Semi-legal cash turnover and close ties helped Sam Bankman-Fried’s companies expand

​How a Hong Kong-based exchanger contributed to the growth of FTX. Financial Times investigation

10.12.2022

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5 min

New details about the FTX crypto exchange and its CEO Sam Bankman-Fried’s partners continue to surface. Financial Times reporters talked to several participants in the events, and we recount the most interesting from the investigation.

The FT article begins with last year’s photo of Bankman-Fried’s 29th birthday celebration. At the time, the company was celebrating not in the Bahamas, but in Hong Kong, where the infamous crypto exchange was originally registered. The photo was taken at the local exclusive club, The Crown.

Pictured together are Bankman-Fried, Alameda Research CEO Caroline Ellison, FTX co-founder Gary Wang and employees of Hong Kong-based crypto firm Genesis Block. The company provided retail digital asset trading services to clients and, according to FTX’s investment portfolio, part of the company was owned by a subsidiary of Alameda Ventures.

Genesis Block attracted clients through an unusual business model, exchanging cryptocurrency for cash. A former employee of the company told the FT reporter that “people were literally lining up around the corner with bags of cash at Genesis Block.” Sometimes the office had to close for a while because there were not enough bitcoins for everyone who wanted it.

FTX declared bankruptcy last month, and Genesis Block followed a few days later. This hit many Hong Kong investors. “I have lost generational wealth,” one of them says. “My children’s children will never forgive me. I’ve got friends who are declaring personal bankruptcy.”

Hong Kong played an important role in the formation of FTX. Genesis Block was building a network of bank accounts that offered easy access to hard currency and customer acquisition channels. The company was not afraid to take on cryptocurrency deposits and withdrawals, a service shunned by traditional regulated banks.

Genesis Block actually provided banking services for FTX and Alameda and served as a source of liquidity. According to experts interviewed by the FT, trading volumes in Hong Kong, a major financial hub, were extremely high due to high net-worth individuals and family offices interested in cryptocurrencies.

Genesis Block was one of the few local crypto businesses with a physical office in Hong Kong, making it the center of the local crypto community. When the company opened a new office in Kowloon in March 2021, it treated clients to cookies with the FTX logo.

The “kimchi premium”

Genesis Block was founded in 2017 and immediately started gaining popularity during the cryptocurrency boom. The company’s main source of income was a scheme called the “kimchi premium.” According to former employees, the firm bought cryptocurrency in Hong Kong and then sold it at an inflated rate in Japan and the rest of China. Bankman-Fried is believed to have used the same scheme to make his first large capital before FTX.

Bankman-Fried met Genesis Block executives in 2018 during a trip to Macau, a city near Hong Kong that is considered the local Las Vegas. After the acquaintance, a close relationship developed between the companies, and in 2020, Alameda Ventures bought a stake in Genesis Block. At the time FTX collapsed, both companies had offices in the same building in Hong Kong. Cottonwood Grove, a wholly owned subsidiary of Alameda Research, was listed one floor below Genesis Block.

Genesis Block co-founder Clement Ip was a director of FTX’s Hong Kong arm. The LinkedIn page of Genesis chief trader Charles Yang lists him as a partner in the company. Yang appeared at various events as a “principal” of Alameda Research.

Journalist interlocutors also claimed that Genesis Block operated a network of bitcoin ATMs across Asia after the merger with Bankman-Fried’s companies. Some of the company’s traders and analysts also worked for FTX in parallel. According to employees, Genesis had so much faith in FTX that they accepted the exchange’s native tokens FTT as payment for stakes in the companies.

In July 2020, Charles Yang said in one of the podcasts, “There is maximum trust between Alameda and FTX and Genesis Block just because we have been working with them for so long.” According to him, the companies have had good relationships with money exchanges, and that is “a grey-area business.” Genesis was able to do business in places other investors would be afraid to go, such as “Cambodian peer-to-peer markets.”

The founders also invested in mining in China, which gave them ties to the mainland and allowed them to exchange more RMB for crypto than rivals.

They had a network of 50 to 100 linked bank accounts used by Alameda, Yang said. “[We] have a whole network of what we call satellite bank accounts in our control. . . It’s a very grey area, I’m not going to lie. It could sound shady to some people,” Yang told in the same podcast.

Connections in Hong Kong

Genesis Block also made connections with wealthy families in Hong Kong who then invested in FTX. Many of the local influencers described Bankman-Fried as a workaholic. This image created a kind of “personality cult” and “mystic appeal” around him.

“He was such the boy genius, people were falling over themselves to get allocation,” says the manager of a Hong Kong crypto hedge fund, which estimates that similar local funds had lost an average of up to 20% in the FTX collapse.

The Hong Kong Securities and Futures Commission (SFC) said that funds licensed to invest in virtual assets were exposed to “immaterial” risk after the FTX collapse. However, managers say that there are other venture capital firms, family offices, and hedge funds that are not subject to the SFC’s licensing regime.

After the bankruptcy of the exchange, many FTX managers with ties to local family firms returned to Hong Kong. Following China’s crackdown on the 2020 protests in Hong Kong, the extradition treaty with the United States was terminated. Former Genesis Block employees try to distance themselves from FTX as much as possible.

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