FTX’s Bankman-Fried Says ‘Messy’ Crypto Regulations Need Fixes

(Bloomberg) -- The U.S. is actually only a minor player in cryptocurrencies and the removal of regulatory uncertainties could help the nation grow its influence on the industry, according to Sam Bankman-Fried, the billionaire founder and chief executive officer of the cryptocurrency exchange FTX.

Bankman-Fried, 29, testified to Congress Wednesday about how the space should be regulated. He and FTX US President Brett Harrison joined Bloomberg’s “What Goes Up” podcast to elaborate on their discussions in Washington and to talk about other hot topics in the industry.

Below is a condensed and lightly edited transcript of their conversation with Bloomberg. Click here to listen to the full show and subscribe on Apple Podcasts, Spotify or wherever you listen. 

Q: Sam, can you talk about your experience at the hearings? The quality of the questions from lawmakers seemed better than what many had been expecting. 

Bankman-Fried: I totally agree with that. The questions were better and more informed than I was expecting. I also think that they were more balanced. I was expecting there to be more grandstanding and I was just pleasantly surprised in general. Congress has done a really good job of starting to get up to speed on digital assets. And I think that they showed a lot of eagerness to continue learning. 

Q: Ten or 15 years ago, when the stock market was still in its adolescent stages when it comes to electronic and algorithmic trading, there were all sorts of hiccups and flash crashes. It seems there are a lot of parallels in crypto, which might be in an adolescent stage, and stuff is still going wrong. Is that a problem that needs to be solved? How do you look at the market now in respect to the idea of regulation and what needs to be done?

Bankman-Fried: These are absolutely problems that need to be solved, but I think that there are pretty straightforward solutions to a lot of them. Price bands -- we put them on FTX, it’s not that complex. And, in a lot of cases, it’s like, yeah, there’s definitely ways the market needs to grow, but it shouldn’t be that hard to get there.

Harrison: The fact that cryptocurrency exchanges came about much later in the technological development of the internet and software, and just how easy it is to deploy software on the cloud, for example, means that the barrier to entry to making an exchange was super low -- which has its good parts and its bad parts. If you want to write in your garage some code and try to deploy a new Nasdaq tomorrow, you can’t -- there’s way too many barriers to entry to doing that. But there are literally thousands of exchanges where you can buy Bitcoin. There’s only a couple that really matter in terms of volume, but there are thousands of exchanges, which means not all of those players, absent of a clear regulatory framework in the U.S., are going to create the right rules to make sure that their exchange doesn’t screw up a lot and print something way down or just break or be halted for a long time. And so it’s up to exchanges like FTX to put in the right rules. 

Q: In what ways does the market still have to evolve?

Bankman-Fried: One obvious place is, frankly, on the regulatory side where there is a lot of messy parts of the regulatory ecosystem today. Some fairly straightforward things could help that a ton. Just regulation enforcing that stablecoins are fully reserved is something that would address a lot of the current concerns around them. And I think that having a clear markets framework for digital assets would be really important. 

Q: Coinbase has proposed an SRO, a self-regulatory organization, where the industry is really policing itself. Is that something you’d get on board with too?

Harrison: In general, we’re on board with that. And one of the exchanges that we own, FTX US Derivatives, is an SRO, it’s a DSRO. But when you think about how it is in the equity market with FINRA, for example, FINRA, as we know it today was the evolution of decades of equity markets. And in order to get to the point where we have the ideal SRO for crypto, this is not something that’s gonna happen in three months, or six months or a year. And we are in the situation right now where there is unclear regulation, with many exchanges choosing to impose different policies upon themselves and thus adding confusion and regulatory risk. And there’s a lot of common-sense things that we could do with the existing regulatory frameworks without having to wait for building the perfect SRO for crypto.

Bankman-Fried: I basically agree with that. And I think also saying that there should be SROs in crypto doesn’t mean there shouldn’t be federal regulatory oversight as well. In addition to SROs, the SEC and the CFTC and other regulators have important roles to play in the crypto regulatory ecosystem. 

Q: The issue that comes up a lot is that the light hand of regulators is what’s attractive to a lot of people in crypto. Does the U.S. focusing on this and trying to be a standard-bearer for regulation make the U.S. more or less attractive?

Bankman-Fried: I would change the tenses a little bit. It has been something that has led to that. And you look today, the United States is something like 5% to 10% of global crypto volume, which is tiny compared to its broader fraction of most markets. But I’m optimistic that it could go from a negative to a positive without that much work.

Harrison: It’s not regulation alone that drives the business away from the U.S. It’s lack of clarity and, therefore, regulatory uncertainty. Being worried that if you make the wrong decision you might be hit with an enforcement action two years from now makes it a pretty unattractive place to try to be an entrepreneur. The derivatives markets in the U.S., for example under the CFTC, are some of the strictest in the world -- but we also have most of the world’s liquidity and derivatives. But it’s a clear regulatory framework and that makes it possible for people to innovate, to be able to create exchanges, to be able to either become FCMs or DCMs and be able to provide liquidity that way. It’s this lack of clarity, this gray area that everyone’s operating in that is driving the talent, the new operations offshore. 

Q: Sam, you’re a proponent that stablecoins should be backed one-to-one. How do algorithmic stablecoins fit in, or should they be in a separate bucket than the Tethers of the world?

Bankman-Fried: I think they should be. And I think the basic answer is clarity and transparency are the key things here. Maybe there’s a different word -- maybe you have fiat fully reserved stablecoins, and you have algorithmic stablecoins or whatever words you want to use. But it should be clearly disclosed to users that this isn’t a stablecoin in the sense of being backed one-to-one by a stable asset. It’s an algorithmic thing which attempts to maintain a price peg but could fail. And I think that is an interesting product -- but it’s a different product than something like USDC is.

Q: Regulators say Tether has gotten so large that, if something goes awry, it could pose challenges to other areas of the market -- if something does go awry, where would you look to see it happening in the first place? 

Bankman-Fried: This is one of the reasons why it would be really valuable to move to a system where there is a clear regulatory framework for transparency around the reserves of stablecoins. That would go a long way here. I don’t think that it’s currently at a place where it is threatening what people are most worried about because I do think it is probably backed right now by sufficient assets -- but that doesn’t necessarily mean it always will be. And that doesn’t necessarily mean that there’s enough transparency around that. And I think that it would be healthy to move to a framework where there is more enforced transparency around that if a stablecoin wants to take part in U.S. crypto markets.

Q: A criticism of the NFTs space is that there’s a lot of manipulation -- is the NFT market manipulated?

Harrison: What we’re seeing is that there’s not just a small number of people reaping the benefits, there’s a small number of people interacting with the NFT ecosystem, period. And I think that has less to do with manipulation -- maybe there is, it’s hard to know exactly what’s going on in that market. What is true is that the barrier to entry for, for example, NFT marketplaces is pretty high for the existing marketplaces. Let’s say you go buy an NFT on OpenSea. First you have to create a MetaMask wallet, which is something you have to install a browser extension for and create a secret key password. Now you have to open an account, maybe on FTX or Coinbase, and buy some Ethereum there. Then you have to transfer it out to your MetaMask wallet and you have to connect your wallet to OpenSea.

We’re already six steps in, and for the average person, you’re introducing 20 new concepts and it’s very difficult. And as long as the NFT world remains very much a DeFi product, I think there’s going to be a very high barrier to entry for people. That, plus the idea of spending $6 million on an image is a little bit hard to swallow for the average person getting into this business.

Q: When will you go public?

Bankman-Fried: It’s something we’re thinking about. We don’t know whether or not we will, and if so, when. We might. We want to be ready to do it because we think that there is certainly upside in doing so. Obviously, it’s a big production. We’re fortunate to be in a position where we don’t have to. We’re profitable as is, and we’re able to raise in private markets as well. So I think the honest answer there is we’re thinking about it and we’ll see. But I don’t know that answer, so I can’t give you an answer to it. 

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