Sam Bankman-Fried is the richest person in crypto, with a net worth of $16.2 billion. His cryptocurrency exchange, FTX, also recently set a record for the largest private fundraiser in crypto history, bringing in $900 million at a valuation of $18 billion.
This rapid ascent is based, in-part, on leveraging surging demand for cryptocurrency derivative products, such as futures and options, that let investors trade on the price of an asset such as Bitcoin without actually touching it. Many of these products are unregulated, and some are offered with leverage that let investors substantially increase the nominal size of their positions beyond their actual holdings. Because of this risky nature, crypto derivatives have been either scapegoated or blamed for causing and magnifying recent price crashes in the volatile crypto market.
However, Bankman-Fried criticizes this narrative as short-sighted. In an exclusive interview, he says that the crypto derivative industry is maturing, becoming more responsible, and ultimately necessary for a healthy crypto market. He also says that many critics of the large leverage (sometimes 100x) in crypto conveniently forget that it has existed in traditional markets for years.
We also discuss the challenges of building a regulatory compliant exchange in this industry without sacrificing the opportunity to grow and innovate, how he plans to spend FTX’s $900 million, what critics of crypto derivatives misunderstand about the market, and his intentions to ultimately give away all his wealth.
This interview first appeared in our premium research and news service, Forbes CryptoAsset and Blockchain Advisor.
Forbes: I want to talk a little bit about the derivatives market—it’s interplay with spot prices because it’s starting to get a lot more attention these days. That’s one of the areas where you first made a name for FTX. What is the role of a derivatives market? What do you think are healthy trading volumes ratios between the various types of markets?
Bankman-Fried: This is a somewhat misunderstood area. A lot of people are seeing something happening and assume this is the first time it has happened in history. That might be true in some cases, but not in all. I think derivatives are a good example of this. People will note that derivatives trade more volume in crypto than spot, which is true. But that is true of every asset class in the world. The reason is basically that derivatives are a bit more efficient if you don’t need immediate delivery (spot). Here’s an example. Two people are doing a trade, Bob is buying from Sally. Maybe Bob is buying a bitcoin from Sally for X dollars. If it’s pretty important for Sally to have a physical bitcoin, because she needs to go send it somewhere, then it needs to be a physical bitcoin trade. And if it’s very important for Bob to have the dollar, because he needs to go pay for something, then it’s important for it to be a physical trade. But if neither of them cares about the short-term deliverability and what they’re looking for is your hedge position or put on a delta or something like that then neither necessarily care whether it’s a futures or a spot contract. I think it adds liquidity to markets and makes them more efficient in general.
There are cases where it makes them less efficient, though, and these get a lot of attention in crypto, because they are sometimes quite important. I do want to emphasize that overall, I think futures have made crypto substantially more efficient, although there are high profile times where it makes them less efficient. Those times tend to be on liquidations and what you’ll see happen often is people put on a leveraged position, the market moves against them and then those positions will get liquidated and it can create a little bit of a momentum effect where liquidations are triggered causing impact, which triggers further liquidations and markets move more. That is a real effect in crypto, it does really happen. Sometimes it happens to a significant degree and really does influence the market. So, there are cases where futures can cause illiquidity and blowouts, although I think more frequently they solve those than cause them.
Forbes: When SEC Chairman Gary Gensler spoke recently, he signaled more of a willingness to consider derivative-focused ETFs, as opposed to spot ETFs. What’s your opinion as to why he might think that derivatives are a bit more palatable right now?
Bankman-Fried: I believe his thought process is that there is exactly one crypto exchange in the world that he trusts and it’s CME. He’s just looking at which underlying exchange and marketplace will be the most transparent, compliant and least open to manipulation.
Forbes: Let’s talk about margin too, because that’s another big issue that can accelerate liquidations or short squeezes. You recently made the decision to reduce or eliminate 100x margin on FTX. One of the justifications you gave was that it comprised a very small part of your overall trading volume anyway. Why did you decide to offer it in the first place given the risks?
Bankman-Fried: A few things. One is that our users wanted it. We did not have this on day one and it was the most requested feature from our users. They were refusing to use the platform unless we had it. One of FTX’s chief duties is serving its users and serving what they want. The other thing to note is that crypto is not unique in that respect; many asset classes have high leverage that sometimes go to 500x. I think there are a lot of places offering way more than 100x on equities trades, as well. In any case, people started to become very concerned with it, and it wasn’t a big part of the business. I also don’t want to try and claim that it was important for efficient markets, because I don’t think it is. Any position that you’re putting on with that level of leverage can’t be absolutely crucial for efficient markets, and this is not something I felt was particularly important or good for crypto market health. It is not something I think regulators are going to be a huge fan of and it just seemed like the right idea to remove it. Although I do maintain that it got a worse rap than it deserved.
Forbes: If you were faced with that decision now, do you think you would have offered that level of leverage?
Bankman-Fried: Would I have done it in the first place? Probably not if I had to do it over again.
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Forbes: In a recent interview, you mentioned spending about five hours a day dealing with regulation. Can you give a little flavor as to what that’s like?
Bankman-Fried: Crypto has always been regulated, and comments saying that it is just becoming regulated are not not really correct. But it is true that regulators are building out frameworks, more so now than they had before. We are seeing this two pronged push on the part of global regulators, one of which is to build out licensing frameworks for cryptocurrencies that legitimate businesses can apply for, and they’re policing non-compliant behavior. To give a flavor of what this looks like, one thing is just applying for licenses. Sometimes this means applying for a de novo license, sometimes this is an acquisition. Sometimes this is a conversation with the regulator. But yes, one big part of it is literally just applying and I think we’re applying in something like six or seven jurisdictions right now.
