The New York Times: Crypto Billionaires Roaming the Globe

For a long time, high leverage has prevailed in the cryptocurrency market, causing significant losses for many investors and exacerbating the volatility of the crypto market, becoming one of the biggest systemic risks affecting it. Because of this, in recent months, many countries around the world have issued warnings about the derivatives services offered by exchanges like Binance.

In the past week, FTX and Binance announced a reduction in their maximum leverage from over 100 times to a maximum of 20 times, indicating that these two major global cryptocurrency derivatives trading platforms have made concessions under regulatory pressure.

In this context, a New York Times reporter recently interviewed two nomads in the crypto industry—FTX founder SBF and Binance founder Changpeng Zhao—discussing their growth and entrepreneurial history, their views on the derivatives market, and their strategies for coping with regulatory pressure, while analyzing the development history and issues of the crypto derivatives industry, which is believed to be beneficial for readers to understand the state of the derivatives industry.

In the early hours past midnight in Hong Kong, Sam Bankman-Fried (hereinafter referred to as SBF) stared at the trading data on his six monitors, watching in real-time as the global crypto market collapsed.

SBF is a 29-year-old Californian who often works around the clock, just as he did on that evening in May. He dozed off on a beanbag next to his computer. A folded blanket lay on the floor. His net worth is at least $8 billion.

Even after the downturn that began in spring, the total global loss of all cryptocurrencies in this collapse ultimately exceeded $1.3 trillion. When SBF saw it happening, he knew his business played a role in the collapse.

Cryptocurrencies—digital currencies not backed by any country—are known for their wild and frequent fluctuations. But the cryptocurrency trading platform FTX, operated by SBF, specializes in a type of trading that accelerates the global market collapse.

Most of his clients are betting on future price fluctuations of cryptocurrencies rather than buying and selling Bitcoin; they are borrowing money to increase their stakes.

This is a risky approach. But it can yield enormous victories.

Now, as the value of Bitcoin is rapidly declining, it crushes the bullish traders' high-leverage bets on FTX and other exchanges, forcing them to liquidate accounts in wave after wave. These forced sales are wreaking havoc on cryptocurrency prices.

"In terms of price movements, the biggest part is liquidation," SBF wrote in an email to The New York Times on May 24.

This is precisely the situation that U.S. regulators are trying to avoid by prohibiting cryptocurrency exchanges like FTX from selling high-risk futures to non-professional investors in the U.S. This is also why SBF moved to Hong Kong—because he wanted to offer these products, namely derivatives.

SBF is a cryptocurrency nomad, one of a group of industry leaders who once lived in the U.S. or Canada and subsequently established companies that operate in ways that somewhat exceed the jurisdiction of U.S. regulators.

Other nomads include Changpeng Zhao, 44, a Canadian of Chinese descent and founder of Binance, who now resides in Singapore; and 35-year-old Arthur Hayes, a trader born in Detroit who created BitMEX, based in the Seychelles.

This is a tribe that never closes: trading occurs 24 hours a day, 365 days a year. (SBF says he sleeps when there are no meetings, "working when this counterparty is awake and that counterparty is awake.")

These crypto nomads, inspired by multiplayer online games, have built a global playground and offer "leaderboards" for clients using aliases like Dark Crypto Lord, with prizes like Teslas or iPhones to be won.

Industry data analyzed by researchers at Carnegie Mellon University shows that the high-leverage trading forms offered by these platforms have become so popular that in July, the total daily trading volume of these derivatives reached ten times that of cryptocurrency spot trading.

All of this should be off-limits to U.S. investors, but that is not the case. Trading data provided to The New York Times also shows that despite the ban, billions of dollars in investments linked to U.S. clients have been funneled into at least one of these global sites.

"I'm not saying this will lead to 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 flapping its wings in Brazil that causes a tornado in Texas?"

Binance founder Changpeng Zhao admitted in an interview, "Leverage amplifies volatility. So that's for sure."

But he and other industry advocates argue that high-leverage futures trading is common on Wall Street and in foreign exchange markets. Some also say they had to relocate because U.S. regulators did not adequately embrace these creative investment opportunities.

"This is not going away," billionaire entrepreneur, TV personality, and cryptocurrency enthusiast Mark Cuban said, who is also a supporter of FTX's funding. "But by pushing derivatives exchanges offshore, we are losing a lot of jobs and a lot of financial depth."

In fact, just last week, FTX raised $900 million to help expand its global business, with a valuation of $18 billion. Forbes estimates that this deal could push SBF's wealth to $16 billion, making him "the known richest cryptocurrency billionaire," as he owns nearly 60% of the company.

1. Betting on the Future

SBF entered the cryptocurrency industry four years after graduating from MIT.

At that time, SBF was still living in California—both of his parents are law professors at Stanford University—and he noticed that Bitcoin and other tokens were sometimes sold at different prices in different countries.

This was an open invitation to creative players to make money, with a classic arbitrage strategy: buy at a lower price in the U.S. and sell at a higher price in Japan.

It ultimately became complicated. When he tried to quickly transfer large sums of money, financial institutions began closing his accounts. He also needed Japanese citizenship to complete transactions at local banks. But he ultimately made tens of millions of dollars through these early initiatives.

In 2018, he attended a two-week cryptocurrency conference in China, and he effectively settled in Hong Kong. "I think I should have canceled my lease in the Bay Area at some point," he recalled. 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 price changes in commodities like oil or grain.

In the U.S., some cryptocurrency derivatives trading occurs on platforms like the Chicago Mercantile Exchange, which has long offered options and futures in various fields such as agriculture, energy, and metals. But the CME is a traditional exchange with more restrictions and federal oversight, where only professional traders can use lower leverage limits.

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

BitMEX started what Arthur referred to as perpetual contracts—betting on future price changes that do not expire—and ultimately offered 100 times leverage. This means a $1,000 investment could immediately translate into a $100,000 bet on the future price of Bitcoin.

As Arthur explained in an industry talk in 2016, from the beginning, BitMEX was explicitly aimed at attracting not just professional traders but also retail investors who enjoy gambling and risk-taking. "Some people offer similar types of products but focus on fallen gamblers, that is, retail traders of Bitcoin," he said, "so why don't we do that?"

The exchange targeted social media ads at potential customers in the U.S. and claimed "registration takes less than 30 seconds."

At least initially, some exchanges like BitMEX made almost no effort to screen investors to determine their true identities or confirm their actual locations, as U.S. banks and other trading firms are required to do, even though U.S. participants were banned from entering. Many platforms, including BitMEX and Binance, have recently ramped up enforcement efforts to try to curb trading by U.S. investors.

This occurred after the U.S. Department of Justice charged Arthur at the end of last year, claiming he and other BitMEX executives operated an illegal cryptocurrency exchange that processed about $11 billion in trades involving at least 85,000 user accounts linked to the U.S. He subsequently left the company.

But the market size of the business model he helped create has expanded.

Arthur Hayes

FTX and Binance are currently among more than a dozen global cryptocurrency platforms offering perpetual contract products, most of which are located in Asia. FTX alone has one million users worldwide, processing trading volumes of up to $20 billion daily, most of which are derivatives trades.

Like their clients, these platforms are also in competition. FTX began offering up to 101 times leverage for derivatives trading to compete with BitMEX. Binance then outdid them with a leverage of 125 times.

Trader losses can translate into huge profits for the exchanges.

When the price of the underlying cryptocurrency is unfavorable for traders, the platforms earn trading fees from forced sales. The collapse in May began with regulatory crackdowns in China and Elon Musk's cryptocurrency actions. But liquidations then significantly propelled it.

Some executives, including SBF, also own related companies that engage in algorithmic trading to profit immediately from the market distortions that occur during these sell-offs. SBF said, he believes there is no conflict in his business playing both roles, as these initiatives help maintain market liquidity during significant downturns.

Founders of FTX, Binance, and BitMEX all argue that only a small portion of clients actually use high leverage. But even those making smaller bets can quickly run into problems if cryptocurrency prices start to fall. According to cryptocurrency derivatives data firm Bybt, on May 18 alone, the total liquidation amount for BitMEX, Binance, and FTX reached $1.6 billion. In mid-May, the total forced liquidation in the crypto market was $20 billion.

"If you go all in with maximum leverage every time, the market will turn against you at some point, and you will be eliminated," Zhao Changpeng said, "professional futures traders manage risk."

But cryptocurrency critic Michael Green argues that the derivatives market is inherently at odds with novice traders. "The mathematical principle of highly volatile instruments is that the house almost always wins." He added that from his perspective, "these are unregulated casinos."

2. From Shanghai to Malta

Changpeng Zhao is so focused on promoting Binance's brand that he has tattooed the company logo—two diagonal squares representing the bid and ask in trading—on what he now calls his "crypto arm."

He and other cryptocurrency nomads have become global celebrities, with millions of followers on Twitter, podcasts, and even YouTube. They are diplomats of a rebellious industry, not beholden to any specific country.

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

Japan then announced new cryptocurrency trading rules. "So we said, well, that's not suitable," Zhao explained, "we had to move again."

The next stop was Malta, a small island nation in the central Mediterranean. Now Zhao does not specify any location as the company's headquarters.

In a way, Binance's constantly changing base reflects his own life story. Born in China, he moved to Canada at age 12, interned in Japan while studying computer science at McGill University, and continued to work on developing trading products in Tokyo, New York, Singapore, Hong Kong, and Shanghai.

"I've moved around a lot in my life," Zhao said. This international experience has provided him with a "broader worldview," informing his business and its borderless mindset.

Other companies are also relocating. Dutch cryptocurrency exchange Deribit announced last year that it would be operated by a subsidiary called DRB Panama, with several of its executives moving to Central America. Palm trees and tropical landscapes now appear 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 bases are merely a ruse. BitMEX lists its headquarters as the Seychelles, an island republic in the West 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 at the end of 2020, founder Arthur claimed that bribing Seychelles authorities only cost "a coconut"—less than buying favors from regulators in the U.S. and elsewhere. Arthur did not plead guilty in April, and his case is pending. He now resides in Singapore.

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

Until recently, Hong Kong was a gathering place for cryptocurrency masters, where they often met at industry conferences or local bars and cafes before the pandemic broke out.

Zhao said this community made him very popular in the cryptocurrency industry. He noted that he found at conferences around the world, "this is a very geeky, honest community."

These personal relationships sometimes lead to economic ties. Zhao's company was an early investor in SBF's exchange, while SBF's trading firm is a client of Zhao's platform. They often talk to each other.

"I think I've met him in Taiwan, Hong Kong, Singapore, and even Europe," Zhao said of his crypto nomad counterpart, "but mainly in Asia."

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

But globally, the cryptocurrency derivatives market continues to soar—with clear signs that major U.S. participants are still injecting funds into the game.

Traders involved in the transactions told The New York Times that a dozen large private trading firms with U.S. ties have set up offices in the Cayman Islands and other offshore locations, creating new corporate entities to push funds on a large scale through Binance and FTX's overseas derivatives platforms.

"I'm not American," said a trader representing a large fund that moved to the Cayman Islands, initially leaving his family in the Midwest to conduct business, "but I am 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—combined with the constant rollout of new, unregulated, and often high-risk products—is now facing perhaps its most significant test.

Since June, Binance has become a target for financial regulators in the UK, Cayman Islands, Hong Kong, Lithuania, Italy, Poland, and Thailand, many of whom have focused on its high-leverage derivatives products or new product lines. This spring, Binance allowed customers to purchase tokenized versions of some stocks, like Tesla and Apple.

In the face of strong opposition, Binance announced in mid-July that it would abandon its stock token products.

The company stated in a statement to The Times, "The crypto industry is a very emerging industry, and the landscape, including the regulatory approach to cryptocurrency exchanges, is constantly evolving." It attributed the recent scrutiny partly to last year's mainstream acceptance of cryptocurrencies and stated that regulatory reviews of the industry "are appropriate."

As SBF's three-hour series of interviews with The Times was coming to an end, he suggested that it might be time for the industry to withdraw its most extreme products, such as derivatives trading with leverage of up to 125 times.

"It's easier to get rid of it than to keep talking about it," SBF proposed a possible 10 times leverage limit, adding that it was mainly to counter the perception that the industry encourages risky bets. He believes this is unfair.

Binance and FTX also look forward to ensuring a space recognized in the U.S. market. Over the past two years, they have opened U.S. platforms that do not offer derivatives but focus on actual cryptocurrency buying and selling.

FTX recently also purchased the naming rights to the Miami Heat arena and placed its company logo on patches worn by Major League Baseball umpires, as it is committed to building visibility here. SBF, through a $5.6 million donation, was also one of the largest donors to help President Biden's campaign last year—though he stated in interviews that this was unrelated to his business.

Currently, the profits generated by these U.S. operations are minimal compared to their overseas counterparts. However, they do comply with U.S. regulations. This does make a difference.

"This is a less exciting product," SBF said.