Behind Turbocharged Push FTXs to Attract Small Crypto Savers

[ad_1]

(Bloomberg) – Early last year, cryptocurrency exchange FTX US was targeting a large pool of money: Individual Retirement Accounts, or IRAs.

Bloomberg’s Most Read

We have IRAs trading today on FTX and we strive to serve this segment, Nate Clancy, vice president of business development for FTX US, wrote in a March email to an investment adviser based in New Jersey, a copy of which was seen by Bloomberg News. Americans held more than $11 trillion in IRAs last year.

The outreach, part of a multifaceted effort by the broader FTX Group to expand its daily retail client base, highlights the exchange’s sprawling ambitions in the months leading up to its implosion and provides insight into how the damage could have been even worse. had the plans had more gestation.

FTX and former CEO Sam Bankman-Frieds, the larger crypto empire, collapsed in November. US authorities allege he fraudulently used his clients’ money to prop up his trading firm Alameda Research, leaving legions of clients dry when FTX went bankrupt. The charges relate to the FTX.com Group’s global trading platform, but FTX US, its smallest unit for US investors, was part of the bankruptcy.

Every start-up prioritizes growth, and prosecutors have publicly attributed no sinister motive to the retail push, which seemed like a pretty logical way for FTX to gain market share. But the allegations against Bankman-Fried underscore the dangers of luring unsophisticated savers into a loosely regulated industry pushing highly volatile and opaque instruments, with often little client protections when things go wrong.

The story continues

It is quite clear that FTX relied on continuous flows of new capital coming into the platform, just like many other financial systems, and retail marketing was the fastest way to attract these flows, said Cory Klippsten, chief executive of crypto startup Swan Bitcoin. Better to explode before it gets bigger.

Representatives for FTX did not respond to requests for comment. Mark Botnick, a representative for Bankman-Fried, declined to comment. The former leader, who was released on $250 million bail in December, pleaded not guilty to the charges against him on Tuesday. Clancy, who has not been charged with any wrongdoing, declined to comment.

FTX, which has built up a loyal base of more experienced crypto investors, had made no secret of its desire to compete with Binance and Coinbase Global Inc. for retail clients spending millions of dollars on advertisements, sponsorships and partnerships with celebrities like former model Gisele Bündchen.

The company did not provide a public breakdown of the number of retail customers it had or any given growth targets for the segment. In March, the company said institutional investors such as hedge funds accounted for about two-thirds of trades on global and US platforms. Bankruptcy filings for more than 130 FTX Group entities have listed more than one million creditors.

In a 2021 annual report that Bankman-Fried tweeted in January last year, the company said attracting retail investors was a key part of its growth strategy. The effort was based on offering an easy to use app suitable for inexperienced traders.

Our goal is to create a retail-friendly app that empowers anyone to get involved, whether through education, making their first crypto purchase, or exploring the burgeoning NFT ecosystem, according to the FTX report, using the acronym Non-Fungible Tokens.

FTX product manager Ramnik Arora played a key role in the push, according to people familiar with the matter. He led efforts to woo retail-focused startups like Dave Inc., Stocktwits and Public.com, according to those people, who asked not to be named because the discussions were private.

Arora spent five years at Facebook, where he worked on the social media giants’ defunct Libra digital currency project. He first met Bankman-Fried on an impromptu Zoom call, just minutes after connecting with him on LinkedIn, Arora said in a video interview in September 2021. Through his attorney, Arora declined to comment. He has not been charged with any wrongdoing.

This awareness was part of an initiative to accelerate its expansion through links with third-party applications. Fintech companies from PayPal Inc. to Revolut Ltd. use similar agreements with other companies to allow users to buy and sell crypto on their apps, with transactions executed on a digital asset exchange. PayPal, for example, uses a company called Paxos.

Deals with Dave, GameStop

When Dave, a Los Angeles-based mobile banking app founded in 2015, sought a partner to expand into crypto, more than 10 companies submitted proposals, according to a person familiar with the matter. But FTX, through its investment arm FTX Ventures, stood out by offering to invest $100 million in the startup via a convertible note.

FTX US and Dave unveiled their partnership and the investment in March, but never launched any joint crypto services. Dave is monitoring the developments and will review their impact on his relationship with FTX going forward, a spokesperson said.

FTX US continued its partnerships, culminating in an agreement with GameStop Corp. announced in early September two months before the exchange escalated into bankruptcy. In a not very detailed press release, the companies said that FTX US would work with GameStop to introduce its customer base to the digital asset ecosystem.

The day FTX Group filed for creditor protection, GameStop tweeted that it was ending the partnership. GameStop representatives did not respond to requests for comment.

California investigation

Regulators are investigating FTX relationships with investment advisers. The California financial regulator, which is conducting its own FTX investigation, questioned advisers about their involvement with the crypto exchange and its affiliates.

The Department of Financial Protection and Innovation asked advisers if anyone in their firm sells FTX-related investments and if their clients have exposure to FTX or related entities, according to a copy of the regulators’ questionnaire seen. by Bloomberg News.

The DFPI investigation will be open until early 2023 and its results are confidential, said Elizabeth Smith, a spokeswoman for the agency.

Although no public data is available, FTX US appears to have made progress in attracting the attention of retirement savers in the months leading up to its bankruptcy.

Posting to an online forum in mid-July, George Blower, the general counsel for My Solo 401k Financial, responded to a request regarding the transfer of retirement savings to the FTX US platform.

We have certainly helped a significant number of clients open accounts for 401k solo plans as well as IRA LLC accounts at FTX.US, he wrote in the post, which was deleted after Bloomberg News reported it. interrogates. He also tagged FTX’s US employee Clancy in his post. Blower confirmed the exchange, which appeared on a web forum affiliated with his company.

Blower said My Solo 401k Financial does not provide investment advice or oversee client assets, and the company has never had a business relationship with FTX US. In response to customer questions about how to transfer retirement funds to the exchange, we provided customers with educational feedback on the mechanical steps, Blower said in an emailed statement.

Supercharged Leverage

Bankman-Frieds’ ambitions went beyond simply soliciting retail investors for FTX. He struck deals with struggling companies like Voyager Digital and BlockFi Inc., which would have increased his empire’s footprint in the retail crypto space if he hadn’t been knocked out first.

FTX also had talks about buying stock trading app Webull as recently as this summer, according to a person familiar with the matter. The talks progressed to price negotiations, the person said, although the companies never reached an agreement. Earlier in the year, Bankman-Fried bought a 7.6% stake in Robinhood Markets Inc. The stake was being seized by the U.S. government, attorneys in court said Wednesday.

FTX designed a market where risk-tolerant speculators could win or lose big. The global platform, FTX.com, offered traders ways to place high leverage bets, including a period where they could increase their buying power to $101 for every dollar in their accounts. It also offered tokens with built-in leverage, such as one called ETHBULL which used futures contracts to amplify potential returns on bullish bets on the Ether cryptocurrency.

Easy leverage can be a powerful incentive for day traders looking for a big payday without investing a lot of capital, but it also exposes them to huge risks.

Another way to reach individual investors was through sports marketing, an avenue crypto companies have pumped billions into in recent years. FTX has quickly become a heavyweight in the sports world, spending nearly $100 million in sponsorships in 2021 alone, according to consultancy GlobalData. The company boasted ties to everything from cricket to a Japanese baseball star and Formula 1 drivers.

He’s also teamed up with some of the most recognizable stars, including basketball player Steph Curry and quarterback Tom Brady. The two athletes have not publicly commented on their relationship with FTX after its implosion.

Samuel Taylor, a 24-year-old accountant living in Arizona and an avid sports fan, said he encountered FTX literally everywhere and was drawn to its celebrity endorsements. He became an FTX US client in July.

Taylor and his wife had about $12,500 most of their savings on FTX US when the company went bankrupt along with the rest of the Sam Bankman-Frieds empire. While he managed to withdraw around $1,000 worth of Bitcoin as FTX faltered, he did not recover the money he had parked on the exchange.

Taylor said he believed cash deposits were insured by the Federal Deposit Insurance Corp. The FDIC issued a cease and desist order against FTX US in August, accusing it of falsely claiming or insinuating that the deposits were protected by the agency.

I was devastated at first, Taylor said. Second, I was so surprised.

–With help from Hannah Miller, Olga Kharif, Jody Megson and Yueqi Yang.

Bloomberg Businessweek’s Most Read

2023 Bloomberg LP

[ad_2]