FTX’s lingering ties remind city of the bullet it dodged and risks ahead
Ten days before his fall from grace in the collapse of the world’s second-largest cryptocurrency exchange, Sam Bankman-Fried was enjoying the limelight in Hong Kong.
Speaking by video from the Bahamas, the 30-year-old founder of FTX – valued then at US$32 billion – expounded on “how new technologies are supporting financial inclusion”, playing to a gallery of financial regulators who were lining up at 2022 Hong Kong FinTech Week to hear how disruptive technology could lead to the betterment of society.
Two days after the 35-minute interview with Bankman-Fried, known as SBF in the cryptocurrency world, a report by Coindesk on a leaked FTX balance sheet revealed that the company’s largest asset was FTT, its own token. That set in motion a series of events that led to a run on FTX, exposed alleged fraud and mismanagement, ending in bankruptcy on November 11, marking one of the fastest implosions in global corporate history.
As liquidators pick through the aftermath of FTX, several global venture capital funds – including SoftBank Group Corporation, Sequoia Capital, and the Ontario Teachers’ Pension Plan – wrote off their investments in the exchange. Singapore’s sovereign wealth fund Temasek wrote off US$275 million, possibly losing one of its largest bets in a single investment.
Hong Kong appeared to have dodged the bullet. Local investors speaking with the Post said they either passed on, or missed, opportunities to invest in FTX and its related derivatives trading firm Alameda Research. The Securities and Futures Commission (SFC) previously said the city’s exposure to FTX was “immaterial.”
Still, regulators feel compelled to put up some guard rails to protect local investors, as they acknowledge that Hong Kong’s open economy and convertible currency leave cryptocurrency fans vulnerable to fraud and misadventures elsewhere. Financial
Secretary Paul Chan Mo-po reiterated Hong Kong’s FinTech Week commitment to building a well-regulated digital assets market. The SFC said that week that it would unveil a public consultation for local retail investors to dabble in virtual assets.
“The FTX debacle points to exactly why Hong Kong regulators need to bring virtual asset trading back in a well-regulated market for investors,” said Richard Douglas, Hong Kong chief executive of Saxo Markets. “The Securities and Futures Ordinance is a well-structured regulatory framework, [with] very detailed and specific guidelines around how client money and client securities should be treated, which all licensed entities have to adhere to, and is designed to prevent exactly this type of situation.”
The ordinance, which regulates all financial instruments from bonds to equities, does not cover the tokens traded by Alameda on FTX. That is why both firms, based in Hong Kong until September 2021, did not come under the SFC’s purview.
FTX’s remaining links to Hong Kong now present regulators with a chance to prove that it can corral the wild west cryptocurrency market as it joins other jurisdictions to find out where the exchange’s money has gone.
At the time of Alameda’s collapse, former chief executive Caroline Ellison was reported by The New York Times to be in Hong Kong, where she travelled from her home in the Bahamas. She did not answer multiple calls placed to her mobile phone.
FTX owes money to an estimated 1 million creditors, investors and staff, according to bankruptcy filings in the US state of Delaware. About 3 per cent of customers were in Hong Kong, even if the FTX website barred non-professional investors from certain products. The mainland, which banned cryptocurrency mining outright in 2021, still made up 8 per cent of FTX’s customers, according to the filings.
This is why some see an opportunity for better regulations in Hong Kong. Bankman-Fried once championed this in Washington, a cause that has since been taken up by Binance founder Zhao Changpeng, who played a role in FTX’s downfall when he disclosed plans to liquidate his company’s FTT holdings.
As regulators mull their next move, some local investors are breathing a sigh of relief at not having given in to FTX’s overtures.
In May 2021, Bankman-Fried and FTX’s head of product Ramnik Arora held meetings with potential investors in Hong Kong to raise US$500 million, valuing the company at US$20 billion.
At the time, FTX was doing “exceptionally well”, according to an email by Arora, a former Facebook research scientist for the Libra stablecoin project.
Kenetic Capital’s founder Jehan Chu was a seed investor in FTX, which raised US$8 million in August 2019, according to data by Crunchbase.
“Though some material personal funds were lost on FTX, Kenetic had no direct exposure, as the company had already exited our seed investment in FTT tokens,” Chu said.
Among Hong Kong investors, only New Huo Technology, formerly known as Huobi Technology, publicly quantified its loss from FTX, which it put at
US$18.1 million deposited with the exchange.
Back in 2019, FTX and Alameda occupied office space at Pacific Place in Admiralty.
Ellison, who stepped down this month as Alameda’s chief executive, appeared to have kept more ties to Hong Kong than Bankman-Fried. Before her LinkedIn page was removed, Ellison’s profile picture showed her against a backdrop of the city’s hills and high-rise buildings.
FTX’s move to the Bahamas in 2019 was once seen as an indictment of Hong Kong’s stricter regulations around cryptocurrencies, which drove the industry offshore to Singapore, the United Arab Emirates and the Bahamas.
Now, it seems like a blessing in disguise, vindicating Hong Kong’s conservative approach, some analysts said. Just before FTX’s collapse, Hong Kong’s regulators were in talks to establish the framework for a regulated cryptocurrency exchange to reclaim its status as Asia’s digital assets hub, according to several people familiar with the matter.