the company, which also operates a network of bitcoin ATMs across Asia, as integrated with FTX and Alameda. Genesis Block also offered customers alternative coins, said two other people with knowledge of the company. Some Genesis Block compliance staff and traders also went directly to work for FTX.

Genesis Block believed in FTX so much that it took the company’s native FTT tokens as part of the payment for equity, people familiar with the matter said. FTT tokens were an important part of FTX’s liquidity crisis, as they were used as collateral for loans, but turned out to be worthless.

“There is maximum trust between Alameda and FTX and Genesis Block because we’ve been working with them for a long time,” Genesis Block’s Yang said in a July 2020 podcast.

“We have a good partnership with money exchanges, there is still gray area business,” Yang said, adding that the business trades in places where other investors are unsure, such as Cambodia’s peer markets.

The founders also mined cryptocurrency in China, giving them a connection to the mainland and allowing them to exchange renminbi for more cryptocurrency deals than their competitors.

Genesis Block had a “network” of 50 to 100 linked bank accounts, according to Yang, who people familiar with the company said would be attractive to Alameda because it offered “open and drop” to hard currency.

“[We] We have a whole network of what we call satellite bank accounts under our control. . . it’s a very gray area, I’m not going to lie, it can seem shady to some people,” Yang said on the podcast.

Ip, Yang, Genesis Block, Bankman-Fried and FTX did not immediately respond to a request for comment.

Build close relationships with wealthy family offices

The company also established relationships with wealthy families in Hong Kong, many of whom later invested in FTX.

Members of Hong Kong’s crypto community describe Bankman-Fried’s businesslike lifestyle – where he was available on vegan delivery and boasted of sleeping in a bean bag in Hong Kong – as helping to create a “cult of personality” around him and adding to his “mystical allure”. . .

“He was such a genius guy that people fell over themselves to get space,” said one cryptocurrency-focused hedge fund manager, who estimated that most equivalent funds lost up to 20 percent on average in FTX’s collapse.

Hong Kong has been involved with cryptocurrency for years, but has recently taken steps to legalize retail trading of cryptocurrencies. The city’s Securities and Futures Commission said fund managers licensed to invest in virtual assets were “intangibly” exposed to the FTX collapse. However, fund managers pointed out that there are other venture capital firms, family offices or hedge funds that are not part of the SFC licensing regime.

A number of former FTX executives returned to Hong Kong after the collapse of the FTX, many with family ties in the city. The United States suspended its extradition treaty with Hong Kong in 2020 after China suppressed Hong Kong protests.

But at Genesis Block’s Kowloon office in Hong Kong, employees tried to distance themselves from FTX. “We don’t wear FTX jackets, do we?” said one of the workers.

Additional reporting in Hong Kong by William Langley and Stephanie Findlay

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