At a posh financial-industry gathering in Florida, the main attraction was a face-off between a young crypto billionaire and a futures-exchange kingpin.
Among the topics discussed was a heated debate regarding an FTX proposal to execute all aspects of customers’ crypto derivatives trades on its own- effectively bypassing other exchanges, financial intermediaries and banks.
Many people in traditional finance fear that if the FTX proposal is cleared by regulators, the model will be applied to other assets – thereby threatening the stranglehold that Wall Street enjoys over lucrative market plumbing. The core of FTX’s proposal involves using algorithms to execute the trades instead of brokers, in a crucial process for settling transactions that ensures buyers get the assets they have purchased and sellers get their funds.
Crypto Exchange could be a major disruptor
David Weisberger, Founder of crypto company CoinRoutes, said that this was the first real disruption to traditional market structures. He also added that all change creates tension.
Those opposed to the FTX plan say that brokers could lose their jobs, investor protections could be undermined, and risks disrupting markets that are functioning well. The unvoiced bigger concern is that if the proposal is approved by the Commodity Futures Trading Commission, it would give FTX a toehold to expand into vast markets ranging from oil to gold, and even currencies.
When asked about the plan during a television interview, Bankman-Fried said that FTX is focused on retail crypto transactions for now. He also added that he felt there are really interesting applications to a wide variety of asset classes.
The high stakes were on display in March when Duffy, aged 63, and Bankman-Fried, aged 30, met at The Boca Raton resort in Florida, according to more than half a dozen people who witnessed the conversation that lasted more than an hour.
Duffy and Bankman-Fried both declined to comment on their conversation.
What differentiates the FTX pitch from others is that it would allow customers to open accounts directly with the platform, and computer systems would monitor the trades using margin, which involves putting up collateral. The system, unlike brokers, would assess whether investments have lost value, and whether more funds should be deposited. If positions fall below a predetermined level, the algorithm would liquidate them.
FTX already clears some trades directly, but the proposal would for the first time allow it to do so for crypto futures bought on margin by retail investors. The company has said that it would put up USD250 million of its own capital to backstop losses if buyers or sellers can’t fulfil their obligations.
FTX executives argue that their proposal is intended to offer an alternative way of trading, not to bypass intermediaries entirely. The CFTC will also decide on whether it could be applied beyond crypto, they said.
Mark Wetjen, a former CFTC commissioner and now Head of Regulatory Strategy and Policy at FTX, said that it was a natural human behavior to respond in a certain way to something new or novel.