By Alexander Osipovich
Want to trade Tesla Inc. 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
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
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
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.
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
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
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
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
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
Mr. Bankman-Fried says his donation to the pro-Biden group was
similar: He viewed defeating Trump as important for geopolitical
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."
Write to Alexander Osipovich at
(END) Dow Jones Newswires
April 16, 2021 05:44 ET (09:44 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.