WASHINGTON – Before it collapsed this month, FTX stood apart from many rivals in the largely unsupervised crypto industry by boasting it was the “most regulated” exchange on the planet and inviting closer scrutiny from the authorities.

Now, company documents seen by Reuters reveal the strategy and tactics behind founder Sam Bankman-Fried’s regulatory agenda, including the previously unreported terms of a deal announced earlier this year with IEX Group, the United States stock trading platform featured in American author Michael Lewis’ book, Flash Boys, about fast, computer-driven trading.

As part of that deal, Mr Bankman-Fried bought a 10 per cent stake in IEX, with an option to buy it out completely in the next 2½ years, according to a June 7 document. The partnership gave the 30-year-old executive the opportunity to lobby IEX’s regulator, the US Securities and Exchange Commission (SEC), on crypto regulation.

That deal and others referenced in the documents – which include business updates, meeting minutes and strategy papers – illuminate one of FTX’s broader goals: quickly crafting a congenial regulatory framework for itself by acquiring stakes in companies that already had licences from the authorities, taking a shortcut across the often drawn-out approval process.

FTX saw its regulatory status as a way of luring new capital from major investors, the documents show. In documents to support its bid for hundreds of millions of dollars in funds, it held out its licences as a key competitive advantage. The “regulatory moats”, it said, created barriers for rivals and would give it access to lucrative new markets and partnerships beyond the reach of unregulated entities.

“FTX has the cleanest brand in crypto,” the exchange proclaimed in a June document presented to investors.

FTX spent some US$2 billion (S$2.75 billion) on “acquisitions for regulatory purposes”, the FTX documents seen by Reuters from a Sept 19 meeting show. Last year, for example, it bought LedgerX, a futures exchange, which gave it three Commodity Futures Trading Commission (CFTC) licences in one swoop. The licences gave FTX access to US commodities derivatives markets as a regulated exchange. Derivatives are securities that derive their value from another asset.

Mr Bankman-Fried did not respond to a request for comment on questions about FTX’s regulatory strategy. FTX did not respond to requests for comment.

An SEC spokesman declined to comment for this article. The CFTC also declined to comment.

In a text exchange this week with Vox, Mr Bankman-Fried made an about-face on regulatory matters. Asked if his prior praise of regulations was “just PR”, he said in a sequence of texts: “Yeah, just PR... f*** regulators... they make everything worse... they don’t protect customers at all.”

Patchwork of regulators

FTX collapsed last week after a futile attempt by Mr Bankman-Fried to raise emergency funds. It had come under some regulatory oversight through the dozens of licences it picked up via its many acquisitions. But that did not protect its customers and investors, who now face losses totalling billions of dollars. As Reuters reported, FTX had been secretly taking risks with customer funds, using US$10 billion in deposits to prop up a trading firm owned by Mr Bankman-Fried.

Four lawyers said the fact that Mr Bankman-Fried was courting regulators while taking massive risks with customer funds without anyone noticing exposes a yawning regulatory gap in the cryptocurrency industry.

“It is a patchwork of global regulators – and even domestically, there are huge gaps,” said Mr Aitan Goelman, an attorney with Zuckerman Spaeder, and former prosecutor and CFTC enforcement director. “That is the fault of a regulatory system that has taken too long to adjust to the advent of crypto.”

A person familiar with the SEC’s thinking on crypto regulation said the agency believes crypto firms are illegally operating outside US securities laws and instead lean on other licences that provide minimal consumer protection. “Those representations, while nominally true, do not cover their activity,” the person said. REUTERS