EXCLUSIVE How FTX bought its way to becoming the ‘most regulated’ crypto exchange

  • FTX buys 10% stake in IEX with option to acquire 100%
  • FTX spends $2 billion on ‘acquisitions for regulatory purposes’
  • The documents show FTX sees its regulatory status as a way to attract new capital from major investors

Nov 18 (Reuters) – Before collapsing this month, FTX stood apart from many rivals in the largely unsupervised crypto industry by boasting it was the “most regulated” exchange on the planet and inviting closer scrutiny from authorities.

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

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

That deal and others referenced in the documents, which include business updates, meeting minutes and strategy papers, illuminate one of FTX’s broader goals: to quickly create a favorable regulatory framework for itself by acquiring a stake in companies that already have licenses from authority, frequent shortcuts. drawn-out approval process.

FTX spent some $2 billion on “acquisitions for regulatory purposes,” FTX documents seen by Reuters from the Sept. 19 meeting show. Last year, for example, bought LedgerX LLC, a futures exchange, which gave it three Commodity Futures Trading License Trading Commission in one fell swoop. The license gives FTX access to the US commodity derivatives market as a regulated exchange. Derivatives are securities whose value is derived from another asset.

FTX also sees its regulatory status as a way to lure new capital from major investors, documents show. In documents to support his request for hundreds of millions of dollars in funding, it held out its license as a key competitive advantage. The “regulatory moats,” it said, created obstacles for competitors and will give them access to lucrative new markets and partnerships beyond the reach of unregulated bodies.

“FTX has the cleanest brand in crypto,” the exchange proclaimed 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 this week’s text exchange with Vox, Bankman-Fried made about-face in regulatory matters. Asked if his earlier praise of the regulations was “just PR,” he said in a text sequence: “yeah, just PR … bastard regulators … they make everything worse … they don’t protect customers at all.”

An IEX spokesperson 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 regarding the previous transaction,” the spokesperson said.


FTX collapsed last week after a failed bid by Bankman-Fried to raise emergency funds. It has been under some regulatory oversight through the dozens of licenses acquired through its many acquisitions. But that doesn’t protect their customers and investors, who are now facing billions of dollars in losses. As Reuters reported, FTX has quietly taken risks with customer funds, using $10 billion in deposits to prop up a trading firm owned by Bankman-Fried.

Four legal experts said the fact that Bankman-Fried is courting regulators while taking massive risks with customer funds without anyone noticing reveals the yawning regulatory gap in the cryptocurrency industry. “It’s a patchwork of global regulators – even domestically there are big gaps,” said Aitan Goelman, a lawyer with Zuckerman Spaeder and former CFTC prosecutor and enforcement director. “It’s the fault of the regulatory system that took too long to adjust to the arrival of crypto.”

People familiar with the SEC’s thinking on crypto regulation said the agency believes crypto firms are operating illegally outside of U.S. securities laws and are instead leaning toward other licenses that provide minimal consumer protection. “Those representations, while nominally true, do not cover their activities,” the person said.

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Bankman-Fried has big ambitions for FTX, which by this year has grown to more than $1 billion in revenues and accounted for about 10% of trading in the global crypto market, since its establishment in 2019. He wants to build a financial application. , where users can trade shares and tokens, transfer money and banks, according to an undated document titled, “FTX Roadmap 2022.”

“Step 1” toward that goal, the “Roadmap” document says, “is to become as licensed as possible.”

“Partly this is to ensure that we are regulated and compliant; partly this is to be able to expand our product offering,” the document said.

That’s where FTX’s acquisition spree comes in, according to the document. Instead of applying for each license, which can take years and sometimes uncomfortable questions, Bankman-Fried decided to buy them.

But the strategy also has its limits: Sometimes, the companies it acquires don’t have the precise licenses it needs, the documents show.

One of FTX’s goals, according to the documents, is to open up the US derivatives market to customers in the country. It is estimated that the market will bring additional trading volume to the tune of $50 billion a day, generating millions of dollars in revenue. To do that, it is necessary to persuade the CFTC to amend one of the licenses held by LedgerX, FTX’s newly acquired futures exchange.

The application process continued for several months, and FTX had to pony up $250 million for the standard insurance fund, standard requirements. FTX anticipated that the CFTC may ask to increase the fund to $1 billion, according to the minutes of the March meeting of its advisory board.

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

Buying the company for the license also has other advantages, documents reviewed by Reuters demonstrate: It can give Bankman-Goreng the access he wants to the regulator.

A prime example is the IEX deal, which was announced in April. In a joint interview with CNBC, Bankman-Fried and IEX CEO Brad Katsuyama said they want to “form regulations that ultimately protect investors.” The most important thing here, added Bankman-Fried, is that “there is transparency and protection against fraud.”

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

Bankman-Fried was invited to meet 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 inform the SEC in advance of the deal with FTX, which had not been made public at the time, and to discuss the possibility of IEX creating a trading venue in digital assets, such as bitcoin. FTX’s role is to provide crypto trading infrastructure, the source said.

SEC officials outright rejected their initial plan because it would have involved the creation of a non-exchange trading place that is more easily regulated, something the agency opposes for cryptocurrencies, said a source familiar with the SEC’s thinking.

Reuters could not determine the extent of Bankman-Fried’s involvement in subsequent conversations with the SEC. In their minds, SEC officials have agreed to meet with Katsuyama in March, and Bankman-Fried is just tagging along, said a source familiar with the SEC’s thinking. He was mostly silent during the meeting, with Katsuyama in the “driver’s seat,” the source added.

Whatever the involvement, FTX is communicating its discussions to investors. In the September meeting of its advisory board, FTX said talks with the SEC were “very constructive”.

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

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

A source close to IEX said the exchange never entered into an operational agreement with FTX, adding that it never got to that point.

The May FTX document provides a list of FTX contacts with individual regulators. The document, which has not been reported before, shows how in most cases FTX can solve the problems that arise.

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

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

The May documents also show that FTX has had brushes with the SEC. The SEC has conducted an investigation earlier this year into how crypto companies handle customer deposits. Some firms offer interest on deposits, which the SEC says can make them securities and must be listed under its rules. In its list of regulatory interactions, FTX said the investigation looked at whether the assets were “lent or used for operational purposes.”

This month, as reported by Reuters, it emerged that FTX has done just that, transferring billions of dollars in client funds to Bankman-Fried’s trading firm, Alameda Research.

In the May document, FTX said the SEC’s examination staff, which scrutinizes market practices that may present risks to investors, is concerned with a different issue: the reward program offered to customers, under which it pays interest on crypto deposits.

According to the documents, FTX told regulators it had no similar problems with products from other suppliers the agency investigated.

“We emphasize that this is only based on rewards and does not involve lending (or other use) of stored crypto,” wrote FTX. The SEC wrote back, saying it had completed an “informal inquiry” and did not need any further information “at this time.”

The SEC had no comment on the investigation. In an email to Reuters, Bankman-Fried wrote: “FTX’s response is accurate; the US FTX reward program does not involve lending any assets.”

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

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