The New York Times: Crypto billionaires are nomadic around the world

Author | Eric Lipton, Ephrat Livni

Compilation | Hu Tao

In Hong Kong just after midnight, Sam Bankman-Fried (SBF) stares at the trading data on his six monitors, watching the global crypto market crash in real time.

SBF, a 29-year-old Californian, often works around the clock, like he did on that night in May. He naps on a bean bag next to his computer. A folded blanket lay on the floor. His book value is at least $8 billion. Even after the downturn that began in the spring, the total global losses of all cryptocurrencies in the crash ended up exceeding $1.3 trillion. When SBF saw it happen, he knew his business played a role in the collapse.

Cryptocurrencies — digital currencies not backed by any state — are known for their wild and frequent swings. But FTX, a cryptocurrency trading platform operated by SBF, specializes in a type of trading that hastened the collapse of global markets.Most of his clients are betting on future cryptocurrency price swings, rather than buying or selling bitcoin, they borrow money to up the ante. This is a risky approach. But it can yield huge wins.

Now, the value of Bitcoin is falling fast, crushing highly leveraged bets by bullish traders on FTX and other exchanges and forcing them to liquidate their accounts in waves. These forced sales are destroying the prices of cryptocurrencies.

"In terms of price action, the biggest part of it is liquidation," SBF wrote to The New York Times on May 24 in Hong Kong.

This is exactly what U.S. regulators are trying to avoid by banning cryptocurrency exchanges such as FTX from selling risky futures to U.S. non-professional investors. thisAlso the reason why SBF moved to Hong Kong - because he wanted to offer these products, derivatives。

SBF is a cryptocurrency nomad, one of a group of industry leaders who once lived in the U.S. or Canada and have since founded companies whose operating bases are somewhat outside the purview of U.S. regulators.

Other nomads include Changpeng Zhao, 44, a Chinese-Canadian founder of Binance who lives in Singapore; and Arthur Hayes, 35, a Detroit-born trader who founded Seychelles-based BitMEX.

It's a never-ending tribe: transactions are happening 24 hours a day, 365 days a year. (SBF says he sleeps when there are no meetings, "working while this counterparty is awake and that counterparty is awake.")

Inspired by multiplayer online games, these crypto nomads have built a global playground and offer "leaderboards" for customers who use aliases like Dark Crypto Lord and can win prizes like Teslas or iPhones.

Industry data analyzed by researchers at Carnegie Mellon University shows that the highly leveraged forms of trading offered by these platforms have become so popular that the total daily value of these derivatives buying and selling reached 10 times the value of spot cryptocurrency trading in July as much.

All of this should be off-limits for U.S. investors, but it isn't. Transaction data provided to The New York Times also showed that despite the ban, billions of dollars worth of investments by U.S.-connected clients had been diverted to at least one of these global sites.

"I'm not saying this will cause the next financial crisis," said Timothy Massad, former chairman of the U.S. Commodity Futures Trading Commission, which regulates derivatives trading. "But could it be the butterfly that flaps its wings in Brazil and unleashes a tornado in Texas?"

Binance founder Changpeng Zhao admitted in an interview, “Leverage magnifies volatility. So that’s for sure.”

But he and other industry advocates argue that highly leveraged futures trading is common on Wall Street and on foreign exchange exchanges. Some also said they had to relocate because U.S. regulators did not fully embrace these creative investment opportunities.

“It’s not going away,” said billionaire entrepreneur, TV personality and cryptocurrency enthusiast Mark Cuban, who is also a supporter of FTX’s financing. “But we’re losing a lot of jobs and a lot of financial depth by pushing derivatives exchanges overseas.”

In fact, just last week, FTX raised $900 million in funding to help it expand its global operations at a valuation of $18 billion.first level title。

01 Betting on the future

When SBF entered the cryptocurrency industry, he had already graduated from MIT for four years.

SBF was still living in California at the time — his parents were both Stanford law professors — and he noticed that bitcoin and other tokens were sometimes sold at different prices in different countries.

It's an open invitation for creative players to make money, with a classic arbitrage strategy: buy at a lower price in the US, sell at a higher price in Japan.

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SBF

He was in China in 2018 for a two-week cryptocurrency conference, and he is actually based in Hong Kong. "I figured I'd cancel my lease on the Gulf at some point," he recalls. He decided to create a new company, FTX, specializing in derivatives.

In traditional markets, derivatives are used to help farmers or other businesses hedge against changes in the price of commodities such as oil or grains.

In the U.S., there is some cryptocurrency derivatives trading on platforms such as the Chicago Mercantile Exchange, which has long offered options and futures on commodities as diverse as agriculture, energy and metals. But CME is a traditional exchange with more restrictions and federal government oversight, and only professional traders can use lower leverage caps.

Cryptocurrency innovators like Arthur Hayes, one of the founders of BitMEX, took this classic approach and turned it into a more lucrative idea, at least for the platform.

BitMEX started what Arthur calls perpetual contracts — bets on future price changes that don’t expire — and eventually offered 100x leverage. This means that an investment of $1,000 can instantly translate into a $100,000 bet on the future price of Bitcoin.

As Arthur explained in an industry presentation in 2016, from the beginning, BitMEX was clearly aimed at attracting not only professional traders, but also retail investors who like to gamble and gamers who like to take risks. “There are some who offer a similar type of product but focus on the depraved gambler, the retail trader of bitcoin,” he said, “so why don’t we do that?”

The exchange targets social media ads to potential customers in the U.S. and claims that “signup takes less than 30 seconds.”

At least initially, some exchanges like BitMEX made little effort to screen investors to determine their true identities or confirm their physical location, as banks and other trading firms in the U.S. are required to do, Although US participants are barred from entering. A number of platforms, including BitMEX and Binance, have recently stepped up enforcement efforts in an attempt to curb trading by U.S. investors.

This comes after the U.S. Department of Justice filed charges against Arthur late last year, with the government alleging that he and other BitMEX executives illegally operated a cryptocurrency exchange that processed some $11 billion in transactions involving at least 85,000 U.S. Associated user accounts. He has since left the company.

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Arthur Hayes

FTX and Binance are among more than a dozen global cryptocurrency platforms currently offering perpetual contracts products, most of which are based in Asia. FTX alone has 1 million users worldwide and processes up to $20 billion in transactions per day, most of which are derivatives transactions.

Like their customers, these platforms are competing. In order to compete with BitMEX, FTX began to provide up to 101 times leverage for derivatives trading. Binance then beat them with a leverage of 125.

A trader's loss can be turned into a huge gain for the exchange。

Platforms earn transaction fees based on forced sales when the price of the underlying cryptocurrency moves against traders. The May debacle started with a regulatory crackdown in China and Musk’s cryptocurrency activism. But the reckoning then gave it a big boost.

Some executives, such as SBF, also own related companies that trade algorithmically to profit immediately from the market distortions that occur during these sell-offs. SBF said,He sees no conflict for his business to play both roles, as such moves help keep markets liquid during sharp declines。

The founders of FTX, Binance, and BitMEX have all argued that only a small percentage of clients actually use high leverage. But even for those with smaller bets, problems can quickly arise if cryptocurrency prices start to drop. On May 18 alone, BitMEX, Binance and FTX liquidated a combined $1.6 billion, according to crypto derivatives data firm Bybt. In mid-May, there was a total of $20 billion in forced liquidations in the crypto market.

“If you go all out with maximum leverage every time, the market will turn against you at some point and you will be eliminated,” Changpeng Zhao said. “Professional futures traders will manage risks.”

But cryptocurrency critic Michael Green said the derivatives market is inherently antithetical to novice traders. "The math behind the highly volatile instrument is that the casino almost always winsfirst level title

02 From Shanghai to Malta

Changpeng Zhao is so focused on Binance’s branding that he tattooed the company’s logo on what he now calls his “crypto arm” — two diagonal squares that represent bids and asks on exchanges.

He and other cryptocurrency nomads have become global celebrities, with millions of followers on Twitter, podcasts and even YouTube. They are diplomats of the renegade profession, not affiliated with any particular country.

Binance opened an office in Shanghai in July 2017. But the company moved to Tokyo two months later when the Chinese government announced a crackdown on cryptocurrency exchanges.

Japan then announced new rules for trading cryptocurrencies. “So we said, well, that’s not appropriate,” explained Changpeng Zhao, “and we had to move again.”

The next stop is Malta, a small island nation in the middle of the Mediterranean Sea. Now Changpeng Zhao has not identified any location as the company's headquarters.

In a way, Binance’s ever-changing home base mirrors his own life story. Born in China, he immigrated to Canada at the age of 12, interned in Japan while studying computer science at McGill University, and went on to work developing trading products in Tokyo, New York, Singapore, Hong Kong and Shanghai.

"I have moved a lot in my life," said Changpeng Zhao. This international experience provided him with a "wider world view" that informed his business and its borderless mentality.

Other companies are also migrating. Dutch cryptocurrency exchange Deribit announced last year that it would be run by a subsidiary called DRB Panama, with several of its executives relocated to Central America. Palm trees and tropical landscaping now feature in executives' social media posts. Another exchange specializing in derivatives trading, BTSE, moved its headquarters from Dubai to the British Virgin Islands.

But in some cases, the claimed offshore operating base is nothing more than a ruse. BitMEX listed its headquarters as Seychelles, an island republic in the western Indian Ocean, but federal investigators found that most of its employees worked in New York, Hong Kong and San Francisco.

When U.S. federal prosecutors charged him in late 2020, founder Arthur claimed that bribing Seychellois authorities cost "a coconut" — less than buying from regulators in the U.S. and elsewhere. Arthur pleaded not guilty in April and his case is ongoing. He lives in Singapore now.

"Arthur Hayes and his co-defendants in this case are innocent and look forward to defending themselves in court," Arthur's spokesman Nate Johnson said.

Until recently, Hong Kong was a gathering place for cryptocurrency gurus, at least until the outbreak, where they often met at industry conferences or local bars and cafes.

Changpeng Zhao said that this community has made him popular in the cryptocurrency industry. He said he found at conferences around the world, "It's a very geeky, honest community."

These personal relationships sometimes lead to economic relationships. Changpeng Zhao's company is an early investor in SBF Exchange, and SBF's trading company is a client of Changpeng Zhao's platform. They often talk to each other.

“I think I’ve seen him in Taiwan, Hong Kong, Singapore, and even Europe,” Changpeng Zhao said of his fellow crypto nomads, “but mostly in Asia.”

SBF and Changpeng Zhao said in separate interviews that they are committed to complying with U.S. regulations, even if their global exchanges are based abroad.

But globally, the cryptocurrency derivatives market continues to soar --There are clear signs that major US players are still pumping money into the game。

A dozen large private trading firms with U.S. roots have set up offices in the Cayman Islands and other offshore locations, creating new corporate entities to trade overseas through Binance and FTX, traders involved in the deal told The New York Times. Derivatives platforms push funding at scale.

"I'm not American," said a trader who moved to the Cayman Islands on behalf of a large fund, initially leaving his family in the Midwest to run the business, "but I'm still a U.S. citizen."

The trader requested anonymity because he was not authorized to discuss the arrangement publicly.

This stateless approach to running these cryptocurrency exchanges — coupled with the constant rollout of new unregulated and often high-risk products — is now facing perhaps its most important test yet.

Since just June, Binance has been targeted by financial regulators in the UK, Cayman Islands, Hong Kong, Lithuania, Italy, Poland and Thailand, many of whom have set their sights on its highly leveraged derivatives offering or new product line. This spring, Binance allowed customers to buy tokenized versions of some stocks, such as Tesla and Apple.

Faced with backlash, Binance announced in mid-July that it was ditching its stock token offering.

“The crypto industry is a very new one and the landscape, including the way crypto exchanges are regulated, is constantly evolving,” the firm said in a statement to The Times, which attributed the recent scrutiny in part to mainstream acceptance of cryptocurrencies last year, saying it was "right" for regulators to scrutinize the industry.

SBF said at the end of a three-hour series with The Times that it may be time for the industry to pull back on its most extreme products, such as leverage up to 125 times on derivatives trading.

"It's easier to get rid of it than to keep talking about it," SBF suggested a leverage cap of perhaps 10 times, adding that it was mainly to counter the perception that the industry encourages risky bets. He thought it was unfair.

Binance and FTX are also looking to secure a recognized space in the US market. Over the past two years, they have opened U.S.-based platforms that do not offer derivatives but instead focus on the actual buying and selling of cryptocurrencies.

FTX also recently bought the naming rights to the Miami Heat's arena and put its corporate logo on the patches worn by Major League Baseball umpires, as it works to build awareness here. SBF, through a $5.6 million donation, was also one of the largest contributors to helping Biden's presidential campaign last year -- though he said in interviews that it had nothing to do with his business.

These U.S. operations currently generate tiny profits compared with their overseas counterparts. They do follow US regulations, though. It does make a difference.

"It's a less exciting product," SBF said.