The most powerful people in crypto

THE HONG KONG den of FTX, a cryptocurrency exchange, is where high finance meets teenage chaos. It is 7.30pm and staffers in shorts and T-shirts are still arriving for work, slaloming among desks fitted with six screens each. Booze, boxes and general junk, from guitars to badminton shuttles, lie everywhere. A buffet of delivery food tempts the peckish; traders and developers face off on wooden chess boards. Art casting Sam Bankman-Fried, FTX’s founder, as the King of Clubs or Uncle Sam in the trenches adorns the walls. When bitcoin prices are booming, poker tournaments often take place in a cluttered meeting room (tonight the house is closed).

Two-year-old FTX is the hottest firm in crypto. In October it raised $420m from star investors including BlackRock, the world’s largest asset manager, and Sequoia, a giant of venture capital, which valued FTX at $25bn—just three months after the previous funding round had valued it at $18bn. Its name graces the home arena of America’s Miami Heat basketball team, the uniforms of elite baseball umpires and appears on Super Bowl ads following a series of sponsorship deals worth hundreds of millions of dollars signed in 2021. It will soon be emblazoned on the Mercedes Formula One team’s cars and drivers’ overalls, too. It is stealing market share from rival exchanges and now consistently ranks in the top four. Mr Bankman-Fried, known in the trade as SBF, has a net worth estimated at more than $22bn. He is just 29 years old.

The whizz-kid is one of four main players in an epic contest to rule a universe that has grown 12-fold in total market value, to $2.3trn (as of mid-December 2021), since the start of 2020. He is taking some shine off Changpeng Zhao, the Chinese-Canadian boss of Binance, the largest crypto-exchange (who, at 44, is the oldest of the four). Mr Zhao, who goes by CZ, himself three years ago dethroned Arthur Hayes, the African-American co-founder of Bit MEX, which pioneered the most popular—and riskiest—products in crypto. Brian Armstrong, the introverted, unflappable CEO of Coinbase, the only exchange listed and regulated in America, is playing the long game, hoping that being the most above-board will help lure punters wary of trading through less-policed offshore exchanges.

All four have amassed multi-billion-dollar fortunes, and huge influence, in just a few years. In conventional finance, where money is commonly borrowed, spent or saved, the most powerful intermediaries are bankers, payment firms and asset managers. But private currencies today are mostly used to speculate, which makes exchange bosses, who provide punters with the tools and venues to trade, the kings of a world whose raison d’être, paradoxically, is to do away with mighty middlemen.

Crypto’s demigods are ambivalent for other reasons. They argue that regulation is not a threat, yet most hop from one lenient base to the next when local watchdogs start to growl. Some outsiders doubt their sincerity; others attribute their success to timing rather than entrepreneurial vision. Believers marvel at their skill in riding wildly gyrating markets, though some wonder how long they can keep doing it. Little is known about their personal lives, beliefs and aspirations. Through interviews with three of the founders, as well as insiders, The Economist got a sense of what it takes to be the most powerful people in crypto—and what they may leave behind once gone. Mr Hayes, who has been charged in America with anti-money-laundering failings and is awaiting trial, declined to take part, but your correspondent spoke to sources who know him well. He denies wrongdoing.

Born to cerebral middle-class parents, most started with good cards in hand to do well at school. SBF, the son of law professors at Stanford, says he was “strongest” at maths. CZ, whose father taught geophysics after fleeing China’s Cultural Revolution, ranked among the top ten in Canada’s national maths competition. California-born Mr Armstrong’s mother earned a PhD in bioinformatics. Mr Hayes’s parents worked in manufacturing, at General Motors in Buffalo and Detroit, but he favoured chemistry and economics, having won a scholarship to a private school.

The square roots of success

Even that early, however, there were hints of restless entrepreneurialism. In high school Mr Armstrong taught himself how to code and founded an e-commerce website listing refurbished computers, selling “maybe 50” in total . He was not alone in often finding university too abstract. “I actually struggled in maths and physics, because they got too much into theory,” CZ says. As a second-generation immigrant, he wanted to learn how to achieve “financial freedom”.

This quest for money-fuelled liberty began at trading-technology firms, where CZ wrote code. Mr Hayes and SBF cut their teeth on Wall Street. Mr Armstrong drew a winning “lottery ticket” by joining Airbnb, a holiday-rental firm now valued at $115bn, in which, like all joiners, he was given a stake. That he chose to leave early shows how much he believed in crypto, says Dan Romero, one of Coinbase’s first employees.

For Mr Armstrong the trigger was a trip after leaving college to Argentina, where reckless money-printing was fuelling hyperinflation. For Mr Hayes the trigger was more literal: his bank fired him. Having read about bitcoin on Zerohedge, a libertarian financial blog, he became enamoured with its built-in scarcity—bitcoin’s blockchain is designed so only 21m coins can ever be “mined”. A gold bug, he was intrigued by the idea that, as with the yellow metal, limited supply could give it value. CZ quickly grasped that bitcoin “would do to finance what the internet did to information”. SBF simply saw an opportunity to do “really good trades”.

The founders’ loftiest visions have not been realised: bitcoin’s price has exploded, from $700 in 2016 to $50,000 in mid-December, but it is rarely used to make payments. Still, they argue, it will, in time, foster “economic freedom” by offering an alternative to mismanaged “fiat” currencies, boosting financial inclusion, cheapening cross-border payments and enabling startups to raise funds wherever they are. CZ predicts 80% of people will accept crypto payments within five to ten years. Two years ago, he says, it “felt rude” to ask if he could pay for a bottle of wine in crypto. No longer.

Given their professed credo it may seem odd that the founders are not running payment firms but what, to sceptics at least, look like giant digital casinos. Mr Hayes started his crypto career by buying bitcoin overseas and swapping them for cash in China, where they were trading at a premium, before crossing the border with bags of banknotes. Bit MEX, which he co-founded in 2014, pioneered crypto “derivatives”—contracts allowing punters to bet on the future performance of digital assets. It took off when it started offering 100 X leverage, meaning a $10,000 account at Bit MEX could be turned into a $1m bet; FTX and Binance then pushed the cap even higher. Regulators ban exchanges from offering such high-risk products to non-professional investors in America, but they can still buy them using cheap software, such as a “VPN”, to circumvent restrictions. Today, the volume of derivatives traded far exceeds that of actual cryptocurrency transactions.

The founders see no contradiction. When he launched Coinbase—which does not list derivatives but has applied for a licence to do so—Mr Armstrong argued that setting up a trusted exchange would help make what was then a fringe product easier and safer to use. Nine years later that is still his view. CZ says his mission is not “as low as making money, but not as high as saving the world”: it is about providing people with more choice.

Whether for purpose or profit, all are toiling away. Mr Armstrong, a self-described “night owl”, starts at 10am and finishes at midnight. CZ, who works solely from home, has remote meetings with his lieutenants six days a week. SBF mostly sleeps on a bean bag next to his desk, four to five hours a day, in between meetings scheduled around the clock. He makes little distinction between dinner and breakfast, “other than which restaurants are open for delivery”. The day he spoke to The Economist his “last call tonight” was scheduled for 5am.

No time to dice

Brain power, idealism splashed with opportunism and physical stamina seem to be key ingredients for making it in crypto. In three domains, however, the founders differ markedly—and it is those that could decide not just who gets even richer, but who ends up shaping, and dominating, the future of the industry.

The first is management style. People close to SBF describe him as capable of handling extraordinary detail while juggling many things, from issues at the exchange to ambitious side projects (including Solana, a superfast blockchain). He admits he is “pretty hands on”. By contrast CZ jokes that he is a “poor manager”, prone to delegating. Binance dominates the trading of crypto futures, a type of derivative, but CZ is rarely involved. In 2018 it bought Trust, a popular crypto wallet; when The Economist interviewed him, he had not spoken to its founder, who still runs it, in six months.

Mr Armstrong is somewhere in between in terms of engagement, while leading the pack when it comes to transparency and humility—in keeping with his good-pupil credentials. He has asked his senior managers to nominate six potential successors each, so the firm “stands the test of time”. He encourages staff to complain, though his promised reward of $20 (in crypto) to whoever offers “the most raw, negative” feedback sounds a little stingy. Mr Hayes is the closest of the four to a superstar executive. He is charming, muscular and good on TV. “He’s trying to play like it’s James Bond running the company,” says Rich Rosenblum of GSR, a crypto-trading firm. He is also the closest to a self-styled visionary: his fortnightly essays muse on the present and future of digital finance.

Mr Hayes’s high-octane lifestyle certainly comes closest to that of the fictional British spy. In 2018 he arrived at a crypto trade show in an orange Lamborghini, tweeting later to his throngs of followers, “Did you see my ride today?” He skis in Hokkaido, plays squash in Hong Kong’s amateur league, practises yoga daily and has just taken up kiteboarding. He wears tightfitting T-shirts and luxury watches. His favoured tipple, however, is a far cry from Bond’s martini, shaken not stirred: “low-intervention” wine, made using few chemicals. In 2018 he kitted out Bit MEX’s flagship office in Hong Kong with a giant aquarium featuring live sharks, evoking a Bond villain rather than the spy himself. His distaste for discretion contrasts with the tamer temperaments of the other founders, none of whom own cars, prestigious properties or predatory fish. SBF shares a flat with friends from a previous job. CZ uses only one room of his rented flat. He does, however, like to splash out on gadgets: six iPhones adorn his desk.

Mr Hayes’s flamboyance may help explain why American regulators have not taken kindly to him. But his attitude towards authority, the third point of difference among crypto bosses, is what riles them most. In 2020 they accused him, along with his two Bit MEX co-founders, of failing to run proper anti-money-laundering controls on the platform. His indictment has angered crypto buffs. He is paying a price for being the first mover, they say, at a time when rules had yet to be written. Some even argue the financial establishment felt threatened by a successful black man who did not mince his words.

But many outsiders reckon he painted a bullseye on his own back. In 2016 he said Bit MEX’s strategy was focused on “degenerate gamblers”; at the time the firm targeted potential customers based in America, boasting that to “sign up takes less than 30 seconds”. Asked about why Bit MEX was legally domiciled in the Seychelles in 2019, he noted that bribing American regulators costs more and that the archipelago’s price had been “a coconut”. Backers dismiss such quips as showmanship on the part of an otherwise profound man. The FBI did not like the joke; a year later its New York chief warned he and his comrades would “soon learn the price of their alleged crimes will not be paid with tropical fruit”.

Contrast that with Mr Armstrong, whose business model is premised on being the most trusted, compliant exchange. From the start, he says, he could see that the minute crypto got big there would be “a lot of scrutiny”. He hired a lawyer and a compliance officer among his first ten staffers and even “put on a suit” to meet regulators. It was “painful at times” to watch what more freewheeling competitors were getting up to, he says. His intuition has been borne out: in recent months watchdogs around the world, alarmed by crypto’s giddy growth, have started tightening the noose. China has declared all transactions in virtual coins illegal, and America’s Securities and Exchange Commission is seeking new powers to regulate what its chairman calls the “Wild West” of crypto.

Mr Armstrong now says he wants to be an “education resource” for regulators, hinting that he will seek to influence the rules as they are created. That is not something the other founders’ offshore exchanges can easily do. SBF, for his part, accepts that local clampdowns could very soon have practical implications for FTX: were Hong Kong to go the way of mainland China, it might have to relocate most of its staff, which could well happen “a couple of years from now”.

The endgame

The uncertain outlook leaves the founders mulling many questions, not least what impact a firmer regulatory crackdown, or a prolonged bitcoin bust, would have on their fortunes. All are huge on paper, but Mr Armstrong is the only one whose wealth is liquid (he sold $292m-worth of shares in Coinbase during its stockmarket listing in April 2021). CZ’s is all held in cryptocurrencies, with just a few thousand dollars in cash to pay for near-term expenses. SBF’s treasure is mostly shares in his private firm. Mr Hayes allegedly withdrew $140m from Bit MEX along with his co-founders, according to early investors in the firm who sued it in 2019 (the lawsuit was settled out of court in December 2020).

Equally hard to predict is what the quartet’s legacy might be. Will one or more become an icon of global finance (like Jamie Dimon of JPMorgan Chase), a transformer of our way of life (like Steve Jobs, who placed a smartphone in everybody’s hands) or even a reinventor of rocket science (like Elon Musk or Jeff Bezos), once they hang up their sneakers?

Mr Armstrong, an admirer of Mr Musk, shares his ethos most closely: he is saving the bulk of his capital, he says, for “moon shot-like projects” or “philanthropic stuff”. Sources say he is into “longevity” and biology, and, like Tesla’s boss, enjoys learning about fields he does not know by canvassing experts who do. He recently hung out with the founders of WhatsApp to understand how they “built a global product”.

CZ, meanwhile, has no grand plans to splurge his wealth in space, or indeed spend it any other way: “Anything over $100m I don’t need.” He intends to donate the rest to medical research and charities. SBF may do something similar. A vegan, he values causes such as curing tropical diseases, boosting pandemic preparedness and improving animal welfare.

The crypto contest, however, is far from over. Just like elite players of Texas Hold ‘Em, all four founders have so far kept their most important cards close to their chests, taking big gambles only when the pay off seemed worth the risk. But to come out on the other side of the crypto boom with all their chips, they will need more than probabilistic genius and discipline. For winning a full game of poker is often less about skill than persistent luck. ■

ILLUSTRATIONS: KRISTIAN HAMMERSTAD