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Two approaches to cryptocurrency exchanges

Basically, we’ve seen two approaches to cryptocurrency exchanges so far. One category of operation—companies like Coinbase Global (COIN), which went public in April, and Gemini, founded by Cameron and Tyler Winklevoss in 2014—have set up U.S.-based operations that attempt to comply scrupulously with U.S. regulatory frameworks, even though those are cumbersome and ill-suited to the nascent asset-class. As a result, these companies offer a relatively limited set of offerings—mainly spot-market sales of a select list of cryptocurrencies. (In June 2020, FTX launched a U.S. subsidiary, FTX.US—with offices in Berkeley, Chicago, and Miami—which also takes that conservative approach.)

But a set of much more lucrative companies—like BitMEX, Binance, Bitfinex, and FTX’s international exchange—have taken a much riskier approach. They have set up offshore, and have offered a wide array of innovative products, including crypto futures, swaps, other derivatives, and “tokenized stock” (digital assets said to be tethered to actual stock holdings held by a custodian somewhere, like, in FTX’s case, a German bank). The offshore exchanges have also let traders—including unsophisticated retail traders—buy many of these volatile instruments on margin. Until last month, for instance, several exchanges, including FTX, spotted their customers margin ratios as high as 100:1; that is, you could buy a $100,000 position in a crypto derivative with just a $1,000 deposit. One big price swing—hardly unusual in crypto markets—can result in automated margin calls that wipe out a trader’s position. (Last month, a few days after The New York Times published a story questioning the suitability of such products for retail traders, FTX and Binance each reined in their ratios to 20:1. Though comparisons are not apples-to-apples, the regulated CME Group—the Chicago Mercantile Exchange—requires 35% collateral for trades in its bitcoin futures product.)

In hopes of evading U.S. regulators, the offshore exchanges, including FTX, all say they refuse orders from U.S. customers. But such “geofencing” is notoriously hard to do in a world with virtual personal networks (VPNs) and other workarounds, and there’s evidence that at least some exchanges haven’t always tried very hard. Manhattan federal prosecutors indicted the founders of BitMEX last October alleging violations of U.S. anti-money laundering laws, while the U.S. Commodities Futures Trade Commission sued those founders for failing to register under the U.S. Commodities Exchange Act. (The defendants have denied wrongdoing.) Binance, the largest cryptocurrency exchange today—and one that no longer reveals where it is based—is reportedly under scrutiny by the U.S. Department of Justice, Internal Revenue Service, and the Commodities Futures Trading Commission. It’s also under investigation by regulators in Japan, the U.K., Germany, Italy, and others, and Thailand’s Securities and Exchange Commission brought criminal charges against it last month. (Binance CEO Changpeng Zhao has denied wrongdoing by his company.)

“There’s just inherent risk associated with this business model,” says Lee Reiners, the executive director of the Duke University School of Law’s Global Financial Markets Center. “Major, major regulatory risk,” he continues.

“There have been a few like FTX over the years,” says one player in the U.S. crypto community who is bullish on bitcoin, yet takes a dim view of the offshore exchanges. “U.S. regulators caught up with every one of them,” says this person, who requested anonymity. “FTX is relatively new, and the wheels of justice grind slowly.”

‘I wish we were perfect, but no one is’

So which is it? Is Bankman-Fried more scrupulous than his competitors? Or have the regulators just not yet gotten around to nabbing him?

“We’ve put a lot of attention and care into regulation and interfacing with regulators,” Bankman-Fried responds. (He appears to tread carefully here, so as not to draw explicit contrasts between FTX and the other exchanges. He counts Binance’s Zhao as a friend, and Binance was an investor in FTX until just last month.)

“I wish we were perfect, but no one is,” he continues. “If there’s anything we’re doing that a regulator doesn’t want, you don’t have to sue us. Just reach out and tell us what you want.” He also stresses that FTX has “had KYC since day one,”—i.e., Know Your Customer rules, designed to prevent money-laundering or terror-financing. He believes those address the regulators’ most urgent concerns.

“Their goal isn’t to go to war with industry, by and large,” he says of regulators worldwide. “They have things they want to enforce or prevent, and they want to also help industry grow. . . . They want to find a way to balance these and I think the big thing is finding a way to meet them there.”

This article aims to shed light on whether Bankman-Fried can achieve his audacious goal: persuading the world’s regulators to fashion new rules to accommodate his fait accompli exchange. It is the most in-depth profile so far of Bankman-Fried, perhaps the most pioneering young entrepreneur of our time. It draws chiefly on interviews with eight people, including more than five hours of conversations with four who know him extremely well, plus more than four-and-a-half hours of Zoom interviews with Bankman-Fried himself.

Bankman-Fried is marked by striking contradictions. On the one hand, he is a classically driven businessman who sleeps four-hour nights, famously catnapping in a beanbag chair at the office so subordinates can wake him at any hour for guidance. (Crypto trading is 24/7—and must be, given the wild, precipitous price swings. Bitcoin, for instance, was trading at nearly $64,000 in March; around $29,000 in July; and close to $46,000 this week.)

Yet Bankman-Fried is also disarmingly reflective, candid, and almost academic in his apparent effort to give dispassionate and truthful answers.

He is also an autodidact moral philosopher—a self-described “Benthamite,” “effective altruist,” and vegan—who is, nevertheless, devoting his career to a sector that many associate with crime, ransomware, and environmental irresponsibility.

Also—strikingly unusual for someone steeped in the crypto world—he is notably non-boosterish about it. (“I don't want to wave away all of these problems, because they're not all irrelevant,” he says of the attacks on crypto, before commencing a professorial overview of its dangers and potential benefits.)

A key Bankman-Fried character trait is that, while he’s not a daredevil, neither is he risk averse. Perhaps this stems from the fact that he’s “super-quantitative,” as FTX’s lead engineer, Nishad Singh, puts it. “Whenever we’ve had big decisions to make or been in scary times, Sam takes to his spreadsheets.”

In any event, if the mathematical upside is high enough, he appears willing to accept harrowing downside-risk in ways that more emotional types would not. Aside from the potential exposure he faces from U.S. regulators, Bankman-Fried also has to worry about whether mainland China will eventually subject Hong Kong to its own sharply anti-crypto policies. China recently banned “bitcoin-mining” in China—the energy-draining, computational process by which new bitcoin are minted—and for years it has officially outlawed cryptocurrency exchanges on its soil (though it has also tolerated puzzling exceptions).

Does he ever worry about a mainland Chinese crypto crackdown in Hong Kong—and even winding up under house arrest, the way some mainland Chinese crypto executives reportedly have? He deflects the question, offering only, “We’re doing what we can to be respectful of local regulations.”

But he does stress that FTX—which now has about 100 employees—is mobile, and can pick up its bags if need be.

“Given the emerging nature of the industry,” he says, “it’s not yet clear where the best places to be will be. We are talking with a lot of jurisdictions right now about building out regulatory frameworks. . . . We’re opening up a bunch of offices right now and we may have a new, very substantial one in the next year or so.”

For his part, Yedidia trusts Sam’s instincts. “He’s been right about not only finance things, but about personal things in my life,” he says—alluding to “girlfriends and stuff.”

Yedidia continues: “I don’t know exactly what the right word is, but part of me wants to use the word wisdom.”

That’s a big word to apply to a 29-year-old who makes a living offshore doing things that would be illegal at home. FTX could yet prove to be the Napster of commodities futures trading. But for the time being, shrewd is certainly a plausible word for someone who appears to have threaded a needle no other American could—while amassing a net worth of $16 billion.

A family of ‘take-no-prisoners utilitarians’

Sam Bankman-Fried was born March 6, 1992, on the Stanford University campus. Both his parents were—and are—law professors there. Barbara Fried writes about the intersection of law, economics, and philosophy, while Joseph Bankman mainly teaches tax policy. (In conversations, Bankman-Fried will sometimes use the word quaere—the imperative of the Latin verb quaerere, meaning to inquire. It’s a term commonly used by law professors that means, essentially, “Ask yourself ....”)

Singh, a friend of Bankman-Fried's younger brother who knew his family well when both were growing up, describes Barbara Fried as a “consequentialist.” That’s an “umbrella” term, Singh explains, for a set of philosophies of which “utilitarianism is one specific instantiation.”

It’s an odd way to describe a high-school friend’s mother, but the fact that Singh does so gives a feel for how these branches of moral philosophy permeated Bankman-Fried’s home growing up.

In an interview, Barbara Fried says that while she herself has only been “inching toward” utilitarianism over her career, her husband and both of her sons have long been “take-no-prisoners utilitarians.”

“The ethical goal of utilitarians,” she explains in a followup email, “is to maximize the total well-being of the world’s people (and for some, animals as well). . . . That goal leads utilitarians to focus their efforts on helping people in the direst straits . . . and on policy interventions that will lower the risk of existential threats to present and future generations.”

When Bankman-Fried was about 14, his mother says, she noticed that—completely on his own—he had been reading up in this area intensively.

“He emerged from his bedroom one night and said to me, ‘Mom, what kind of person labels an argument he disagrees with ‘the repugnant conclusion?’” Bankman-Fried had stumbled upon the writings of philosopher Derek Parfit, who had used that phrase in criticizing a certain strain of utilitarian thought.

“Sam was mad at Parfit for being wrong,” Barbara Fried recounts, “but madder at Parfit for the cheapness of his argument. ‘If you’re gonna take this on, you damn well need to grapple with the argument’” and not merely label it “repugnant.”

Despite his intellectual gifts—or, rather, because of them—Bankman-Fried hated school.

“It was super-structured,” he recounts in an interview, “I have a lot of pedagogical disagreements with how a school is run. . . . On the social side, I think I always felt more comfortable around older people.”

Though Bankman-Fried wasn’t a complainer, his mother says, she noticed a severe problem when he was in seventh or eighth grade. One day, she recalls, she came across him crying. “And he said to me, ‘Mom, I’m so bored I’m gonna die.’”

She and her husband then arranged to get their son some advanced math classes, and later sent him to the Canada/USA Mathcamp over summers. There he was introduced to “puzzle hunts”—versions of scavenger hunts that require solving a series of logical riddles, which are stepping stones to solving a larger meta-riddle. When he returned to high school after the summer, he organized and largely wrote a puzzle hunt in which teams from local schools could compete.

“I saw a different side of him than I had ever seen,” Barbara Fried recounts. He had “amazing managerial skills” and “could muster visible, exuberant, infectious enthusiasm for it.”

That said, high school remained a bad period for Bankman-Fried. “I was a little bit in waiting mode for the next chapter to begin,” is how he recalls it. “High school and middle school are not the things that I am really made for.”

In 2010, he went to MIT—he “basically flipped a coin” between it and Cal Tech, he says—where he chose to live at a coed group house known as Epsilon Theta, or ET.

“Think of a fraternity,” says Yedidia, who met Bankman-Fried at Epsilon Theta, “but replace all the alcohol with the nerdiest stuff you can imagine.” They would party late into the night, Yedidia continues, but that would entail playing elaborate board games or chess or “Starcraft” or “League of Legends” video games.

Bankman-Fried especially liked games that involved time pressure, according to Gary Wang, who arrived at Epsilon Theta in Sam’s sophomore year. “Sam’s really into thinking fast,” says Wang, who first met Sam at the summer math camp during high school. “In chess or other games, he would insist on playing with a timer.” (Today, Wang is FTX’s chief technology officer.)

Although Bankman-Fried was brilliant, Yedidia says, Yedidia didn’t count him as the smartest person at Epsilon Theta. (Wang might have held that distinction, Yedidia muses.) “But people were drawn to [Bankman-Fried],” Yedidia says. He was “charismatic” in a nontraditional way, and eventually became “commander” (president) of Epsilon Theta. Yedidia thinks it had to do with the fact that when Bankman-Fried spoke, it was obvious that “he really meant the stuff he said.”

Bankman-Fried majored in physics in college, with a minor in math. But he is witheringly dismissive of formal education, even at MIT. “Nothing I learned in college ended up being useful,” he says, “other than, like, social development. . . . On the academic side, though, it’s all f***ing useless. . . . School is just not helpful for most jobs. . . . Everyone knows it’s true. . . . Some people kind of don't really want to say it's true, but it just is.”

In the summer after his sophomore year, he began blogging. He mainly wrote essays on utilitarianism or statistically-based jeremiads about baseball or politics (the last category being “a sh***y version of FiveThirtyEight,” as he described it at the time).

In one of his first entries, he identified himself as “a total, act, hedonistic/one level (as opposed to high and low pleasure), classical (as opposed to negative) utilitarian,” while furnishing explanatory hyperlinks for the words “total,” “act,” “hedonistic” and “classical.”

For the lay reader, his baseball essays may be the most accessible. There he railed against the convention of grooming pitchers as “starters,” “relievers,” and “closers.” Instead, he argued, managers should always remove every pitcher after no more than two or three innings. This would, among other things, prevent batters from adjusting to “a pitcher’s stuff.” He offered empirical corroboration for some of his arguments, gleaned from a Python script he had written (dubbed “Basim”) that simulated baseball games based on the statistics of players in lineups.

Many of his essays were mordantly contrarian. In one, entitled “The Fetishization of the Old,” he decried the excessive praise (in his view) heaped upon Shakespeare, Stradivarius violins, “Citizen Kane,” aged wines, and the U.S. Constitution “as a guide to public policy.”

“Romeo and Juliet are incredibly flimsy characters,” he wrote, “and the plot is absurd. . . . [T]he number of lines between when Romeo is first made aware of Juliet's existence and when he recites his first love sonnet about her is 32, and none of those involve any action on Juliet's part, let alone interaction between them.”

‘Earning to give’

In his sophomore year, Bankman-Fried became exposed online to “effective altruism,” which he regards as a turning point in his life. That movement, founded by two Oxford philosophy professors, urges people to use their time and resources to bring about the greatest good to the greatest number they can. “EAs,” as effective altruists call each other, use empirical analysis to determine which charities are most efficient in terms of alleviating suffering in the world, and then try to advance those causes through either direct action or donation.

Around that time, he attended a talk by Will MacAskill, one of EA’s founders. Bankman-Fried’s reaction, as his mother recalls it, was along the lines of: “Yes, that's right. All of this is right. This is what I’ve been thinking about—and there's a name for it!”

Later that year, Bankman-Fried had lunch with MacAskill. “That was sort of the point,” Sam says, “at which I started to think in a more principled way about what I should do with my life.” Until then he had been assuming he’d probably become an academic. But now he began thinking that, among other drawbacks to that plan—like hating academic research—it would be hard, as an academic, “to have real positive impact on the world on a mass scale.” A more compelling pathway might be “earning to give”—an EA term for making a lot of money in some conventional, morally neutral occupation and then giving generously to a highly efficient, underfunded cause like, say, malaria relief. Basically, the notion was that, depending on one’s skill set, it may make more sense to become rich on Wall Street and donate $1 million to a Mother Teresa than to try to become a Mother Teresa. (I’m assuming, for these purposes, that one could have empirically established that Mother Teresa used donations efficiently and that she wasn’t already overfunded.)

Around that time, Bankman-Fried and his friend, Yedidia—who had also become an EA—both became vegetarians. That’s not an uncommon choice for those EAs who include animal suffering in the utilitarian calculus. (Later, both became vegans.)

“You spend half an hour eating a chicken,” Bankman-Fried explains, “and [the chicken] has to be put through a pretty miserable experience [at a factory farm] for a month in order to generate that, and it seemed like you had to make some pretty implausible assumptions about chickens for that to make sense.”

Bankman-Fried then devoted a number of blogposts to effective altruism themes. In late 2012, for instance, he performed an analysis of which charities were most effective. By his arithmetic, for instance, giving to the Berkeley Repertory Theater was hard to defend when the same dollars could be given to the Against Malaria Foundation. “For the cost of saving a life in a developing country,” he wrote, “you could subsidize about 30 tickets to a play.”

By his junior year, Bankman-Fried was torn between working for the Center for Effective Altruism itself or going to Wall Street to pursue the earning-to-give pathway. In talks with MacAskill and Ben Todd—the founder of “80,000 Hours,” an EA group that provides career counseling—he recalls sensing a gentle nudge toward the latter route.

That summer, he interned at Jane Street Capital, a Wall Street quant firm.

“I really liked it there,” he says. It’s the first time, in recounting his life story to me, that Bankman-Fried evinces unalloyed happiness. He returned to Jane Street full-time after graduation.

What did he do there exactly? “It’s being hard to answer that question is actually one of the defining properties of it,” he says. “You just try to do the right trades, whatever tool gets you there,” he says. “It straddled the lines of computer and human trading. There’s a lot of automation, but there’s a lot of manual oversight and intuition involved as well.”

Why did it appeal to him so much? Singh, now lead engineer at FTX, thinks that, in trading, Bankman-Fried had finally found an activity where he wasn’t bored. “Trading will soak up Sam’s full attention,” he says. “There’s sort of an unbounded number of things you could be thinking about productively while trading, especially at a busy moment.”

Often when Bankman-Fried has conversations, Singh continues, he’ll play a video game in the background—“even at the risk of disrespecting the other person”—because his mind just isn’t fully consumed.

(During the first of our interviews, I asked Bankman-Fried if he was doing that. “I thought about it,” he confessed. “But, completely honestly, I was sort of like just waiting to see how engaging the first few minutes were. Turned out the answer is: engaging enough that it was going to take up more of my brains than I had to spare after a video game.”)

Jane Street’s casual atmosphere appealed to him, too. Jane Street is a “proprietary firm,” Barbara Fried explains, meaning they trade on their own account rather than for clients. “Which means the quotient of bull**** is really, really low. Which was key for Sam. He could go to work in shorts and sandals all year round and nobody cared.”

Bankman-Fried worked there happily for three years. True to the earning-to-give strategy, he gave away more than half his earnings to charity during that period, he says.

In 2017, he took his first vacation in years, flying back to the Bay Area. “I forced myself to sit down and run some numbers about what I should do with my life,” he says. “Like, here’s seven things I could do, and what are the expected values of them? And it dawned on me that . . . there were just a bunch of things that seemed like maybe very high upside. . . . While Jane Street was competitive with all of them, I felt like it was unlikely to be competitive with whichever of them turned out to be the best.”

A risky venture with huge potential upside

One idea that still appealed to him was working directly for the Center for Effective Altruism. But another was setting up his own cryptocurrency trading firm.

He knew remarkably little about crypto at the time. He had never traded it at Jane Street, nor paid attention to it at MIT. (The principles behind bitcoin were first laid out in a nine-page white paper in 2008, and the first bitcoin was minted on a blockchain in 2009—the year before Bankman-Fried entered college.)

Among Bankman-Fried’s close friends, only his Epsilon Theta buddy, Gary Wang, knew anything about crypto. Wang had actually written himself a bitcoin arbitrage trading bot at MIT in 2014. He made a “couple thousand dollars” one semester—which “was nice for a college kid,” Wang says—but dropped it when he started interning at Google that summer.

Despite knowing little about crypto, as a trader Bankman-Fried recognized it had a potentially enormous upside.

“There was huge demand, huge volatility, huge inflows, huge price appreciation, huge amounts of attention and interest—and the infrastructure wasn't there,” he recalls. For an arbitrageur, the most obvious opportunities were the so-called “Kimchi premium” in Korea and a more modest premium in Japan. Relative to U.S. bitcoin exchange prices, bitcoin was trading about 30% higher in Korea and about 10% higher in Tokyo. Demand for the coins was tremendous in those countries, and the obstacles to international crypto trading—laws, regulations, fear—were hampering foreign-held bitcoin from being sold there.

“Theoretically,” he continues, “if you could get the right setup, you could make 10% doing that—in a day or something.” But he had no idea if the apparent opportunities were realizable in practice.

He began reaching out to friends and urging them to move to Berkeley and help him launch a crypto exchange there. Wang remembers Bankman-Fried telling him that the chances of success were only 20% to 25%, but the potential upside was huge. Even if they failed, Wang recalls him saying, there were a lot of effective altruists in Berkeley and maybe they could do something with that.

Wang began designing a prototype trading system for them. “At first,” says Bankman-Fried, “that meant building out [a manually operated platform] for us to be able to have one interface to trade on every exchange instead of having to go to each website. Later that meant . . . automated trading systems.”

In September 2017, Bankman-Fried quit Jane Street and Wang quit Google, and each moved to Berkeley.

In October, however, Bankman-Fried also took a position as director of development at the Center for Effective Altruism in Berkeley. Recognizing that his crypto idea might not pan out, he was pursuing both paths.

He wasn’t candid with the center, he admits. “I felt nervous about telling colleagues that I was unsure if I was going to be there for a long time,” he says. “It just creates a weird dynamic.”

The arrangement was untenable. “It was absurd of me to try to do both at once,” he admits. “I had to make a decision, with crypto trading just seeming like, every week, higher expected value than it did the week before.”

In November, he quit the center. That month he registered Alameda Research, which had already been trading for a month, as a Delaware LLC headquartered in Berkeley. (Spokespeople for the Center for Effective Altruism declined comment for this article.)

Because of currency restrictions on offshoring the Korean Won, Alameda Research focused on trying to profit from the Japanese bitcoin premium. In theory, the idea was simple. Buy bitcoin cheap in the U.S. Sell dear in Japan. Wire the proceeds back to the U.S. Rinse and repeat.

“Oh, great. Free money,” Bankman-Fried comments.

It was not simple. At the time, he soon discovered, most major U.S. banks wouldn’t deal with crypto exchanges. In any case, U.S. crypto exchanges, like Coinbase, had daily withdrawal limits, curbing an arbitrageur’s potential profits. In addition, you needed to be a Japanese resident to do certain transactions with Japanese cryptoexchanges or banks. Many Japanese bank tellers had never heard of arbitrage, and balked at facilitating repetitive transfers of Japanese Yen from crypto exchanges to U.S. banks, which raised every red flag in the book.

“At first, it seemed Sisyphean,” Bankman-Fried continues. But the hurdles proved finite in number, and, one by one, they were overcome. “All of a sudden, you could do it.”

They made about $20 million, he estimates, before the spreads suddenly dried up in early 2018. (He’s not sure why. Possibly other arbitrageurs also figured out how to make the trades. Alternatively—because bitcoin prices were then crashing worldwide—demand was drying up on both sides of the Pacific, bringing prices into alignment.)

For the next two years, Alameda Research did well. But Bankman-Fried and the other traders became frustrated with some of the offshore exchanges they were trading on. To understand the issues, it’s useful to think about—for contrast—how a regulated U.S. commodities futures exchange works. With the Chicago Mercantile Exchange or Chicago Board of Options Exchange, for instance, there are many layers of safeguards in place. If a trader defaults on a contractual commitment, an exchange “member”—the registered “futures commission merchant” through whom the trade was made—must make good on it, for instance.

No comparable safety nets existed on the offshore crypto exchanges. If a customer’s account became net negative, many exchanges would, in effect, recuperate the exchange’s losses from other customers—even though those other customers were fully collateralized and their positions were in the black. Alameda Research wrote white papers on how the exchanges could improve their practices to avoid these outcomes, but in vain.

In late 2018, Bankman-Fried went to a conference in Macau. While there, something happened that he calls “the most mismanaged event in crypto exchange history.” A digital asset called “bitcoin cash” was undergoing a technological fork and splitting into two different successor coins. This created a legitimate challenge for the exchanges in figuring out how to handle existing futures contracts on the original coin. Nevertheless, the solutions some exchanges hit upon were, in Bankman-Fried’s view, preposterous, and innocent customers collectively lost about $25 million.

“We’d obviously been frustrated for a while about how exchanges functioned,” he says, but this event made Bankman-Fried think that he and his team could do better.

While attending a series of previously scheduled meetings in Hong Kong, he got encouragement for his idea from a number of Asian crypto players. He summoned Wang, who flew the next day to Hong Kong. As for Bankman-Fried himself, he says, “I just canceled my return flight, rented out a WeWork, and basically never left.”

Wang and he began building an exchange platform with a range of improvements, particularly with respect to the risk engine and margin rules.

Back at Alameda, launching the new exchange was controversial, recounts Singh. Alameda was profitable, but “hugely understaffed,” he says. Now its best trader and best engineer, Bankman-Fried and Wang, were leaving for Hong Kong to immerse themselves in a risky new project.

“Our estimation was that it was only 20% likely to work out,” he says. “So in 80% of cases, we would have lost momentum and value in Alameda without other concrete gains.”

In hindsight, it was a phenomenal decision, Singh says. “But at the time it seemed extremely risky—and was contentious.”

Though it may sound like a stretch—lots of billionaires have boundless ambition—both Singh and Barbara Fried firmly believe that Bankman-Fried’s risk-tolerance stems from his effective altruism.

Barbara Fried puts it this way. “If you’re earning money for personal consumption, there is a very steep, declining marginal utility of income. After your fifth Porsche, do you really need a sixth? . . . But if you’re earning money to give it away to charity, there’s no diminishing marginal utility to money. The last life you save is worth as much as the first life you save.” (Aside from taking the occasional business-class flight, Bankman-Fried has little taste for living large, according to people who know him. In Hong Kong, he still lives with roommates, they note. )

Bankman-Fried registered FTX as an Antigua and Barbuda limited company in April 2019, and then launched from Hong Kong offices the following month.

FTX stood for “Fu-Tures eXchange,” he explains, shrugging. “I’m not great at naming things.”

‘Built by Traders, For Traders’

From the outset, FTX’s close relationship to Alameda Research was a selling point. Its Twitter account still proclaims: “Built By Traders, For Traders.”

For the first year or so, Alameda played a crucial role at FTX. It was the main “liquidity provider,” accounting for “half the volume on the exchange,” Bankman-Fried acknowledges. (While there are definitional nuances, “liquidity-providers,” “market-makers,” and “arbitrageurs” all do pretty much the same thing most of the time, Bankman-Fried explains. In effect, they ensure that exchange customers can sell and buy when they want to, and they keep prices on various exchanges from getting out of line with one another.)

Though FTX’s dependence on Alameda was “not a healthy long-term setup,” it helped the fledgling exchange “bootstrap,” he says. That is, “it helped solve the problem of how’d you get users without volume, or volume without users. Since then, we’ve succeeded in onboarding a number of other liquidity providers, and now have a number of the world’s larger, multi-asset-class trading firms on it.” Alameda is no longer the biggest, he says.

Alameda’s role at FTX invites at least two followup questions, however. One is: If Alameda is based in Berkeley, how could it be dealing with FTX? I thought FTX didn’t accept trades from U.S. customers.

“Yeah, it’s an interesting question,” Bankman-Fried responds. “The answer is that [Alameda Research] is not a U.S. entity at this point. Its operations are not generally in the U.S.”

When did it switch?

“A couple years ago. Before FTX was founded.”

Does it still have offices in Berkeley?

“It doesn’t have a substantial office there.”

Where is it based now?

“So part of the answer is that it’s a bit distributed. Especially during COVID, it’s been the case that people will get stranded in various places for months to a year. . . . But it's been predominantly Asia-based for the last few years.”

Where is its charter?

“BVI.”

Indeed, around the time FTX launched in 2019, a British Virgin Islands entity was formed called Alameda Research LTD. But the Delaware entity, Alameda Research LLC is still in “good standing,” according to Delaware authorities. So is a newly formed entity called Alameda Research Holdings Inc., which was just incorporated in Delaware two months ago. How are they all related?

In response to an email seeking clarification, he writes, without further elaboration, “BVI is a subsidiary of LLC.”

What about all the other large asset managers who now provide liquidity to FTX? Who are they and where are they based?

“So obviously, I don’t want to give away specific client information,” he says in an interview, “but in general when you look at the largest trading firms in the world . . . most of them have non-U.S. teams. This is something most of them have been building out for the last twenty-ish years. Not specifically for crypto.”

The other obvious followup question about the Alameda’s relationship with FTX relates to potential conflicts of interest. Theoretically, such a close connection between a trading firm and an exchange—albeit a very transparent one in this case—could create opportunities for abuses, like front-running.

“I have a hard time believing the S.E.C. or C.F.T.C. would permit that sort of [relationship between a trading firm and an exchange],” says Reiners, of Duke’s Global Financial Markets Center, “and to my knowledge it’s not happening” on any U.S. exchange now.

“Alameda has the same market access as any other entity trading on FTX,” Bankman-Fried responds, when asked about potential conflicts. “It doesn't have special access to data, and goes through the API like others do.”

A platform built on treacherous ground

FTX and Alameda Research have each continued to thrive. Daily trading volume on FTX is now in the $13 billion range. Alameda Research, which has about 20 employees, was making as much as $1 million a day for much of the past year, Bankman-Fried says, on just one of its trading strategies—a weird thing called “yield farming” relating to decentralized finance (DeFi) protocols. (That’s a story in itself.)

Bankman-Fried’s lifetime donations to effective charities now total about $35 million, as Fortune reported last month. In February, FTX also formed a foundation that has earmarked more than $11 million for charities like Oxygen for India, Lighthouse Foundation, and GiveDirectly, a poverty relief organization. FTX employees, many of whom are EAs, have given roughly $10 million more, Bankman-Fried estimates.

What’s hard to tell is whether Bankman-Fried’s growing wealth and stature will give him greater credibility and bargaining power with regulators or just paint a more vivid target on his back.

As the Wall Street Journal reported last month, a recent study by a data group called Inca Digital—combing through Twitter posts backed up by screengrabs—found at least 372 instances in which Americans appeared to be trading on offshore crypto exchanges. In 240 of those cases, they appeared to be trading on FTX. Bankman-Fried told the Journal that some of that number appeared to be mistakes on Inca’s part, but that, in any case, the entire number would account for only 0.01% of FTX’s trading volume. FTX also immediately contracted with Inca to help FTX weed out American traders in the future, the paper reported.

Still, the incident underscores the treacherous ground on which Bankman-Fried is building his platform. Some regulators obviously have grave concerns about offshore exchanges, while influential voices still decry the entire sector. SEC chair Gary Gensler and the U.K.’s top regulator, the Financial Conduct Authority, have each recently rattled regulatory sabers vis-à-vis offshore exchanges, while Nobel Prize winning economist Paul Krugman wrote a withering New York Times column in May called “Technobabble, Libertarian Derp, and Bitcoin.” There he noted that 12 years after their invention—“an eon in information technology time”—cryptocurrencies still play little role in “normal economic activity” and “almost the only time we hear about them being used as a means of payment — as opposed to speculative trading — is in association with illegal activity.”

Bankman-Fried, however, believes that both crypto in general and his exchange in particular are at least morally defensible propositions (aside from fueling his earning-to-give engine).

“You hear very different things [about crypto] depending on which country you’re in,” he says. “You go to half the countries in the world and you would not feel good having their fiat currency in a bank account there”—referring to their official legal tender. “Both from a hyperinflation perspective and . . . from a bank-seizing-your-money perspective. And [I don’t mean] seizing it because of money-laundering concerns, but [seizing it] because they'd prefer to have that money than for you to have it.”

What about Krugman’s critique? “Krugman is right that, right now, most legit payments don't use crypto. But I think they could and, in many cases, it would be better if they did. There's a self-fulfilling prophecy about saying nothing legit uses crypto, and using that as a way to discourage legitimate services from using crypto. . . . The current financial infrastructure is just not built to be natively digital. But I do think there’s a ton of promise.”

Ransomware? “I do think this is a thing worth . . . trying to combat,” he says. But so-called “privacy coins”—arcane assets like Z-Cash or Monero, whose blockchains are fully anonymous—are the real problems, he thinks. “There should possibly be serious regulation around some of those,” he acknowledges. But “other [digital] coins are in many ways easier to trace than other forms of extortion,” he asserts, because “the public ledger helps.” He cites, as an example, the FBI’s successful recovery of much of the Colonial Pipeline bitcoin ransom as corroboration of his point.

Environmental concerns? “Right now, only bitcoin and ether, of major coins, have large energy usage. As ether switches to [an upgraded blockchain] . . . most cryptocurrencies will not have large energy or climate impacts.”

Don’t most unsophisticated traders get burned trading in volatile crypto markets? “I don’t believe it’s historically been true,” he says, though he cautions that “this is not a forward-looking statement” and “I’m not giving investment advice.”

“Quaere how much of that’s luck versus other things,” he continues, trying to be fair to his critics. “But the people who have been exposed to crypto . . . tend to be pretty happy with their experiences there,” he says. “I think it’s a little bit different than when you look at people who have been exposed to casinos.”

“A lot of the quote unquote trading strategies,” he continues, “are basically like, ‘I think cryptocurrency has a lot to offer the world, so I'm gonna buy some cryptocurrencies. And I think one could make a decent argument that they were basically right for the right reasons, and made money because of that.

“The last thing to note,” he adds, “is that for any asset to mature, there have to be efficient markets for it. [There needs to be] a pathway to liquidity, price discovery, stability, and maturity for the asset class,” all of which FTX is providing.

Will regulators and legislators around the world ultimately be persuaded by such arguments? Nobody knows. Bankman-Fried is betting his livelihood—perhaps even his freedom—on that known unknown.

He is a billionaire, at least in part, because he has more risk tolerance than most of us, and has not been cowed by ferocious condemnations of the sector by powerful and highly credentialed people.

Which is totally in character. As Barbara Fried says of her son: “His position has always been: ‘I will go where the premises of utilitarianism take me. I’m not going to flinch. And I’m not going to name the outcomes ‘repugnant.’ I’m going to think about them, and my judgment is going to be rational.’”

Unlike Bankman-Fried, I’m not a betting man. If I were, though, I’d bet that some of Bankman-Fried’s rational judgments will eventually come into conflict with those of regulators. At the same time, I’d bet that in the long run, U.S. law—which avoids strangling new technologies and new business models in the cradle—will do more accommodating to Bankman-Fried than vice versa.

In addition, success has a way of legitimizing itself in our country. Quaere: how many Congressmen will dare run afoul of Major League Baseball, the NBA, Gisele Bündchen, and Tom Brady?

Correction: An earlier version of this article said FTX.US, FTX's U.S. subsidiary, was launched earlier this year. In fact, it was launched in June 2020. Yahoo Finance regrets the error.

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Roger Parloff is a regular contributor to Yahoo Finance and has also been published in Yahoo News, The New York Times, ProPublica, New York Magazine, and NewYorker.com, among others. He was formerly an editor-at-large at Fortune Magazine.

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