By: Toh Han Shih

The journey of FTX in and out of Hong Kong was driven by the quest for friendlier crypto regulations, according to US court documents related to lawsuits against the defunct crypto exchange’s former management including its former chief executive officer (CEO) Samuel Benjamin Bankman-Fried and his ex-girlfriend Caroline Ellison.

FTX, once the world’s third largest crypto exchange valued at $32 billion, filed for Chapter 11 bankruptcy protection in the US on November 11. Bankman-Fried, who co-founded FTX, pleaded not guilty to eight criminal charges in a New York court on January 3, according to media reports. The charges include fraud, money laundering and illegally giving money to US politicians to foster a conducive regulatory environment for FTX. By pleading not guilty, the 30-year-old set the stage for a potentially explosive trial tentatively scheduled for October.

Ellison and Gary Wang, a co-founder of FTX, pleaded guilty to fraud charges last December 19. Ellison is former CEO of Alameda Research LLC, a crypto hedge fund which was previously majority-owned by Bankman-Fried. They are likely to be jailed in the US for years.

Bankman-Fried co-founded Alameda in November 2017 in a three-bedroom apartment in Berkeley, California, USA, with the downstairs serving as its office, said a lawsuit filed in the US bankruptcy court for Delaware on December 27. The plaintiffs are Americans Austin Onusz and Nicholas Marshall, a Turkish citizen named Hamad Dar and a Dutchman named Cedric Kees van Putten. The defendants include FTX Trading, Alameda, Bankman-Fried, Ellison and Wang.

In late 2018, Alameda “moved its headquarters from California to Hong Kong due to the difficulty of establishing and maintaining relationships with banks in the US as a cryptocurrency trading firm,” said the lawsuit. Despite marketing materials offering investors and lenders “high returns with no risk” and “no downside”, finding investors and lenders was difficult, since banks and traditional Wall Street firms largely shunned crypto because of the lack of regulation and oversight, the lawsuit explained.

“In late 2018, the headquarters of Alameda Research was relocated to Hong Kong. The team at Alameda Research included Defendant Bankman-Fried’s close friends (and later co-founders for FTX) Nishad Singh and Gary Wang. Defendant Caroline Ellison and Sam Trabucco were also part of the group and upon moving to Hong Kong the group lived like college students and fiercely traded crypto,” said a class action complaint filed in the US district court of Miami on December 7. “The firm shifted to Hong Kong, in part to take advantage of arbitrage opportunities in Asian bitcoin markets – including the price discrepancy between BTC in Japan and BTC everywhere else,” said the complaint.

“According to Defendant Bankman-Fried, while attending meetings in Hong Kong, he received encouragement from large players in cryptocurrency. He summoned Defendant Wang to Hong Kong, and they went to work creating the FTX Group,” disclosed the lawsuit filed in the US bankruptcy court for Delaware.

FTX launched a crypto exchange from its Hong Kong offices on May 9, 2019, said the lawsuit. “As would later become significant, the FTX Executive Defendants did not implement internal controls over customer property when they created and launched the FTX Group, nor did they do so later.”

FTX launched its own crypto token, FTT, on July 27, 2019. To maintain its price, Alameda, then based in Hong Kong, served as FTT’s main market maker where Alameda had the ability to set prices for the token, the lawsuit said. “Moreover, by keeping half the tokens uncirculated, FTX.com (the international crypto exchange of FTX) and Alameda could artificially prop up the price while still counting the uncirculated tokens as assets.”

“The FTX Group relocated from Hong Kong to the Bahamas in September 2021, reportedly citing the favorable regulatory environment amidst regulators worldwide beginning to examine cryptocurrencies and China outlawing cryptocurrency transactions,” said the lawsuit.

On September 27, 2021, Markets Insider quoted Bankman-Fried saying FTX was moving from Hong Kong to the Bahamas due to the Caribbean nation’s crypto-friendly legal framework, but he denied the move was due to China banning all crypto businesses on September 24, 2021.

“Leading up to the collapse of FTX (in November 2022), Ellison lived with nine other FTX or Alameda colleagues in Bankman-Fried’s US$30 million penthouse in the Bahamas. She reportedly paid SBF rent, and was occasionally in a romantic relationship with him. In 2021, Ellison tweeted about recreational stimulant use. Upon information and belief, Ellison left the Bahamas and moved back to Hong Kong,” the class action complaint said.

Ellison and Wang are currently in the US under bail.

Bankman-Fried’s Hong Kong affiliations

After FTX shifted from Hong Kong to the Bahamas in September 2021, Bankman-Fried founded a company in Hong Kong called FTX Trading Limited on September 29, 2022, according to Hong Kong corporate records. This firm had a paid-up capital of HK$10,000 (US$1,279) and was fully owned by FTX Trading Limited, a company registered in Antigua and Barbuda which also owned FTX.com. Less than two months later, on November 11, 2022, FTX Hong Kong filed for Chapter 11 bankruptcy protection, according to Kroll, a US risk consultancy which is handling creditor claims on FTX.

FTX Hong Kong’s first directors were Bankman-Fried and Jen Chan Luk-wai, a Hong Kong woman who was FTX’s chief financial officer, Hong Kong corporate records reveal. On November 9, 2022, a Hong Kong man, Clement Joshua Ip, replaced Chan as director of this short-lived company. Ip is a co-founder of Genesis Block, a Hong Kong-based over-the-counter crypto trading firm. Genesis suffered from the collapse of FTX on November 11 and closed its trading operations on December 10, Reuters reported.

In the corporate records of FTX Hong Kong, Bankman-Fried registered an address at a flat in Star Studios I on 8-10 Wing Fung Street in Wanchai. Star Studios I is a residential tower with flats ranging from 206 to 457 square feet, which is small by US standards.

Around the time that Alameda moved from Berkeley to Hong Kong on December 14, 2018, Bankman-Fried established another Hong Kong company, Cottonwood Grove Limited, according to Hong Kong corporate records. At its founding, the company had paid-up capital of HK$10,000 and was 100 percent owned by Bankman-Fried. In 2021, Cottonwood’s paid-up capital increased to HK$1.01 million, wholly owned by a British Virgin Islands company, Alameda Research Limited, Hong Kong corporate records reveal. In 2021, Cottonwood had three directors, namely Bankman-Fried, Charis Law Wing-man and Jen Chan, Hong Kong corporate records show.

FTX Trading, Alameda Research Limited and Cottonwood also filed for Chapter 11 bankruptcy protection on November 11, 2022, according to Kroll.

“The implosion of the FTX exchange also showed that the platforms themselves can be ruinously problematic in their own right. After all, the FTX case has made clear how investors seeking genuine, if risky, frontier investments can find themselves overlooking, or even excusing, the most egregious behavior,” said Steve Vickers, the CEO of Steve Vickers and Associates, a Hong Kong risk consultancy.

Toh Han Shih is chief analyst of Headland Intelligence, a Hong Kong risk consultancy.

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