The GCR Network

Block Kong Breakfast, Sam Bankman-Fried, FTX

“There is no cost for sharing.”

Block Kong is a series of interviews with blockchain-related entrepreneurs and financiers in Hong Kong, brought to you by Charles d’Haussy. This column was previously published in Digfin.

“So how was your weekend?” I ask my latest Block Kong breakfast interviewee.

“It was great,” he replies. “I spend most of it at the office.”

Which means where we are now, having breakfast. It is a typical techie setup: a forest of trading screens eventually give way to a meeting room with the de rigueur beanbag chairs. And my host is wearing shorts and a hoodie, although I’m not sure any hood could conquer his voluminous, irrepressible hair.

Sam Bankman-Fried is the 27-year old co-founder of Alameda Research, along with Gary Wang, co-founder and CTO. The name of the firm is misleading: Alameda is actually a crypto trading shop (or “liquidity provider”, to use the firm’s lingo). It manages over $100 million worth of digital assets, with daily turnover as high as $1.5 billion, making it one of the biggest players in crypto.

Alameda reaches those big numbers because of the nature of his trading strategy: high-frequency bets in derivatives. But that wasn’t enough for Bankman-Fried, or “SBF”, as he likes to be called (it’s his Twitter handle). Early in 2019 he set up a crypto derivatives exchange in Hong Kong called FTX.

This seems a long way from SBF’s original calling, which for lack of a better word was professional altruism.

Bankman-Fried studied physics at MIT and mulled a career in politics or journalism. He wanted to make a difference to society, but unsure how to go about it. “I was having a kind of student-life crisis,” he jokes.

He started out at Jane Street instead, trading global exchange-traded funds. Maybe not saving the world, but the atmosphere suited him more than a science lab, and he enjoyed getting stuck into problem-solving.

Although it is the middle-aged such as myself who should worry about time’s passage, SBF is a 27-year old in a hurry. Efficiency counts. Hence breakfast at his office, instead of at a local cafe. I brought with me two Soylent Bottles (“a complete meal in a bottle” says the branding – très efficace), and French croissants.

As we eat at his desk, I see Post-it Notes pinned behind him. What is that?

He shows me the messages: “1 team, 2 missions / My end goal is to donate.”

So his university ambitions remain intact. Bankman-Fried launches into an explanation of utilitarianism, a belief in maximizing happiness and wellbeing for the majority of the population.

Nor is this merely a goal to be deferred to retirement. Alameda publicly reported more than $4 million in donations to various causes over the past year. Not bad for a company set up in 2017.

There are some other progressive aspects to the Alameda business. For example, it publishes the team’s trading strategy, including in moments of stress for the Bitcoin market. “We are not disclosing anything proprietary,” he says.

But your strategy is right there for all to see!

“There is no cost for sharing,” he insists. The proprietary side is not whether to buy or sell bitcoin or ether – it’s the high-performance trading infrastructure the firm has built. This is the secret sauce that encouraged Alameda to put its name on the leader board of BitMEX, the Hong Kong crypto derivatives exchange. It is unusual in the crypto community for big traders to use their own name. But Bankman-Fried wants the world to know: he has nothing to hide.

Alameda, BitMEX reports, claims to have amassed a profit this year of BTC5,244, about $36 million as of late December 2019.

Bankman-Fried says 99% of Alameda’s trades are executed by computer, but humans remain in charge. “We’re like deejays,” he says, orchestrating the bots rather than making individual trading decisions.

I sip my Soylent. It is a like a drink for machines, human machines like my interviewee.

FTX is a crypto exchange incubated by Alameda. Today around $120 million turns over on the venue daily, still modest compared to the likes of BitMEX. It lists spot, futures and “leveraged tokens”, a new twist on securities tokens. The activities of managing risk and executing trades is done by using special FTX “strategy” tokens – BULL, BEAR and HEDGE – that manage exposures automatically. These tokens allow traders to adjust positions in order to maintain target leverage ratios, and prevent liquidations. FTX allows participants to export these managed strategies for use on other venues.

Portable trading strategies. Hmm. Seductive, and also dangerous. Not my gig. But the creativity in the derivatives markets I am being exposed to seems endless. Now SBF is showing me a crypto futures index that tracks the price of a basket of popular Chinese coins. The index is called “Dragon”.

There’s another futures token that is designed to go long on “shitcoins”. I’ll let you guess its name.

Bankman-Fried enjoys stepping effortlessly from talks about utilitarianism to very deep tech topics. And he’s taking me with him on his enthusiastic deep dive into how crypto markets operate.

Alameda published a research paper over the summer in response to other reports claiming that trading volumes reported on crypto exchanges were fake. “Western media are confused,” SBF says, noting that a lot of negative stories on the industry are written by people who don’t actually trade on these venues. And, obliquely referring to the Chinese people behind some of the industry’s biggest exchanges, SBF says, “There might be some patriotism going on here.”

I look at his report on the market. Data sets, statistics, order book depths, best bids and best offers. Now Alameda publishes online a global exchange volume monitor. I spend some time going through it while finishing my croissant. Alameda says eight out of the top 10 exchanges by volume are headquartered in Asia Pacific. The croissant is only so-so.

It’s all a bit overwhelming.

Bankman-Fried comes off as a quintessential New Yorker. What brought you to the Manhattan of Asia?

He recalls a business trip to Macau for a conference. It involved a stopover in Hong Kong. “I called Gary [his co-founder] and told him this city is the here and now” for crypto.

But it hasn’t been easy for FTX to attract customers. There are more established rivals such as BitMEX in Hong Kong (although BitMEX is registered in the Seychelles) and each broker or investor has their own requirements. 

Does he see major investment banks wading in?

“Acquisitions by banks will be complex,” SBF says. The crypto market is still too small. He reckons the entire market would represent a mere 0.5% of trading turnover for a major bank – but buying a crypto business would be a huge burden and cost to its compliance team. “The compliance officer would have a heart attack,” he reckons.

I’m dizzy with so much exposure to this fast-paced crypto business in Hong Kong. Yet as I go, I manage one more question: what does he think of stablecoins?

“They are the simplest tokenization,” Bankman-Fried says. He’s bullish on stablecoins as a way station for fiat money entering the space. But not all stablecoins are equal, he warns. “Blockchain provides the trustless glue,” he says. “But trust in stablecoins are now at the center of this.”

Seeing me out, SBF makes one last note, almost as an aside. What about tokenizing charity? It seems he is still obsessed with his original mission. And looking for the financial play to make it happen.

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