Exclusive: How FTX became the most regulated crypto exchange’

FTX was a unique competitor in the largely unregulated crypto industry. It boasted that it was the “most regulated” and thus attracted closer scrutiny from authorities before it crashed this month.

Now, Reuters has obtained company documents that reveal Sam Bankman-Fried’s strategy and tactics. This includes the previously unreported terms a deal with IEX Group, which is the U.S. stock-trading platform, as well as the previously unreported terms.

According to a June 7, 2007 document, Bankman-Fried purchased a 10% stake at IEX. The option to purchase it completely within the next two-and-half years was also available. The partnership allowed the 30-year-old executive to lobby the U.S. Securities and Exchange Commission on crypto regulation.

This deal, along with others, highlights one of FTX’s larger goals. FTX is quick to create a favorable regulatory framework by acquiring stakes at companies that have licenses from authorities. This will cut down on the lengthy approval process.

According to documents from FTX, $2 billion was spent on “acquisitions for regulatory reasons” at a September 19 meeting. It bought LedgerX LLC, a futures trading platform, last year. This gave it three Commodity Futures Trading Commission (CFTC) licenses in one transaction. FTX was able to access the U.S. commodities derivatives market as a regulated exchange with these licenses. Derivatives refer to securities that are derived from another asset.

The documents reveal that FTX also saw its regulatory status in order to attract new capital from large investors. It cited its licenses as a competitive advantage in documents supporting its request for hundreds of millions of dollars in funds. It claimed that the “regulatory moats” created barriers for competitors and would allow it to access lucrative new markets and partnerships not available to unregulated entities.

Investors were told that FTX is the “cleanest brand in crypto” in a June document.

Bankman-Fried didn’t respond to a request for comments on questions regarding FTX’s regulatory strategy. FTX didn’t respond to requests for comments.

A spokesperson for the SEC declined to comment on this article. The CFTC declined to comment.

Bankman-Fried made a 180-degree turn on regulatory issues in a text exchange with Vox. When asked if he had ever praised regulations before, he replied in a series of texts that “yeah… just PR… regulators make everything worse… don’t protect any customers.”

A spokesperson for IEX declined to confirm the details of the transaction with FTX. However, he did say that FTX’s “small minority stake” in IEX can not be sold to a third party without its consent. The spokesperson stated that they are currently reviewing their legal options in relation to the previous transaction.


FTX crashed last week following a futile attempt by Bankman-Fried to raise emergency funds. Through the many licenses it acquired through its acquisitions, it had been subject to some regulatory oversight. However, this didn’t protect investors and customers who now face billions in losses. Reuters reported that FTX was secretly taking risks using customer funds, using $10 million in deposits as a way to support a trading company owned by Bankman-Fried.

Four lawyers stated that Bankman-Fried’s courting of regulators and taking huge risks with customer funds, without anyone being aware, exposes a wide regulatory gap in cryptocurrency. Aitan Goelman is an attorney at Zuckerman Spaeder who was formerly a prosecutor and CFTC enforcement chief. It’s because the regulatory system has taken too much time to adapt to crypto.

According to a source familiar with SEC’s views on crypto regulation, the agency believes that crypto firms are operating illegally outside U.S. securities laws. Instead, they rely on licenses that offer minimal consumer protection. The person stated that “those representations, although nominally true, don’t cover their activities.”

Source reuters.com


Bankman-Fried had ambitious goals for FTX. It had more than $1B in revenue by this year and accounted to 10% of global crypto market trading, up from a starting point in 2019. According to an undated document, “FTX Roadmap 202022”, he wanted to create a financial app that would allow users to trade tokens and coins, transfer money, and bank.

According to the Roadmap document, Step 1 toward that goal was “to become as licensed as reasonably practicable.”

The document stated that “Partially, this is to ensure that we’re regulated & compliant; partly this is in order to be able to expand our product offerings.”

According to documents, this is where FTX’s acquisition spree began. Bankman-Fried purchased licenses instead of applying for each one, which can be time-consuming and often uncomfortable.

However, this strategy had its limitations: Sometimes, the companies it acquired did not have the licenses they needed, as the documents reveal.

According to documents, FTX had one goal: to open the U.S. derivatives markets up to its customers. The market was expected to generate millions of dollars of revenue and add $50 billion per day in trading volume. It had to convince the CFTC that LedgerX, FTX’s newly acquired futures exchange, was allowed to amend one of its licenses.

The application process took months and FTX was required to pay $250 million for a default fund. According to the minutes of a March meeting, FTX believed the CFTC would ask for the fund to be increased to $1 billion.

FTX was denied approval because it collapsed. It has since withdrawn its application.

Buying licenses for companies also offered other benefits, as Reuters documents show. It could allow Bankman-Fried to have the access he desires to regulators.

The IEX deal was announced in April. Bankman-Fried and IEX CEO Brad Katsuyama spoke out in a joint interview with CNBC. They stated that they want “to shape regulation which ultimately protects investors.” Bankman-Fried also said that transparency is important and that fraud protection is a must.

Reuters couldn’t determine the amount FTX paid for this stake.

Bankman-Fried was invited along with Katsuyama to meet Gary Gensler, SEC Chairman, and other SEC officials in March.

According to a source close to IEX, the purpose of the meeting was for the SEC to know in advance about the deal it had with FTX and to discuss the possibility that IEX could create a digital asset trading platform such as bitcoin. According to the source, FTX was responsible for providing the infrastructure for crypto-trading.

Officials at the SEC rejected the initial plan, citing that it would have led to the creation of a nonexchange trading venue that was less tightly regulated. This is something the agency opposed for cryptocurrencies.

Reuters was unable to determine whether Bankman-Fried had been involved in the subsequent discussions with the SEC. According to a source familiar with SEC thinking, they believed that Katsuyama had been invited by the SEC officials in March and that Bankman-Fried was merely following along. The source said that he was quiet during the meeting with Katsuyama as the “driver’s chair”.

FTX discussed its discussions with its investors, regardless of his involvement. FTX stated that talks with the SEC had been “extremely constructive” at a September meeting.

According to meeting minutes, it stated that “We are likely to have pole position there”.

According to a source familiar with SEC’s thinking, they would not dispute that FTX is in the “pole situation.” Any regulation the SEC makes to regulate crypto trading will be available to all market participants.

Sources close to IEX claimed that the exchange never entered into operational agreements with FTX and that it never reached that point.

The May FTX document gives a summary of FTX’s interactions with regulators. This document, which was not previously reported, shows that FTX was able in most cases to resolve any issues that arose.

South African authorities issued a warning in February to consumers about the possibility of FTX and other cryptocurrency exchanges being allowed to operate in South Africa. FTX signed a commercial agreement to continue offering the services. “FTX has been fully regulated in South Africa in relation to its current activities,” FTX stated.

South African Financial Sector Conduct Authority did not respond to our request for comment.

The May document also shows that FTX was in contact with the SEC. The SEC conducted inquiries earlier in the year about how crypto companies handled customer deposits. The SEC stated that some firms offered interest on deposits. This could be considered securities and should be registered according to its rules. FTX stated in the list of its regulatory interactions that the inquiry was focused on whether these assets were being “lent out” or used for other operational purposes.

As Reuters reported, this month it was revealed that FTX had done exactly that, moving billions in client funds to Bankman-Fried’s trading firm, Alameda Research.

FTX stated in the May document that the SEC’s examination staff, which examines market practices that might pose a risk for investors, was concerned over a different matter. It offered a rewards program to customers under which it paid interest crypto deposits.

The document states that FTX informed the regulator that it didn’t have the same problems as other providers.

FTX stated that these were only rewards based and did not involve lending (or any other use) of deposited crypto. The SEC replied, stating that it had concluded its informal inquiry and didn’t require any further information at this point.

The inquiry was not addressed by the SEC. Bankman-Fried sent an email to Reuters stating that “FTX’s answer there was accurate; FTX US’s rewards program didn’t involve lending out any assets.”

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