How monopolistic FTX bought its way to becoming the ‘most heavily regulated’ cryptocurrency exchange

FTX bought a 10% stake in IEX with a 100% takeover option. FTX spent $2 billion on ‘acquisitions for regulatory purposes’. After FTX’s collapse this month, it set itself apart from many competitors in the largely unsupervised cryptocurrency industry by boasting that it is the “most heavily regulated” exchange on the planet and calling for closer scrutiny from authorities. Now, the company documents seen by Reuters reveal the founders’ strategies and tactics. Sam Bankman-Fried’s regulatory agenda, including IEX Group, an American stock trading platform featured in Michael Lewis’ book “Flash Boys” on fast computer-based trading, and previously unreported trading terms announced earlier this year. As part of that transaction, according to documents dated June 7, Bankman-Fried purchased a 10% stake in IEX, with an option to purchase it outright within the next two and a half years. The partnership gave the 30-year-old executive the opportunity to lobby the US Securities and Exchange Commission, IEX’s regulatory body, for cryptocurrency regulation. Transactions and other things mentioned in documents including business updates, meeting minutes and strategy documents shed light on one. One of FTX’s broader goals is to acquire stakes in companies that have already been licensed by authorities to expedite the creation of an appropriate regulatory framework for itself and shorten the often delayed approval process. FTX has spent about $2 billion on “acquisitions for regulatory purposes.” FTX docs seen by Reuters at the Sept. 19 conference show. For example, last year we acquired LedgerX LLC, a futures exchange, that received three Commodity Futures Trading Commission licenses at once. The license gave FTX access to the US commodity derivatives market as a regulated exchange. Derivatives are securities that derive value from other assets, and FTX saw its regulatory status as a way to attract new capital from major investors. Documents supporting hundreds of millions of dollars in funding requests presented licensing as a key competitive advantage. A “regulation moat” would create barriers for competitors and provide access to lucrative new markets and partnerships that are out of reach for unregulated companies, he said. “FTX has the cleanest brand in cryptocurrencies,” the exchange declared in a document published in June. investor. Bankman-Fried did not respond to a request for comment in response to questions about FTX’s regulatory strategy. FTX did not respond to a request for comment. The CFTC also declined to comment, and in a text exchange with Vox this week, Bankman-Fried changed its stance on the regulatory issue. When asked if his previous praise for regulation was “just publicity,” he said in a series of texts: ” An IEX spokesperson declined to confirm details of the deal with FTX, except to say that FTX’s “minority stake” in IEX cannot be sold to third parties without consent. “We are currently evaluating our legal options with respect to the previous transaction,” the spokesperson said. REGULATORSFTX’s patchwork collapsed last week in a futile bid by Bankman-Fried to raise emergency funds. It has had some regulatory oversight through dozens of licenses obtained through many acquisitions. But that has failed to protect customers and investors who now face total losses of billions of dollars. As Reuters reports, FTX has been secretly taking risks with customer funds, using $10 billion in deposits to support a trading company owned by Bankman-Fried. It reveals huge regulatory gaps in the cryptocurrency industry without anyone noticing. “It’s a patchwork of global regulators, and there are huge gaps domestically as well,” said Aitan Goelman, Zuckerman Spaeder’s attorney, former prosecutor and CFTC executive director. “It is the fault of the regulatory system that has taken too long to adapt to the advent of cryptocurrencies,” he said. Other licenses that provide minimal consumer protection. Reuters Graphics Reuters Graphics’STEP 1: LICENSES’ Bankman-Fried had big ambitions for FTX, which had grown to over $1 billion by the end of this year. Since 2019, it has accounted for about 10% of global cryptocurrency market transactions. According to undated documents, he wanted to create a finance app where users could trade stocks and tokens, as well as transfer money and banks. , “FTX Roadmap 2022.” “Step 1” towards that goal, the “roadmap” document said, is “to obtain licenses whenever reasonably possible.” In part, this is so that we can expand our product offering.” According to the document, that’s where FTX’s acquisition came in. Bankman-Fried said that applying for all the licenses could take years and sometimes ask inconvenient questions. Instead, it decided to purchase a license, but the strategy also had limitations: according to the documents, one of FTX’s goals was to open up the US derivatives market to customers in the US, which would allow the market to add $50 billion per day. It was estimated to bring trading volume and generate millions of dollars in revenue, which required convincing the CFTC to modify one of the licenses held by FTX’s newly acquired futures exchange, LedgerX. needed to raise $250 million for its basic insurance fund requirements, FTX expected the CFTC to be able to request an increase in the fund to $1 billion, according to the minutes of its March advisory committee meeting, which FTX approved. It collapsed before it could even be received and withdrew its current application Documents reviewed by Reuters show benefits include: Allowing Bankman-Fried to grant regulators the access they desire Bankman-Fried in a joint interview with CNBC “Ultimately, we want to create regulations that protect investors,” said Brad Katsuyama, CEO of IEX and Bankman-Fried, adding that the most important thing here is “there is transparency and there is protection against fraud.” Sources said the purpose of the meeting was to inform the SEC in advance about trading with FTX, which was not disclosed at the time, and for IEX to be a venue for trading digital assets such as Bitcoin.According to the source, FTX’s role was to provide cryptocurrency trading infrastructure.The SEC A source familiar with the idea said Reuters could not determine the extent to which Bankman-Fried was involved in subsequent conversations with the SEC. Law SEC officials agreed to meet with Katsuyama in March and Bankman-Fried was just following along, said a source familiar with the SEC’s thinking. The source added that Katsuyama remained silent for most of the meeting, with him “in the driver’s seat.” FTX said its talks with the SEC were “very constructive” during an advisory board meeting last September. You will object that FTX is in a “pole position”. Sources said that anything the SEC has done to regulate cryptocurrency trading will be open to all market participants. A source close to IEX added that the exchange has never signed an operating agreement with FTX and has not reached that point. May’s FTX document provides an overview of individual regulators and FTX’s contacts. This previously unreported article shows how, in most cases, FTX has been able to fix the issues it encountered. It works there. So FTX entered into a commercial agreement with the local exchange to continue providing the service. “FTX is now fully regular in relation to its current activities in South Africa,” said FTX. The regulator, the South African Financial Sector Conduct Authority, did not respond to a request for comment. SEC. Earlier this year, the SEC investigated how crypto firms handle customer deposits. Some companies offered interest on deposits, and the SEC said they could make them into securities and would have to register under the rules. On its list of regulatory interactions, FTX said it was investigating whether the asset was “slowed down or used for operational purposes.” In a May document, FTX said the SEC’s examination staff, which scrutinizes market practices that pose risks to investors, are concerned about a different issue: its rewards program. said. According to the documents, FTX told regulators it did not have the same problems with products from other providers that the agency investigated. It does not include lending (or other use) of deposited cryptocurrencies,” FTX wrote. The SEC replied that it had completed an “informal investigation” and that “at this time” no further information was needed. Bankman in an email to Reuters -Fried said “FTX’s response was correct. FTX US’s rewards program did not include asset lending,” wrote Chris Prentice and Hannah Lang, Washington, Angus Berwick, London, edited by Megan Davies, Paritosh Bansal, and Chris Sanders. Our criteria: Thomson Reuters Trust Principles.
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