Now, company documents seen by Reuters reveal the strategy and tactics behind founder Sam Bankman-Fried’s regulatory agenda, including the previously undisclosed terms of a deal announced earlier this year with IEX Group, the US stock trading platform that featured in Michael Lewis’ book “Flash Boys” about computer-based flash trading. As part of that deal, Bankman-Fried bought a 10 percent stake in IEX, with an option to buy it out in full over the next two and a half years, according to a June 7 filing. The partnership gave the 30-year-old executive an opportunity to lobby IEX’s regulator, the US Securities and Exchange Commission, on cryptocurrency regulation. That deal and others mentioned in the documents, which include business briefings, meeting minutes and strategy papers, illuminate one of FTX’s broader goals: to quickly create a favorable regulatory framework for itself by acquiring stakes in companies that already had licenses by authorities, often shortening the approval process. FTX spent about $2 billion on “acquisitions for regulatory purposes,” FTX documents seen by Reuters from a Sept. 19 broadcast show. Last year, for example, it bought LedgerX LLC, a futures exchange, which gave it three Commodity Futures Trading Commission licenses in one go. The licenses gave FTX access to the US commodity derivatives markets as a regulated exchange. Derivatives are securities that derive their value from another asset. FTX also saw its regulatory status as a way to attract new capital from large investors, the documents show. In documents to support its request for hundreds of millions of dollars in capital, it held up its licenses as a key competitive advantage. The “regulatory moats,” he 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 said in a June document presented to investors. 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, Bankman-Fried discussed regulatory issues. Asked if his previous praise of regulations was “just PR,” he said in a series of texts: “yeah, just PR… screw the regulators… they’re making everything worse… they’re not protecting customers at all. “ An IEX spokesman declined to confirm details of the FTX transaction, except that FTX’s “small minority stake” in IEX cannot be sold to a third party without its consent. “We are currently evaluating our legal options in relation to the previous transaction,” the spokesman said.

SET OF REGULATORS

FTX collapsed last week after a failed attempt by Bankman-Fried to raise emergency funds. It had come under some regulatory oversight through the dozens of licenses it obtained through its many acquisitions. But that didn’t protect its customers and investors, who are now facing losses totaling billions of dollars. As Reuters reported, FTX was secretly taking risks with client funds, using $10 billion in deposits to back a trading firm owned by Bankman-Fried. Four lawyers said the fact that Bankman-Fried courted regulators while taking huge risks with clients’ funds without anyone noticing exposed a yawning regulatory loophole in the cryptocurrency industry. “It’s a patchwork of global regulators — and even domestically there are huge gaps,” said Aitan Goelman, an attorney at Zuckerman Spaeder and a former CFTC prosecutor and director of enforcement. “This is the fault of a regulatory system that was slow to adapt to the emergence of crypto.” A person familiar with the SEC’s thinking on cryptocurrency regulation said the agency believes crypto companies are illegally operating outside of US securities laws and instead rely on other licenses that provide minimal consumer protection. “These representations, while nominally true, do not cover their activity,” the person said. Reuters Graphics Reuters Graphics ‘STEP 1: PERMISSIONS’ Bankman-Fried had big ambitions for FTX, which by this year had grown to more than $1 billion in revenue and accounted for about 10% of global crypto market transactions, from a solid start in 2019. He wanted to create an economic app , where users could trade stocks and tokens, transfer money and do banking, according to an undated document titled “FTX Roadmap 2022.” “Step 1” toward that goal, the Roadmap document said, “is to get as licensed as possible.” “In part this is to ensure we are regulated and compliant. in part this is to enable us to expand our product offering,” the document said. That’s where FTX’s buying spree came in, according to the documents. Instead of applying for each permit, which can take years and sometimes awkward questions, Bankman-Fried decided to buy them. But the strategy also had its limits: At times, the companies it acquired lacked the precise licenses it needed, the documents show. One of FTX’s goals, according to the filings, was to open U.S. derivatives markets to its clients in the country. He estimated that the market would bring in an additional $50 billion in trading volume per day, generating millions of dollars in revenue. To do so, it had to convince the CFTC to amend one of the licenses held by LedgerX, FTX’s newly acquired futures exchange. The application process continued for months, and FTX had to come up with $250 million for a default insurance fund, a standard requirement. FTX expected the CFTC could ask it to increase the fund to $1 billion, according to minutes of a meeting of its advisory board in March. FTX collapsed before it could get approval and has now withdrawn its application. Buying companies for licenses also had other advantages, documents reviewed by Reuters show: It could give Bankman-Fried the access it wanted to regulators. A case in point is the IEX deal, which was announced in April. In a joint interview with CNBC, Bankman-Fried and IEX CEO Brad Katsuyama said they wanted to “form regulations that ultimately protect investors.” What matters most here, Bankman-Fried added, is that “there is transparency and protection against fraud.” Reuters was unable to determine how much FTX paid for the stake. Bankman-Fried was invited to meet with SEC Chairman Gary Gensler and other SEC officials along with Katsuyama in March. A source close to IEX said the purpose of the meeting was to give the SEC advance notice of its deal with FTX, which had not been publicly announced at that point, and to discuss the possibility of IEX creating a digital asset trading venue . like bitcoin. FTX’s role was to provide the cryptocurrency trading infrastructure, the source said. SEC officials flatly rejected their original plan because it would have involved creating an over-the-counter trading venue that would be more lightly regulated, something the agency opposes for cryptocurrencies, the source familiar with the SEC’s thinking said. Reuters was unable to determine the extent of Bankman-Fried’s involvement in subsequent talks with the SEC. In their minds, SEC officials had agreed to meet with Katsuyama in March, and Bankman-Fried was just tagging along, said the source familiar with the SEC’s thinking. He remained mostly silent during the meeting, with Katsuyama in the “driving seat,” the source added. Whatever his involvement, FTX spoke about its discussions to its investors. At a September advisory board meeting, FTX said talks with the SEC had been “extremely constructive.” “We are likely to have pole position there,” he said, according to the minutes of the meeting. The person familiar with the SEC’s thinking said they would dispute that FTX was in the “polar position.” Anything the SEC did to regulate crypto trading would be open to all market participants, the source said. The source close to IEX said that the exchange never entered into operational agreements with FTX, adding that it never got to that point. A May FTX document provides a summary of FTX’s contacts with individual regulators. The paper, which has not been previously reported, shows how in most cases FTX was able to resolve the issues that arose. In February, for example, South African authorities published a warning to consumers that FTX and other crypto exchanges were not authorized to operate there. Thus, FTX entered into a commercial agreement with a local exchange to continue providing the services. “FTX is now fully settled in respect of its current operations in South Africa,” FTX said. The regulator, the Financial Conduct Authority of South Africa, did not respond to a request for comment. The May document also shows that FTX had a brush with the SEC. The SEC had conducted investigations earlier this year into how crypto companies handled customer deposits. Some companies offered interest on deposits, which the Securities and Exchange Commission said could make them securities and would have to be registered under its rules. In its list of regulatory interactions, FTX noted that the investigation looked at whether those assets were “lent or otherwise used for operational purposes.” This month, Reuters reported, it emerged that FTX had done just that, transferring billions of dollars in client funds to Bankman-Fried’s trading firm, Alameda Research. In the May paper, FTX…