Sam Bankman-Fried, founder and chief executive officer of FTX
Want to trade Tesla Inc. TSLA 0.19% 24 hours a day? How about betting on how Robinhood Markets Inc. stock will fare in its initial public offering? Or on whether Donald Trump will retake the presidency in 2024?
All that and more is available on FTX, one of the world’s
fastest-growing cryptocurrency exchanges—but not if you’re American. In that
case, the hottest and riskiest markets of this Hong Kong-based exchange are off
limits, a move FTX made to keep from running afoul of U.S. regulators.
FTX is the brainchild of Sam Bankman-Fried, a 29-year-old
billionaire who sticks to a vegan diet, shares a Hong Kong apartment with roommates
and often sleeps on beanbag chairs in the office. The California native drew
attention last year when he gave $5 million to a group backing Joe Biden’s
campaign, making him the second-biggest CEO supporter of Mr. Biden after
Michael Bloomberg, according to an analysis by The Wall Street Journal.
More recently, FTX notched a $135 million, 19-year deal to
buy the naming rights to the home of the Miami Heat. The deal—which was
approved by the National Basketball Association last week—means the stadium now
called the American Airlines Arena will be FTX Arena starting with the 2021-22
NBA season. FTX says the deal is aimed at promoting its smaller U.S. exchange,
which offers a less exotic array of products than FTX’s overseas operation.
Cryptocurrencies are increasingly going mainstream. Bitcoin
has more than doubled in value this year, and Coinbase Global Inc., one of the
biggest U.S. crypto companies, went public on the Nasdaq Stock Market this
week. Depending whom you ask, Coinbase’s market capitalization of $84 billion
is either a sign that bitcoin mania has gotten out of hand, or that traditional
finance is about to be conquered by disrupters from the crypto world.
To many crypto insiders, the real action isn’t at Coinbase,
which embraces regulation and has long focused on making it easy for newbies to
buy bitcoin. Far more exciting are offshore exchanges like FTX. These operate
outside the reach of U.S. authorities and offer both digital currencies and
crypto derivatives—complex products that let traders make risky bets on the
future price of bitcoin, ether and other coins.
Mr. Bankman-Fried, who worked for quantitative-trading giant
Jane Street Capital LLC before getting into bitcoin, has won praise for running
a more reliable crypto exchange than many of his competitors and for FTX’s
policy of donating 1% of its revenue to charity. But he has raised eyebrows
with his aggressive approach to launching new markets, including some that
skirt the boundary of what’s permitted under U.S. law.
For instance, FTX was the first major crypto exchange to
offer tokenized stocks—digital coins that track the value of shares of
companies like Tesla, GameStop Corp. or BioNTech SE. It also offers a popular
spinoff product called pre-IPO contracts, which let overseas traders bet on the
expected valuations of companies like Robinhood.
Though FTX’s tokenized stocks are a relatively small
market—with about $1.3 billion traded so far this year, a fraction of a single
day’s volume in Tesla—crypto advocates see them as a way to liberate stocks
from unnecessary constraints. Unlike normal stocks, tokenized stocks trade
around the clock, whether or not U.S. exchanges are open, and they can be accessed
by investors world-wide. Binance—by some measures the world’s biggest crypto
exchange—on Monday introduced its own version of FTX’s tokenized stocks.
Mr. Bankman-Fried hopes U.S. regulators will eventually
allow the products. “Nothing operates 9:30 a.m. to 4 p.m., five days a week,”
he said in an interview. “There’s actually a lot of room to innovate in stock
exchanges.”
Skeptics say investors should be wary. “These are very novel
and complex instruments,” said Lee Reiners, executive director of the Global
Financial Markets Center at Duke University. “These things are destined to blow
up at some point, and then FTX will be in the hothouse with regulators and law
enforcement.”
Mr. Bankman-Fried says tokenized stocks aren’t much more
complex than American depositary receipts, which allow U.S. investors to trade
shares of overseas companies. FTX’s tokens can be redeemed for the actual
underlying shares at a regulated German investment firm, CM-Equity AG, which
helps keep the price of the tokens in line with the actual stocks. The pre-IPO
contracts add another twist. When the underlying company goes public, the
contracts convert to tokenized stocks of that company.
Such products fall into a regulatory gray area. If they were
traded in the U.S., they would likely fall within the jurisdiction of the
Securities and Exchange Commission, lawyers say. That would force FTX to abide
by various regulations, potentially including restrictions on offering its
tokens to small investors. FTX is avoiding that by operating overseas and
blocking U.S. customers.
But such a strategy has risks. In October, federal
prosecutors charged the founders of BitMEX, another offshore crypto exchange,
with violating anti-money-laundering laws because of its failure to register
with U.S. regulations while allegedly turning a blind eye to Americans using
its platform. The BitMEX founders deny the charges.
Exchanges make money by collecting fees from traders, and
the more volume they handle, the more they earn. So far this month, FTX says it
has processed some $10.7 billion of trades on an average day, up from around
$900 million six months ago. That makes FTX one of the world’s top crypto exchanges,
even though it only started operations in May 2019.
By comparison, Coinbase—which doesn’t offer derivatives—has
handled around $2.6 billion in daily trades this month, according to data
provider CryptoCompare. FTX’s activity is also a drop in the bucket compared
with traditional derivatives exchanges like CME Group Inc., which handles
trillions of dollars of trades each day.
FTX doesn’t disclose its financials, but its rise has
vaulted Mr. Bankman-Fried into the ranks of the world’s richest people. Earlier
this month, Forbes estimated his net worth at $8.7 billion, most of which is
tied up in his ownership stake of FTX and various tokens.
Some traders privately gripe about the fact that Mr.
Bankman-Fried runs both FTX and a crypto-trading firm, Alameda Research, which
is a significant trader on FTX—an arrangement that wouldn’t be permitted in
other markets, such as U.S. stocks. Mr. Bankman-Fried says Alameda doesn’t get
any special perks on FTX and the businesses are kept separate to avoid conflicts
of interest.
FTX has a reputation for creating new markets at a frenetic
pace. “They’ve certainly pushed the envelope in terms of products and the speed
with which they’ve been able to launch products,” said Rich Rosenblum,
president of GSR, a crypto trading firm.
Some are simply amusing sidelines unrelated to FTX’s crypto
focus. During the U.S. presidential election, for instance, FTX ran a
prediction market that was closely followed by crypto traders. In such a
market, people bet money on future events, and the prices reflect the expected
probabilities of various outcomes. Just before Election Day, the market showed
the odds of Trump winning at 30%. That spiked to 80% after the incumbent
president took Florida, only to fall as further results came in.
FTX’s Trump 2024 market currently implies a 9% chance that
the ex-president will retake the White House, though it is thinly traded,
suggesting that it shouldn’t be taken too seriously.
The son of two Stanford Law School professors, Mr.
Bankman-Fried studied physics at the Massachusetts Institute of Technology and
initially considered a career in academia. Instead, he became turned on to the
“effective altruism” movement, which encourages people to maximize the amount
of positive social impact they have. He decided to go into finance, hoping to
make a fortune so he could give it away to charity.
In 2017, seeing opportunities in bitcoin, Mr. Bankman-Fried
started Alameda Research. He later founded FTX with some Alameda colleagues, in
part because of his frustration with the quality of existing crypto exchanges.
Among the organizations that Mr. Bankman-Fried has supported
are OpenAI, a research lab that seeks to ensure that artificial intelligence
benefits humanity, and the Nuclear Threat Initiative, which aims to reduce the
threat from nuclear and biological weapons.
Mr. Bankman-Fried says his donation to the pro-Biden group
was similar: He viewed defeating Trump as important for geopolitical stability.
Despite being a big-time donor, he hasn’t met the president.
“I’d love to talk to him about crypto regulation,” Mr. Bankman-Fried said. “But
I don’t think he gives a shit.”
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