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

Prior to its demise this month, FTX separated out from its competitors in the mainly unregulated crypto market by boasting it was the “most regulated” exchange on the planet and welcoming closer scrutiny from regulators.

Reuters has found internal company documents that explain founder Sam Bankman-regulatory Fried’s plans. These documents include information about a partnership announced earlier this year with IEX Group, the U.S. stock trading platform that Michael Lewis’s “Flash Boys” book about high-speed, computerized trading talks about.

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According to a legal document dated June 7, Bankman-Fried now owns a 10% investment in IEX and has the option to purchase the remaining 90% within the next two and a half years. The collaboration allowed the 30-year-old CEO to petition the U.S. Securities and Exchange Commission on behalf of IEX regarding crypto legislation.

The documents, which include business updates, meeting minutes, and strategy papers, shed light on one of FTX’s overarching aims: to quickly craft a hospitable regulatory framework for itself by acquiring stakes in companies that already had licenses from authorities, thereby shortening the typically drawn-out approval process.

FTX spent around $2 billion on “acquisitions for regulatory purposes,” according to documents reviewed by Reuters at a September 19 meeting. For instance, it acquired the futures exchange LedgerX LLC last year, so gaining three CFTC licenses at once. The authorizations allowed FTX to operate as a regulated exchange in the United States for commodities derivatives. The value of derivative securities is based on the value of some underlying asset.

According to the documents, FTX also planned to use its regulatory standing to entice new funds from significant investors. It cited its licenses as a major competitive advantage in the paperwork used to secure hundreds of millions of dollars. It claimed that the “regulatory moats” would prevent competitors from entering its lucrative new markets and collaborations.

The exchange proudly declared, “FTX has the cleanest brand in crypto” in a paper delivered to investors in June.
The Bankman-Fried firm declined to comment on FTX-related regulatory questions. A representative from FTX did not provide a statement.
A representative from the SEC declined to provide an interview for this piece. The CFTC was silent as well.
This week, in a text conversation with Vox, Bankman-Fried reversed his position on regulatory issues. When he was asked through text message thread whether his former admiration of regulations was “just PR,” he said, “yes, just PR… stuck regulators… they make everything worse… they don’t protect customers at all.”
A representative from IEX declined to comment on specifics of the deal with FTX, but did clarify that FTX has a “small minority position” in the exchange and that this stake cannot be sold without FTX’s approval. “We are currently analysing our legal alternatives with respect to the prior transaction,” the spokeswoman stated.

Patch Work Regulations

Bankman-failed Fried’s attempt to seek emergency funding contributed to FTX’s demise last week. As a result of accumulating a large number of licenses through its purchases, it was now subject to some form of regulatory control. However, this did not prevent billions in losses to its clients and investors. Reuters alleged that FTX secretly risked $10 billion in customer deposits to support a trading firm owned by Bankman-Fried.
According to four attorneys, the fact that Bankman-Fried was actively wooing authorities while taking significant risks with consumer assets without anybody noticing highlights a massive regulatory void in the bitcoin sector. Aitan Goelman, an attorney at Zuckerman Spaeder and a former prosecutor and CFTC enforcement director, has remarked, “It’s a patchwork of global regulators — and even locally, there are big gaps.” That’s because regulators have been slow to respond to the rise of cryptocurrencies, which is their fault.
According to a source familiar with SEC thinking on crypto regulation, the agency considers it likely that cryptocurrency firms are breaking the law by relying on licenses that do not comply with U.S. securities laws to operate. In other words, “such representations, while nominally truthful, don’t cover their behaviour,” the speaker claimed.


From a standing start in 2019, FTX has grown to generate over $1 billion in revenues and account for around 10% of trade in the global crypto market, far exceeding Bankman-lofty Fried’s goals for the company. According to a document named “FTX Roadmap 2022,” he planned to create a financial app where users could trade stocks and tokens, transfer funds, and conduct other banking transactions.
The “Roadmap” document stated, “The First Step” toward this objective is to obtain as many licenses as is practical.
As stated in the aforementioned document, “part of this is to make sure that we are regulated and compliant;” the other motivation is to increase product variety.
According to the papers, here is where FTX’s buying frenzy comes into play. Bankman-Fried opted to buy licenses rather than apply for them all, which could take years and involve awkward questions.
Although the tactic was not without its flaws: There are indications in the files that some of the companies it acquired lacked the necessary permits.
According to the filings, one of FTX’s primary objectives was to facilitate access to the U.S. derivatives markets for its domestic clients. The market was predicted to bring in an additional $50 billion in trading activity every day, resulting in millions in revenue. In order to do so, it had to convince the CFTC to modify one of the licenses held by LedgerX, the futures exchange that FTX had just bought.
The application process took months, and during that time, FTX had to fork over $250 million to establish a default insurance fund. Advisory board minutes from March show that FTX expected the CFTC to ask it to raise the fund to $1 billion.
After failing to secure the necessary approval, FTX has withdrew its application.
According to the documents reviewed by Reuters, there were further benefits to purchasing companies for licensing. Bankman-Fried might now be able to talk to the government about his concerns.
The IEX transaction was publicized in April as an excellent illustration. In a joint interview to CNBC, Bankman-Fried and IEX CEO Brad Katsuyama claimed they sought “to establish policy that ultimately protects investors.” Bankman-Fried chimed in to emphasize the significance of “transparency and protection against fraud.”
Reuters could not ascertain how much FTX paid for the stake.
Bankman-Fried was asked to meet SEC Chairman Gary Gensler and other SEC officials together with Katsuyama in March.
A person close to IEX claimed the purpose of the meeting was to let the SEC know in advance about its arrangement with FTX, which had not been publicly revealed at that point, and to discuss the idea of IEX developing a trading platform in digital assets, such as bitcoin. FTX’s job was to supply the crypto-trading infrastructure, the insider claimed.
SEC authorities bluntly rejected their initial plan because it would have included the development of a non-exchange trading venue that is more loosely regulated, which the agency opposes for cryptocurrencies, the source familiar with the SEC’s thinking said.
Reuters could not ascertain the scope of Bankman-engagement Fried’s in later interactions with the SEC. A source familiar with SEC thinking explained that when they agreed to meet with Katsuyama in March, Bankman-Fried was only tagged along. According to the same source, Katsuyama was in the “driver’s seat” of the meeting while he remained relatively mute.
Whatever his role was, FTX portrayed it favorably to its shareholders. FTX said that its discussions with the SEC were “very fruitful” in a September advisory board meeting.
“We are likely to have pole position there,” it said, according to the meeting minutes.
The source close to the SEC stated they would disagree that FTX was in the “pole position.” According to the source, any actions taken by the SEC to control cryptocurrency trading will be made public.
According to the IEX insider, the two organizations never even discussed the possibility of forming an operational cooperation.
A document released by FTX in May details the company’s interactions with various regulatory bodies. This previously unreported paper details how FTX dealt with most problems as they arose.
In February, for example, South African authorities published a warning to consumers that FTX and other crypto exchanges were not authorized to operate there. As a result, FTX and a regional exchange have agreed into a business arrangement so that the former may go on offering the latter’s services. For its current operations in South Africa, “FTX is now fully regularised,” the company announced.
The governing body, the South African Financial Sector Conduct Authority, declined to comment.
FTX had an encounter with the SEC, as evidenced by a document from May. Earlier last year, the SEC investigated how cryptocurrency firms were protecting customers’ funds. The SEC ruled that some businesses’ interest-bearing deposit offerings might qualify as securities that required registration. FTX stated in its registry of interactions with regulatory bodies that the investigation concerned whether or not the assets in question were being “lent out or otherwise used for operational purposes.”
The news that FTX had transferred customer funds totaling billions of dollars to Bankman-trading Fried’s firm, Alameda Research, was revealed this month by Reuters.
According to the paper from May, FTX claimed the SEC’s test staff was concerned about something other than its interest-bearing cryptocurrency deposit rewards scheme.
The document states that FTX assured the regulator that their product did not have the same problems as those of other providers.
For their part, FTX stated, “We confirmed these were strictly incentives based and do not entail lending (or other use of the deposited crypto). The SEC replied back, saying it had concluded its “informal inquiry” and did not need any information “at this time.”
There was silence from the SEC in response to the inquiry. Bankman-Fried told Reuters via email, “FTX’s statement there was accurate; FTX US’s incentives program did not entail leasing out any assets.”

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