Sam Bankman-Fried, chief executive officer of FTX Cryptocurrency Derivatives Exchange. Eva Marie Uzcategui/Bloomberg© 2021 Bloomberg Finance LP
Sam Bankman-Fried is the richest person in crypto, with a net worth of $16.2 billion. His cryptocurrency exchange, FTX, also recently set a record for the largest private fundraise in crypto history, bringing in $900 million at a valuation of $18 billion.
This rapid ascent is based, in-part, on leveraging surging demand for cryptocurrency derivative products, such as futures and options, that let investors trade on the price of an asset such as Bitcoin without actually touching it. Many of these products are unregulated, and some are offered with leverage that let investors substantially increase the nominal size of their positions beyond their actual holdings. Because of this risky nature, crypto derivatives have been either scapegoated or blamed for causing and magnifying recent price crashes in the volatile crypto market.
However, Bankman-Fried criticizes this narrative as short-sighted. In an exclusive interview, he says that the crypto derivative industry is maturing, becoming more responsible, and ultimately necessary for a healthy crypto market. He also says that many critics of the large leverage (sometimes 100x) in crypto conveniently forget that it has existed in traditional markets for years.
We also discuss the challenges of building a regulatory compliant exchange in this industry without sacrificing the opportunity to grow and innovate, how he plans to spend FTX’s $900 million, what critics of crypto derivatives misunderstand about the market, and his intentions to ultimately give away all his wealth.
This interview first appeared in our premium research and news service, Forbes CryptoAsset and Blockchain Advisor.
Forbes: I want to talk a little bit about the derivatives market—it’s interplay with spot prices because it’s starting to get a lot more attention these days. That’s one of the areas where you first made a name for FTX. What is the role of a derivatives market? What do you think are healthy trading volumes ratios between the various types of markets?
Bankman-Fried: This is a somewhat misunderstood area. A lot of people are seeing something happening and assume this is the first time it has happened in history. That might be true in some cases, but not in all. I think derivatives are a good example of this. People will note that derivatives trade more volume in crypto than spot, which is true. But that is true of every asset class in the world. The reason is basically that derivatives are a bit more efficient if you don’t need immediate delivery (spot). Here’s an example. Two people are doing a trade, Bob is buying from Sally. Maybe Bob is buying a bitcoin from Sally for X dollars. If it’s pretty important for Sally to have a physical bitcoin, because she needs to go send it somewhere, then it needs to be a physical bitcoin trade. And if it’s very important for Bob to have the dollar, because he needs to go pay for something, then it’s important for it to be a physical trade. But if neither of them cares about the short-term deliverability and what they’re looking for is your hedge position or put on a delta or something like that then neither necessarily care whether it’s a futures or a spot contract. I think it adds liquidity to markets and makes them more efficient in general.
There are cases where it makes them less efficient, though, and these get a lot of attention in crypto, because they are sometimes quite important. I do want to emphasize that overall, I think futures have made crypto substantially more efficient, although there are high profile times where it makes them less efficient. Those times tend to be on liquidations and what you’ll see happen often is people put on a leveraged position, the market moves against them and then those positions will get liquidated and it can create a little bit of a momentum effect where liquidations are triggered causing impact, which triggers further liquidations and markets move more. That is a real effect in crypto, it does really happen. Sometimes it happens to a significant degree and really does influence the market. So, there are cases where futures can cause illiquidity and blowouts, although I think more frequently they solve those than cause them.
Forbes: When SEC Chairman Gary Gensler spoke recently, he signaled more of a willingness to consider derivative-focused ETFs, as opposed to spot ETFs. What’s your opinion as to why he might think that derivatives are a bit more palatable right now?
Bankman-Fried: I believe his thought process is that there is exactly one crypto exchange in the world that he trusts and it’s CME. He’s just looking at which underlying exchange and marketplace will be the most transparent, compliant and least open to manipulation.
Forbes: Let’s talk about margin too, because that’s another big issue that can accelerate liquidations or short squeezes. You recently made the decision to reduce or eliminate 100x margin on FTX. One of the justifications you gave was that it comprised a very small part of your overall trading volume anyway. Why did you decide to offer it in the first place given the risks?
Bankman-Fried: A few things. One is that our users wanted it. We did not have this on day one and it was the most requested feature from our users. They were refusing to use the platform unless we had it. One of FTX’s chief duties is serving its users and serving what they want. The other thing to note is that crypto is not unique in that respect; many asset classes have high leverage that sometimes go to 500x. I think there are a lot of places offering way more than 100x on equities trades, as well. In any case, people started to become very concerned with it, and it wasn’t a big part of the business. I also don’t want to try and claim that it was important for efficient markets, because I don’t think it is. Any position that you’re putting on with that level of leverage can’t be absolutely crucial for efficient markets, and this is not something I felt was particularly important or good for crypto market health. It is not something I think regulators are going to be a huge fan of and it just seemed like the right idea to remove it. Although I do maintain that it got a worse rap than it deserved.
Forbes: If you were faced with that decision now, do you think you would have offered that level of leverage?
Bankman-Fried: Would I have done it in the first place? Probably not if I had to do it over again.
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Forbes: In a recent interview, you mentioned spending about five hours a day dealing with regulation. Can you give a little flavor as to what that’s like?
Bankman-Fried: Crypto has always been regulated, and comments saying that it is just becoming regulated are not not really correct. But it is true that regulators are building out frameworks, more so now than they had before. We are seeing this two pronged push on the part of global regulators, one of which is to build out licensing frameworks for cryptocurrencies that legitimate businesses can apply for, and they’re policing non-compliant behavior. To give a flavor of what this looks like, one thing is just applying for licenses. Sometimes this means applying for a de novo license, sometimes this is an acquisition. Sometimes this is a conversation with the regulator. But yes, one big part of it is literally just applying and I think we’re applying in something like six or seven jurisdictions right now.
Forbes: Are those six or seven jurisdictions that you’re currently operating in and have just launched licensing regimes? Or are they new jurisdictions that you’re hoping to enter?
Bankman-Fried: It’s an interesting question. The basic answer is that many of these are jurisdictions in which we passively have users right now, but in which we don’t have any operations and so one piece of this is wanting to build out operations, marketing, offices, workforces and support in the jurisdictions, and another piece is regulatory frameworks that are coming online. Many of these are either not online yet, very recently came online or are sort of vague and not super crypto aware and so sometimes this involves just talking with the regulators and saying, “Hey, here’s our business. I see your regulations, how does this fit in there?” And often the answer is “that’s interesting. But let me think about it.” Our goal is to have a collaborative dialogue with regulators so we can come to a place where we’re able to operate in a licensed fashion there. In some of these, it’s old frameworks that have been around for decades, but aren’t crypto specific and it’s figuring out how to apply that to a crypto purpose.
Forbes: I think one of the things that people find most interesting about FTX is your sheer scale of growth. What do you think helped you gain scale so quickly?
Bankman-Fried: There are a lot of answers here. We tried really hard to build an efficient organization that could execute well in terms of building out the cross margining, having a stable API and avoiding downtime. But I think it stretches to other areas as well, such as compliance, which is one of the things we’ve been thinking about from day one. We have always had KYC (know your customer) on the platform and been mindful of jurisdictions to exclude. For instance, we’ve always excluded the U.S. from FTX International. People sometimes think of a tension between building products and building compliance, where you can choose one or the other, but not both. I think that was very different from how most exchanges circa 2018, were starting up. We saw a very large number of exchanges that just white labeled some generic tech, didn’t think too hard about it, didn’t hire any compliance on and then just went out and spent a bunch of money marketing. That was a good way to get some early growth, but it was not building sustainable products.
Forbes: Let’s talk a little about some of the more recent developments. FTX recently set a record with its $900 million raise at an $18 billion valuation. I know that it’s going to give you a lot of dry powder to go hunting on the M&A front. What is your strategy or the types of companies you’re looking at to build out the FTX platform?
Bankman-Fried: There are a few different pieces of this. One is looking at applications that have built up large loyal user bases, but that aren’t necessarily FinTech companies and don’t have the internal expertise to build out a lot of the trading products that their customers want. I think that’s one natural area. I also think licensing-related acquisitions can make sense. This depends on what the company had actually built out in addition to literally having the license. Third, we are expecting some consolidation in the industry. I think that’s healthy and it has been a long time coming. I also think that’s going to lead to some I do some sort of acquisitions of other, you know, trading related venues,
Forbes: Do you have ambitions of going public sometime in the near future?
Bankman-Fried: Maybe. You know, we thought hard about it. And what we ended up deciding, I think, especially with changes in public equity markets, was that now is not the time. But we want to be ready to do it if it seems like it’s the right thing for the business. We don’t ever have to do it, we are profitable. And there’s no sort of like, you know, there’s no gun to our head on that one. But, it very well could be good for the business, I think. One other point worth mentioning, is that we’re also not looking to cash out or anything like that. And so that’s sort of like another potential use case of going public that I think is not relevant for us.
Forbes: I wanted to talk a little bit about sort of your relationship and interest in Solana because although you’re not a founder, you are very closely affiliated with the platform. Can you help clarify this, and why do you think that the price of its native token SOL has been going up so much recently?
Bankman-Fried: The right way, think of me basically is as a fanboy. I think it’s a really cool product. I don’t want to claim that it is definitely going to win, if that’s even a meaningful statement because I don’t think that’s true. But I do think that of the currently existing blockchains, it is maybe the only one, or at least one of the very few, which is being built in a way that it has a really plausible chance of eventually being able to host gigantic applications. If you pick your favorite, you know, large consumer facing company, you know, tech company, that company is is going to have something like 100,000 to 10 million transactions per second happening internally. And, and so when you’re sort of thinking about what blockchain could you put a large application on, you know, I think that like, those are good places to look. And, and I think it’s just like very few blockchains have a roadmap to that, and I think Solana does.
Forbes: And just really quickly on your DEX Serum, can you talk a little bit about its growth, and basically, your opinion on DEXs in general, do you think that at some point, they really might overtake centralized exchanges in a meaningful way for longer periods of time?
Bankman-Fried: I think with Serum, what we saw was a pretty big gap in, you know, in the crypto ecosystem for you know, for a DEX that was going to be scalable, and that we can have an order book instead of AMM. And it is not trivial to build those on-chain. So you’d have to find a blockchain that could be scalable enough that canceling orders was like a thing you could do without completely overloading it. And so I think that sort of like mandated a substantially faster chain than what people have been looking at. In terms of the future outlook of DEX’s, I think that they have really high potential, but I do not want to claim that I think that they will overtake centralized exchanges, I don’t think they will. I think that sort of the upside of them is that they end up with like, you know, 25% of the world’s activity on it, which would be sort of like a tail case upside for DeFi. I think that’d be absolutely enormous. But that doesn’t mean that everything’s going to end up there or even most things, because, frankly, it’s never going to be the most efficient technological substrate, it’s always going to be duplicating a lot of computation between lots of independent nodes, it’s always gonna have latency built in from just the fact that it’s trying to be geographically decentralized.
Forbes: You’ve talked about giving away all of your wealth in the past. Do you have any formalized plans, or infrastructure to do this, or if you’ve made any, like meaningful donations so far, with the wealth you’ve accumulated?
Bankman-Fried: Meaningful is relative. I don’t think I’ve made the largest donations yet, I’ve probably given away about $30 million so far. The infrastructure is something that I’m pretty actively working to build out right now, but it is hard to put as much time into it as I would like. And so I think that’s something which is gonna take a while to get through maturity. And it’s also gonna take a while, I think before, you know, some of the donations are gonna happen, just because, right now, my wealth is frankly, not very liquid. When you look at it, it’s mostly equity and locked-up tokens, and so it’s going to be sort of a long term thing. But I do think it’s pretty important to be giving away at least reasonable amounts in the meantime, you know, to prove to myself that this is something that’s real. And so, I am going to keep giving in the meantime, although I think, you know, a lot of it is going to be something that’ll grow more over time.
Forbes: I had the opportunity to interview former Binance.US CEO Brian Brooks before he suddenly resigned in early August. One of the more interesting things he said to me was his core belief that that exchanges are not profitable ventures in the long term due to the trend towards fee compression. How do you respond?
Bankman-Fried: I’m not necessarily super bullish on the future of business that is nothing but a matching engine. So I do think that there’s some truth in that, that, you know, if you don’t own the clearing, settlement, customer, or the the UI or the API, or anything else. But crypto is sort of like a pretty strong counterpoint to that since crypto exchanges are full stack businesses.
Forbes: Finally, tokenized stocks is an area that is starting to get a lot more interest, but also brings a great deal of regulatory scrutiny. What are your thoughts on the future of that type of offering? Additionally, how does the value proposition for tokenized stocks differ based on geographic locations?
Bankman-Fried: Yeah, so I would say two things. First of all, note that, that the, you know, the stock offering that we have right now is not on FTX.US but FTX International. And there are a lot of countries that are just really underserved in equity markets. I think the challenge there frankly, is building out the localization, on ramps, off ramps, and user bases in a lot of different jurisdictions. And that’s something that we’ve already been building out for FTX. And so we’re able to leverage that to give some people easier access to equity markets than they’re able to get, especially in sort of more neglected countries. The US is somewhat different. From that perspective, to the extent that we’re looking at adding equities to the platform, I think the main goal, at least at the beginning, would just be having a somewhat similar offering to what already exists on other platforms, but having it on the same platform that people can access, their crypto and a lot of other things that we’re building out, because, you know, switching between platforms, it’s a pretty big pain. And you have to sort of manage a lot of different applications passwords and logins and everything else at once, which is another good. And so I think that is one of the visions for, for instance, the US for adding stocks.