Bankman-Fried’s Stake in Quant Trading Firm Raises Conflict Questions

Back in 2020, if you weren’t in crypto, you’d never heard of Sam Bankman-Fried, the billionaire owner of the FTX exchange and especially the small quant trading firm called Alameda Research where he’d made the beginnings of his fortune.

A year later, as crypto’s market capitalization soared past $1 trillion, $2 trillion and finally $3 trillion before collapsing at the end of the year, there were a few hundred mentions on Google including coverage in non-crypto business outlets like Bloomberg, The Wall Street Journal and CNBC, with a few stops in the mainstream at the likes of Time and The New York Times after a $5 million donation to then-candidate Joe Biden’s presidential campaign and marketing deal with quarterback Tom Brady and his supermodel wife, Gisele Bündchen.

This year? As his cryptocurrency exchange FTX leapfrogged Nasdaq-listed Coinbase to become the second-largest crypto exchange, his name produces more than 1.5 million hits at sites including Politico, Vogue and New York Magazine. And Alameda Research, which as recently as last year was barely known even inside the crypto world, gets almost 600,000 hits on Google.

And yet, not much is really known about Alameda, which began by making millions in 2017 off the 10% price bonus for bitcoin in Japan. But despite a staff of about 30, the Bahamian firm’s influence is outsized in crypto. Bankman-Fried is thought to own most of the firm.

“It generated about $1 billion in profit last year alone, putting it on par with Wall Street mainstays, including some of the biggest traders of U.S. stocks,” Bloomberg wrote last week. And in crypto, it added, Alameda “has quickly become a force in everything from decentralized finance to venture investing and even distressed lending.”

See also: The Growing Ambitions of Sam Bankman-Fried, Crypto’s Would-Be King

And Bankman-Fried, with his shock of hair and ever-present (other than congressional testimony) khaki shorts, is overtaking bald-headed Coinbase CEO Brian Armstrong as the face of crypto.

That includes Bankman-Fried’s growing focus on lobbying, where he’s a far more frequent attendee of meetings on Capitol Hill than most CEOs and has been strenuously working on influencing the growing push to provide a regulatory framework for crypto — particularly one in which the influence of the Commodity Futures Trading Commission (CFTC) sees its influence grow at the expense of the tougher Securities and Exchange Commission (SEC), whose chairman, Gary Gensler, has said virtually every cryptocurrency except bitcoin is a security.

Read more: Crypto Fight on Capitol Hill Increasingly Favors CFTC

Aside from becoming the second-largest donor to Biden’s campaign, Bankman-Fried has said he will donate at least $100 million in the 2022 election cycle, which would make him one of the largest donors, although this is from his own pocket and he said will focus on non-crypto policies.

Alameda’s Influence

It’s still hard to gauge Alameda’s influence, but “concerns over potential conflicts of interest — particularly its relationship with FTX, the world’s second-largest cryptocurrency exchange” are growing, Bloomberg said. “At a minimum, some say Alameda is able to benefit from a dearth of regulation, a claim that carries even more weight as Bankman-Fried strives to use his position and influence in the crypto community to shape U.S. oversight of the sector.”

FTX is having its own growing pains — Britain’s Financial Conduct Authority (FCA) said the Bahamas-based and regulated exchange — which also has an EU license via Cyprus — is offering products and services in the U.K. without a license.

But Alameda’s position as a major market maker on FTX, profiting on the spread between buying and selling prices, puts it in a position to have a potential conflict of interest with FTX, which gets its revenue from transaction fees and margin loans to traders.

And while the firm’s executives, and Bankman-Fried, say there is a strong firewall between the two — something that, Bloomberg correctly notes, no one has actually said or even suggested has been breached — concerns about the potential for such conflicts of interest are growing as the size and activity of Alameda gains more attention.

The Firewall

Bankman-Fried’s position as the CEO and large owner of both an exchange and one of its top market makers is something that largely doesn’t happen in traditional and better-regulated equities markets.

Crypto, which not so much lightly regulated as unregulated — or at least unclearly regulated under rules that weren’t designed for digital assets and don’t quite fit them — doesn’t have the “disclosure rules or even industry norms that discourage close ties between a market center and a trading operation have yet to develop,” Bloomberg said, comparing the situation between FTX and Alameda to “the New York Stock Exchange and market-making giant Citadel Securities” sharing the same owner.

That lack of regulatory clarity is something that both Congress and the Biden Administration have been focusing heavily on in the past year, even if the long-awaited Treasury Department regulatory framework proposals released last week were too general and broadly written to constitute a regulatory or really, a framework proposal. And Congressional proposals like the Responsible Financial Innovation Act from senators Cynthia Lummis (R-Wyo.) and Cynthia Gillibrand (D-N.Y.) won’t be passed until next term, its authors have said.

In the meantime, the impact and scope of the influence and impact of Alameda — which is a big market maker on many other top exchanges — is less clear.

And FTX — which has a much smaller U.S. sister exchange, FTX.US — isn’t regulated in the U.S.

One big difference between crypto and stock exchanges is that there are policies and procedures that regulators can investigate and enforce, David Weisberger, co-founder of crypto trading platform CoinRoutes, told Bloomberg.

In crypto, he said, “there is a clear case for having a regulator to prove that potential conflicts aren’t happening, and to stop them from happening.”

What those policies and procedures are is something Bankman-Fried is spending more and more time and money to influence, with a foot firmly on both sides.

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