FTX CEO: This is the canary in China’s crypto ban coal mine

Transcript

Angie Lau: China’s crypto activities ban — what does it all mean? How will this impact the global markets and financial hub of Hong Kong? Where do existing crypto users and businesses in China go from here?

Welcome to Word on the Block, the series that takes a deeper dive into blockchain and all the emerging technologies that shape our world at the intersection of business, politics and economy. It’s what we cover right here on Forkast.News. I’m Editor-in-Chief Angie Lau.

So it finally happened — China finally drops the ‘b-bomb’ — the often-talked about ban — that a lot of China industry folks speculated would come — all cryptocurrency transactions and activities. Now, even as ‘China FUD’ was trending on Twitter all weekend, markets went tumbling. 

As we saw with this year’s Bitcoin mining exodus, PBOC’s influence can go far beyond the markets. It can impact jobs and lives of real people in and out of China.

So what does it mean for crypto exchanges in Asia and globally? How does this impact the industry in Hong Kong? Is lack of policy support driving out innovation? Well, we’ve got Sam Bankman-Fried, CEO of FTX. He might have something to say about this and so much more.

Sam, it’s great to have you back on the show. Welcome.

Bankman-Fried: Thanks for having me.

Lau: Well, I love that we are global citizens of the world, and as a global citizen, you are talking to us from the West Coast of the United States at the moment from Berkeley, I understand. But halfway around the world, right here in Asia, that shoe, I guess the proverbial shoe dropped on late Friday afternoon. China, PBOC, says that it is banning crypto activities — for not just exchanges or industry — for everyone. What was your reaction?

Bankman-Fried: It’s complicated. One of the interesting things about this is, it’s always pretty hard from the text of what’s said to try and figure out what’s going to happen. The text of this one was not mostly saying things that are new. It was reiterating things that had been said many times before — that some or many or most or maybe all crypto activities may fall under bands related to various pieces of existing regulation in China. Just reading sort of the text of this against previous announcements, it makes it hard to tell what it means in practice. We’ve seen announcements like this come with very little follow up and we see some of these come with very drastic follow up. In this time in particular, it does seem like it will have at least some impact. Obviously, you’ve seen some significant market movements in response to it. But much more importantly — because I don’t think the market always knows what’s happening here — you’ve seen some reaction from Chinese exchanges, and that’s always the first thing that you want to look at whenever there’s an announcement from PBOC or any other Chinese regulatory bodies. The first thing you want to do is you look at Huobi, you look at OKEx, sometimes, sometimes, not you look at Binance, and you see, ‘are there changes?’ And there are some changes this time. Which are actually somewhat material. I know Huobi, at least, has announced that they are cutting off new registrations from Chinese users, and that’s a pretty significant step.

Lau: It is pretty significant. And it’s totally true, Sam. You and I have been in Asia for long enough to kind of be able to to navigate and read the tea leaves as it were. The fact that timing came out of Evergrande, which is a serious issue for China and one that could have not only domestic but international proportions, the timing of it speaks to an importance. To your point, the exchanges responded almost immediately — that’s the second point. The third point — and I’m sure you and your people have been noting over the weekend, the past 48 hours since the announcement — some really interesting big moves in the market. There have been some market movements of some pretty big amounts flowing out of China or flowing within China out of exchanges. The question is what are you seeing and where is this money going?

Bankman-Fried: Yeah, so we’re definitely seeing some money moving. I think a lot of this is Chinese users looking to off board from exchanges that they think will no longer accept them. That’s probably the single biggest piece of this, combined with a bit of a crypto sell-off, when the news hit which I think originally just hit crypto overall. But if you look at the last day’s token movement, you can see something much more telling than frankly what you saw in the first 24 hours or so after the announcement. You just thought everything was down, and it’s hard to know what that means other than the world thinks, ‘maybe this is bad.’ But if you look, for instance, in the last 24 hours, what you’ll notice is — just to read off some numbers here — Bitcoin and Ethereum have recovered somewhat, Bitcoin’s up 4.5%, Ethereum is up close to 10%. Some DeFi and DEX related tokens are up a lot. dYdX is up 62% in the last day, SUSHI’s up 27%, UNI’s up 37%, Huobi token is down 13%. And so what you’re seeing here, I think, is the market reacting to, first of all, an expectation that Huobi and to a lesser extent, OKEx — I think they haven’t yet announced what their reaction response is going to be — if any of this are going to be hit pretty hard from this, that they may lose a lot of their Chinese user base, combined with an expectation that that might flow to other exchanges or to decentralized exchanges. I don’t know if this is true, but that’s certainly what the market isn’t implying.

Lau: If we’re just going to do that kind of analytical, critical thought process: If you’re a Chinese user and you’re not going to be able to do any crypto activities on monitored exchanges because they still do business in China, why wouldn’t you go to a decentralized exchange? Why wouldn’t you go to a DEX, which speaks to all those DeFi coins and altcoins that are soaring right now?

Bankman-Fried: It’s absolutely right. I think that probably the market’s being a little bit overconfident in that belief because first of all, you can imagine that there might be throttling on websites associated with decentralized exchanges in China. You could imagine actually similar sorts of clampdowns placed on those as you see on some centralized exchanges. But nonetheless, there is certainly some justification for it, and it is very strongly what the market is implying.

Lau: You say a little bit of overconfidence because now comes in the policy. Is this policy going to be enforced, which we have seen these kind of edicts come down before and then a very neutral stance, kind of a ‘wait and see’ until the moment that policy tigers come in and decide to pounce — for lack of a better word.

Bankman-Fried: That’s right. To your point, I think many players in this market are currently waiting to see. It’s often just not clear to most people what the answer will be there. That being said, some people sometimes know at least how it applies to them, usually only in one direction. And so one thing that you might see is some players might know that this will be enforced on them. In fact, we have some strong evidence of that. If you have already shut off access to Chinese users, there’s a pretty good chance that you know something about the likely enforcement of this, at least as it refers to you. There’s at least some signs that — at least for some venues — there will likely be some enforcement because I actually think it’s unlikely [that] you would have seen an exchange where I’m guessing a substantial fraction of their volume does come from China having shut off registrations there without a lot of of pressure behind the scenes. So I think that there’s in some cases going to be enforcement.

That doesn’t mean there will be in all cases though. I don’t know what it means. No one does. If I had to just take a guess here, I would look at the RMB-to-crypto market — the markets where people can buy cryptocurrencies with onshore Chinese yuan as a pretty good place to start thinking about regulatory impact. We know that is something that PBOC cares about. We know that something they’re concerned with, it always has been, it’s always been a focal point. There’s been a ban of centralized exchanges, but there was basically an allowance of peer-to-peer RMB-to-cryptocurrency trading in some specific instances. Whether or not it was enshrined in practice it was, that is a thing that I would be looking at as a canary in the coal mine here, and it’s probably like the most likely thing to get cracks down on. And you do see that on primarily just on the Chinese exchanges. That’s again, historically, outflows of RMB have been a substantial driver of central bank concerns in China about crypto.

Lau: Absolutely. Which brings back to the timing on the heels of Evergrande. Evergrande’s debt is a huge issue. Concerns about a big property bubble. Concerns about local governments as it trickles down. This is an ecosystem under stress. This is a stress test by Evergrande. It is interesting that this crypto edict came down on the heels of that, which really speaks to the concern of capital outflow. To your point Sam, capital outflow has always been a concern. You cannot flow money out of China. More than 50,000 people try it. They get clamped down their different avenues. There’s loopholes that people are always looking for. Crypto is that one thing. You’re absolutely right. The timing of this speaks to ‘don’t move your money in crypto out of China right now, because that is not a policy that supports what’s happening in the country right now, trying to get that under control.’

Bankman-Fried: And I think it dovetails with something else as well. That’s one side of it, but another parallel one could draw is when you look at what’s happened to some of the other large Chinese companies. When you look at what the stance that the central government has taken on Ant Financial, Didi and on a lot of other large tech players, I think you didn’t see a parallel there to where there are threats of clamping down, they’re threats of cutting off access to new users or maybe even existing users. On one side, you have the direct capital flight concern. But on another side, you’ve also seen just concern about the growing influence of parallel economic systems in China and of technology platforms that might be getting larger than the government feels comfortable with. I think that you see all of those dovetailing together and to some extent, right, this is just another in a line of clampdowns on generally fintech-affiliated businesses in China.

Lau: FTX, once upon a time, and I think in the past 48, 72 hours, we have learned that you are no longer in Hong Kong, that you are relocating to the Bahamas. Was this kind of policy awareness — that you have a master of very clearly — kind of reading what those policy shifts and that parallel system and that concern over control might also extend to Hong Kong and what that means? Why did you move? Why did you move FTX of Hong Kong?

Bankman-Fried: The first thing I’ll say is that we are establishing, actually, our first sort of real official headquarters in the Bahamas. That was not a decision that was just sort of made on the fly. There’s been movement there for a while. One piece of this, probably the most exciting piece of this, has been the forward-looking stance taken by the Bahamian regulators, establishing one of the world’s first comprehensive regulatory regimes for cryptocurrency, which includes both spot and derivatives marketplaces. We’re really excited to work with them there. We are registered under the DARE (Digital Assets and Registered Exchanges Bill) Act . We’ve been excited about the team that we’ve been able to build up there and about the locals that we’ve been able to bring on board. That has been going on for the last few months, and we’re really excited about that. 

And another piece of this which is actually quite important, frankly, it’s quarantine. It’s important for me to be in a place where I can get in and out without weeks spent in hotels for meetings and conferences. Being in a jurisdiction that doesn’t have Covid quarantines to get in is really important. Putting aside those, we’ve been paying attention for a while to long term policy shifts in a number of places. In general, media has a tendency to overestimate the spillover from some of these. I think that there’s been sort of estimates of — on scales that I think are probably not the right time scales and are probably substantially shorter than when I actually think changes will happen. That being said, we’ve been looking for a place that we do feel really comfortable establishing a headquarters, and that has to be a place where we feel like there’s clarity from regulators. In the same token, we’ve been really excited about the clarity that the Bahamian regulators have given. There are a number of jurisdictions that haven’t been giving that clarity, in fact, have been giving mixed or negative signals. 

Lau: You’re talking about Hong Kong specifically?

Bankman-Fried: It’s one of many and I think it’s not even so much an outlier. If you look at just many countries in the world right now, you will not see clear signaling from regulatory bodies there about what direction crypto policy is going to go in. I think that’s been true in Hong Kong. I think that’s been true frankly, in more than half of the jurisdictions in the world. You can sort of count on one hand the number of jurisdictions that have actually spelled out explicit policies for at least the majority of the crypto industry. 

Lau: Bahamas has for years been growing that ecosystem. They’ve fallen out of favor initially in the first wave of blockchain projects and protocols in exchanges even. They’ve fallen out of favor because everybody was looking for the gold standard coming out of possibly Hong Kong or Singapore, definitely the United States. What is that kind of gold standard legal mechanism? Now, we’re seeing a return back to the first wave. And maybe it’s like what was once in style is now by default, back again, because what people were looking for in terms of guidance from those first tier, administrations and policymakers wasn’t really that quite clear.

Bankman-Fried: For a while, we’ve seen, frankly, a little bit of over-optimism on much of the industry’s stance about specific jurisdictions following through on comprehensive regulatory regimes. Frankly, these are things that take a long time to develop for most countries. You would have seen some companies move from place to place to place, sort of going with the latest fad each time. The truth is, you’ll get a country that announces an intent to have a regulatory regime for crypto, that doesn’t mean there will be a regulatory regime for crypto or that it will come in the next five years. We remain really excited about some jurisdictions, Singapore, we’re following closely. We’re looking into the spot regime there under the Payment Services Act, and we’re also looking into color about what the future of derivatives regulation might be there because as of now, there isn’t a regime for crypto derivatives. They’re unregulated in Singapore as of now. We’ve seen really forward-looking statements from Singaporean regulators and have been really impressed with how MAS has approached this matter. That’s something that we see as a potential hub. We definitely want to see how everything plays out, and we may look to attempt to get a license there and to establish something there. That’s something we’re absolutely considering.

We’ll see what happens. That’s true in just a lot of places where you have some signs of regulatory regimes coming out, but that doesn’t mean that they have come out or will come out tomorrow or that it’s clear how they will apply to all products. One of the biggest things again for us, like in every other sector, the majority of volume trades in derivatives in crypto. That’s just true in every financial sector, basically. That’s what we see as the gold standard of a regulatory regime for crypto these days, is having a regime for crypto futures. If you don’t have that, you don’t have a regime for more than two thirds of the volume in the world. That makes it tough for there to be a real industry migration to a place. If you look at, for instance, the top exchanges in the world, you go down them, how many of them are only spot? Very few of them, actually. That’s just a criteria that we are always looking at. I know a lot of other people are as well. Frankly, I think that the crypto industry might be surprised by how this shakes out. If you look at which countries have issued or intend to issue derivatives licenses meant for crypto, where are we? So we have one in Bahamas, we have one in Gibraltar with the GSFC. What are the other countries that have issued or have regimes that are issuing them? Japan actually is on that list, which I think is not what people would generally say. There is a regime. That is sort of tied to the existing financial regime, but not entirely. There’s been some starts there. 

Frankly, the country that most people would put at the very bottom of the list in terms of regimes for futures maybe one of the earlier ones to issue some licenses here, which is the United States. It’s an interesting case where it’s a very, very intense licensing process and a very long one. But it is also a comprehensive one that has been tested for crypto futures before under the CFTC. We’re obviously excited to go down that pathway for that track. I don’t think I always thought about this super well. I was surprised when I did a deeper dive at exactly what the global regime looked like. I don’t think it matches up exactly with what people are anticipating from different countries, but that’s the thing that we’re looking at the most closely is, in fact, ‘when all of a sudden done, where can you get licenses?’

Lau: You found one, that’s for sure. But I totally hear you on the policy makers and the policy regulatory landscape is just not there enough to support what we’re already seeing in terms of two thirds of the volume of trades, as you’ve said. This is where innovation is taking us. Are you concerned about the long arm of the law? It could be the U.S., it could be China now, they’re saying that if you are a Chinese national doing and supporting crypto activities — that is so it’s so general and broad and nonspecific. Pretty much everybody would probably fall under this umbrella. Are you worried about the long arm of regulatory law kind of reaching you where you are, wherever you are in the world?

Bankman-Fried: It’s a really good question, and my take on that basically is, if you’re not attempting to do your best fitting within the major regimes in the world, that is a real worry. Obviously, we’re mindful of what jurisdictions we operate in. But we also try to be mindful of what other jurisdictions are thinking. We don’t offer futures in the United States right now, but we are hopefully working towards a licensed product there in concert with LedgerX, which we’re super excited about. We’re going to try and take that approach rather than just looking entirely for separate systems, we want to work within the larger systems as well. Sometimes that means doing a good faith effort, and sometimes that means that there are actual licenses that we can be working towards and that we do hope to because it is — to some extent — a global world.

Lau: It is. There’s no doubt. A lot of people are nervous right now. A lot of Chinese nationals are nervous. In a weekend note that I sent out from Forkast, it’s kind of like the old emperors in China that kept the families of their generals within the confines of the palace walls as those generals fought on behalf of the emperor across the vast landscape of China. A lot of people have family back in China. There is this social contract, social stress that happens when these comments come out officially. I’m sure a lot of parents have been dialing up their kids from around the world worried about this. Have you heard this from your staff? How are you dealing with those questions?

Bankman-Fried: We haven’t seen anything particularly new this time. But it’s always something that I have to be mindful of and that we all have to be mindful of. It’s incumbent upon myself and the rest of the company to create as compliant of an effort as we can to maintain positive relationships with regulators wherever we can and to make sure that we’re creating an exciting, high upside and also safe place for our employees along obviously with our users. I will say that it’s not just on the regulatory side, it’s a volatile industry. That’s something that took some getting used to for me. It certainly takes some getting used to for a lot of people who joined to see the fortunes of the place that they’re working for move so quickly in both directions. There is a little bit of a side error in the office whenever there is a large downturn in markets. That’s how it is. You can’t have moods without down moves, and nothing just goes straight up every day forever. But it certainly is a testing industry I think to work in if you’re looking for something really stable and low volatility.

Lau: Well, as you know, Word on the Block, the show is not about hype. It’s not about those headlines. It’s not about the news that grabs. It is about the context. It is about really what the industry should be thinking and really how to think about it. So in that spirit, Sam, when you take a look at the PBOC announcement in comparison to all of the other things that have have driven some of the market moves, what are the thoughtful, smart takeaways, not just for today, but in the next month, six months to a year that we should be thinking about when it comes to policy and PBOC and what China’s done?

Bankman-Fried: I think it’s going to continue to evolve. We should just remember this isn’t the last time we’re going to be talking about a major announcement from PBOC on cryptocurrencies. It’s probably not the second to last time. There’s going to be many more. A lot of the important context is not necessarily always going to be easy to rock or made super public. It’s not going to be immediately obvious. You’re going to have to look at what the reactions from industry players are and what the follow up is. I don’t know what the future of crypto in China is. I don’t know if anyone does. And I think it’s important to take the updates and to really update your model on them. But to make sure not to overreact to any one of them as well, because in the end, no one really knows for sure what’s going to happen.

Lau: Looking at the very specific words that the PBOC issued, which is crypto activities, note that they did not ban ownership of crypto outright. You can still legally own Bitcoin. You can still legally own Ethereum and crypto. In fact, it is supported by Chinese law, where it is seen as property that is protected. Now the activity, the trading activity is not protected, but actually holding it, if somebody steals it from you, that is a crime in China. That property is protected. So it’s interesting that you can still hold on to it. They just don’t want you to do anything with it, especially outside of China right now.

Bankman-Fried: I think that’s right. That really points to a lot of what probably the focus of this is rather than against the notion of a cryptocurrency. It’s against — if I had to guess — some of the transacting that they were seeing with it. I would guess a lot of the interfacing with Chinese yuan would be a lot of what they’re looking at. And, maybe some other activities as well. But I do think that there’s nuance to it. It’ll take time to tell exactly what it is, and it’s probably going to hit some specific things quite a bit harder than other areas of the sector.

Lau: Absolutely. And we always appreciate your insight as you take a look at the markets and you share it with us and the global audience, it is so insightful. It’s so smart, always. And we always appreciate it, Sam.

Bankman-Fried: Thank you,

Lau: Sam, it’s great to have you on the show. And thank you, everyone for joining us on this latest episode of Word on the Block. I’m Angie Lau, Editor-in-Chief of Forkast.News. Until the next time.