Correcting the name of crypto derivatives - SBF talks about the crypto market and regulation

Billionaire Sam Bankman-Fried Pushes Back Against Critics Of Crypto Derivatives

Source: Forbes

By Steven EhrlichForbes

Compiled by Chen Zou

Sam Bankman-Fried is the current richest person in crypto, with a personal net worth of $16.2 billion. His cryptocurrency exchange FTX recently set the highest private placement record in the history of cryptocurrency - $900 million, and FTX is therefore valued at $18 billion.

FTX's rapid growth is inseparable from the surging demand for cryptocurrency derivatives (such as futures and options), which allow investors to enjoy risk exposure without actually touching physical assets such as Bitcoin. The vast majority of these crypto derivatives are unregulated, and some products also provide high leverage, allowing investors to increase the leverage of their positions at will. Due to this high risk, cryptocurrency derivatives have become the target of criticism and are also considered to be the culprit for causing and amplifying market volatility in the cryptocurrency market.

However, Bankman-Fried criticized this statement as short-sighted. In an interview with Forbes, he mentioned that the cryptocurrency derivatives industry is maturing and becoming more responsible, and that the derivatives field will eventually be a necessary element of a healthy cryptocurrency market. He also said that many people who criticize the huge leverage in cryptocurrencies (sometimes 100 times) may completely ignore that such services have existed in traditional markets (foreign exchange, commodities) for many years.

The interview mainly discusses how Sam Bankman-Fried built a compliant exchange in this industry, how he used FTX's $900 million in financing, the misunderstanding of the market by those who criticize cryptocurrency derivatives, and his plan to eventually give away all his wealth.

The following is the full interview:

Forbes: I want to talk about the derivatives market – how it interacts with spot prices, as this topic has started to get a lot of attention recently. This is one of the areas where you first opened up the market for FTX. What is the role of the derivatives market? What do you think is a healthy volume ratio between the various types of markets?

Sam Bankman-Fried: This is a somewhat misunderstood area. A lot of people see something and think this is the first time in history that this has happened. That may be true in some cases, but not all. I think derivatives are a great example. People would assume that derivatives are traded more in crypto than spot, which is true. But that's true in every asset class in the world. The reason is simple, derivatives allow traders to not need immediate delivery (spot), so obviously it's more efficient. Here's an example. Two people are doing a trade, Bob is buying something from Lisa. Let's say Bob buys one bitcoin from Lisa for X dollars. If it's very important for Lisa to have a physical bitcoin because she needs to get it somewhere, then it needs to be a physical bitcoin transaction. And if it's also very important for Bob to have dollars because he needs to pay for something, then it has to be a physical transaction. But if neither of them cares about short-term deliverability and they're just looking for a trade on a position, then they don't necessarily care if it's a futures or spot contract. I think that this increases liquidity in the market and makes the entire market more efficient overall.

There are certainly some cases where it makes the market less efficient, and those get a lot of attention in crypto because they can be quite significant at times. I want to emphasize that overall I think futures make crypto a lot more efficient, although there are some special cases where it makes it less efficient. Those times tend to be when there are liquidations, for example you often see people take a leveraged position and the market moves in the opposite direction and then those positions get liquidated, which can create a little bit of volatility because the liquidation creates some physical delivery issues, which in turn triggers further liquidations and it kind of snowballs into even more volatility. This does happen in crypto from time to time. So there are some cases where futures can cause illiquidity and wild price swings, although I personally think they more often solve those problems than cause them.

Forbes: When SEC Chairman Gary Gensler spoke recently, he said he was more willing to consider a derivatives ETF application than a spot ETF. Why do you think he thinks derivatives are more acceptable now?

SBF: I guess he probably used CME (Chicago Mercantile Exchange), an exchange he trusts, as a reference. He only cares about the transparency, compliance, and anti-manipulation capabilities of the market.

Forbes: Let's talk about margin again, because that's another big issue that can accelerate liquidations or short squeezes. You recently decided to reduce or eliminate FTX's 100x margin. One of the reasons you gave was, "It's a very small portion of your overall volume anyway." So given that this is a high-risk financial product, why did you decide to offer it to investors in the first place?

SBF: There are several reasons for this. One is that our users want it. We didn't have it when we started, and our users asked us to provide it. Unless we have it, they're going to leave the platform. And one of FTX's main responsibilities is to serve our users and provide them with what they want. Another thing to note is that crypto is not alone in this regard; many asset classes have high leverage, sometimes up to 500x. I think there are a lot of exchanges that offer over 100x leverage on stocks. In any case, people are starting to get very concerned about it, but it's clearly not the main business. I don't want to try to claim that it's important to the market, because I don't think it is. Any position that is over-leveraged is not likely to be critical to the market, and it's not something I think is particularly important or beneficial to the health of the cryptocurrency market. I don't think regulators will take a lot of interest in this issue, and delisting it is a right idea. Although I insist that it gets much less praise than it deserves.

Forbes: If you were faced with this decision now, do you think you would continue to provide this level of leverage?

SBF: Would I have done it the same way from the beginning? If I had to do it again, probably not.

Forbes: In a recent interview, you mentioned that you spend about five hours a day dealing with regulatory issues. Can you tell us more about that?

SBF: Cryptocurrency has always been regulated, and the comment that it has just been regulated is not correct. However, regulators are indeed establishing frameworks, and now the regulatory direction is clearer than before. We see that regulators around the world are taking a two-pronged approach, one of which is to establish a licensing framework for cryptocurrencies, where legitimate businesses can apply, and they are regulating non-compliant behaviors. To explain it more clearly, one thing is to apply for a license. Sometimes this means applying for a new license, sometimes it is an acquisition action. Sometimes it is a conversation with the regulator. But the most important thing is the relevant paperwork, and I think we have now submitted compliance applications in about six or seven jurisdictions.

Forbes: Are these six or seven jurisdictions where you are currently operating and have just launched licensing regimes? Or are they new jurisdictions that you are looking to enter?

SBF: That's an interesting question. The answer I can give is that many of these jurisdictions are areas where we passively have users right now, but we don't have any business in them, so one part of it is looking to establish a business, marketing, offices, create jobs and get local government support in these jurisdictions, and the other part is the regulatory frameworks that are coming online. Many of these regulatory frameworks are either not online yet, have only recently come online, or are a little vague and don't have a strong crypto awareness, so sometimes this involves communicating with the regulator and saying, "Hey, this is our business. I saw your regulations, can we comply?" And the answer is often "That's interesting. But let me think about it." Our goal is to have a collaborative dialogue with the regulators so that we can enter local markets where we can operate in a licensed manner. In some of these cases, they are still using old frameworks that have been in place for decades, but not for crypto.

Forbes: I think one of the things people are most interested in about FTX is your scale. What do you think has helped you grow so quickly?

SBF: There are a lot of aspects to this. First of all, we worked very hard to build an efficient organization that can execute well in terms of building cross-margin, having a stable API, and avoiding downtime. But I think that organizational efficiency also extends to other areas, such as compliance, which is one of the things we have been thinking about from day one. We have always had KYC (know your customer) on the platform and have always been careful about the jurisdictions to exclude. For example, we have always excluded the United States from FTX International. People sometimes think that there is a contradiction between building a product and building a compliant platform, and you need to choose, after all, you can't have your cake and eat it. But I think now is very different from the way most exchanges were launched around 2018. We saw a lot of exchanges just slap a label on some generic technology, didn't think carefully, didn't hire any compliance staff, and then immediately spent a bunch of money on marketing. This is a good way to grow wildly, but it doesn't help them build sustainable products, or develop speed.

Forbes: Let's talk about some recent developments. FTX recently set a record, raising $900 million in private placements, which valued FTX at $18 billion. I know this will give you a lot of leverage in terms of M&A. So what is your strategy, or what kind of companies are you looking for to build on the FTX platform?

SBF: There are a couple of different parts to this. One is looking for companies that have built a large, loyal user base, but are not necessarily fintechs, which often don't have the expertise to build applications for a lot of the trading products that their customers want. And the other part of this is I also think compliance acquisitions make sense. It depends on what value the company actually has beyond just having a license. And the third part is that we're looking at some consolidation in the industry. I think that's healthy and has been for a long time. I also think that will lead me to acquire other trading-related companies.

Forbes: Do you have ambitions to go public in the near future?

SBF: Maybe. You know, we thought about it seriously. We ultimately decided that it wasn't the right time, especially with the way things are going in the public equity markets. But if it looked like the right thing to do for the business, we wanted to be ready to do it. We never had to do it because we were profitable. And there wasn't a gun to our head. But I think it was probably good for the business. And it's also worth noting that we weren't looking for a way to cash out or anything like that. So that's kind of like another potential use case for going public that I don't think is relevant to us.

Forbes: I wanted to talk a little bit about your relationship with Solana because while you’re not a founder, you have a very close connection to the platform. Can you help clarify that? And why do you think the price of its native token, SOL, has been rising recently?

SBF: You can count me as a fan of Solana. I think it's a very cool product. I don't want to claim that it will definitely win, because I don't think it will definitely win. But I do think that among the existing blockchains, it may be the only one, or at least one of the very few, that can host huge application scenarios. If you take your favorite large consumer-facing technology company, the company will have 100,000 to 10 million internal transactions per second. So when you are thinking about what blockchain can put a large application on it, you may first consider Solana. And I think very few blockchains have such a development plan, but Solana does.

Forbes: Regarding your DEX Serum, can you talk about its development plans? Is it really possible that they can surpass centralized exchanges in some way?

SBF: I think there is unlimited potential in Serum. For a DEX, it will be scalable, and we can have an order book instead of an AMM. It is not easy to build these on the chain. Therefore, you have to find a blockchain that is scalable enough. Then building Serum on Solana is our best choice.

Forbes: You've talked in the past about giving away all of your wealth. Do you have any formal plans to do that, or have you made any, let's say, meaningful donations from the wealth you've accumulated so far?

SBF: Meaningful is relative. I don't think I've done many philanthropic projects, and I've probably given away about $30 million so far. Infrastructure is something that I'm pretty actively trying to build right now, but it's hard to devote as much time to as I'd like. So I think it's something that's going to take a while to mature. And I think it's going to take a while, you know, before I can do these things. Because right now, my wealth, frankly, is not very liquid. The data you see online, it's mostly equity and locked tokens, so it's a long-term goal. But I do think it's very important to put some reasonable amounts into it in the meantime, you know, to prove to yourself that this is real and valuable.

Forbes: I had the pleasure of interviewing former Binance.US CEO Brian Brooks before he abruptly resigned in early August. One of the more interesting things he said to me was his core belief that exchanges are unprofitable businesses in the long run due to the trend of increasing competition. How do you respond to this question?

SBF: I'm not necessarily super bullish on the future of businesses other than matching engines. So I think there is some truth to this. However, cryptocurrency would be a pretty strong counterexample because cryptocurrency exchanges are full-stack businesses, not just trading.

Forbes: Finally, tokenized stocks are a topic that is gaining more and more attention, but also brings a lot of regulatory scrutiny. What are your thoughts on the future of this type of product? Also, how does the value proposition of tokenized stocks differ in different geographies?

SBF: I want to say two things. First, just to note that, you know, our equity offering right now is not on FTX.US, it's on FTX International. There are a lot of countries that really have a blank slate in terms of the equity market. And I think, frankly, those are places where there's a need for equity tokenization services. And that's something that we're already building for FTX. So we're able to leverage that and make it easier for some people to get into the equity market, especially in some of the countries that have been overlooked. The situation in the U.S. is a little bit different. And from that perspective, if we wanted to offer equity services on the platform, I think the main goal, at least in the beginning, would be to just have a product that's somewhat similar to what's already on other platforms, but have it on the same platform where people can access, their crypto and a lot of other things that we're building because, you know, switching between platforms, it's a pretty big pain. And you have to manage passwords and logins and everything else for a lot of different apps at the same time, and that's another benefit. So I think that's a vision, for example, to offer equity tokens in the U.S.