How FTX used Hong Kong cash-for-crypto shop to turbocharge growth

At Sam Bankman-Fried’s 29th birthday in March last year, his closest colleagues and friends dressed up in curly wigs mimicking his trademark style. But they were not in the Bahamas — the scene of his spectacular unravelling last month — they were in Hong Kong, the birthplace of his FTX exchange.

In the photo obtained by the Financial Times, Caroline Ellison, Bankman-Fried’s one-time romantic partner and chief of trading company Alameda Research, and FTX co-founder Gary Wang, smiled for the camera at The Crown, an exclusive club started by a Hong Kong celebrity with a private elevator and a seat in the shape of US dollar bills.

The FTX executives were joined by staff from Genesis Block, a crypto retail service company part owned by FTX offshoot Alameda Ventures, which is separate from digital asset trading group Genesis and its parent company Digital Currency Group. At the time, Genesis Block was drawing a crowd with its unusual business model; in a world dominated by the web, it was exchanging crypto for physical cash.

“People were literally lining up around the corner with bags of cash at Genesis Block, sometimes they shut the door saying they were out of bitcoin,” a former employee said.

But last month, Bankman-Fried’s $32bn FTX filed for bankruptcy in a rapid fall from grace even by the standards of the freewheeling crypto industry. Days later, Genesis Block announced it too was shutting down its trading portal and would stop accepting deposits.

The collapse has left a mark on local investors. “I have lost generational wealth, my children’s children will never forgive me,” said one. “I’ve got friends who are declaring personal bankruptcy.”

The apparent failure of the Hong Kong company also underlines the city’s crucial role in Bankman-Fried’s ascent to the top of the digital assets industry. Genesis Block had established networks of bank accounts which provided easier access to hard currency and channels to onboard clients. It functioned as a so-called “ramp” to get money in and out of crypto — a tricky task in a space that traditional regulated banks often avoid.

“Genesis Block has gotten pretty big over the years as an on and off ramp venue . . . A stake would give FTX/Alameda access to banking services and sources of liquidity,” said Carlton Lai, an analyst at Daiwa Capital Markets.

The relationship is important “as volumes in Hong Kong, being a finance hub, is likely much larger, given the aggregation of high net worth individuals and family offices that are interested in crypto”.

Moreover, Genesis Block was one of the few crypto businesses with a storefront in Hong Kong, making a centre for the city’s crypto community. When the company opened a new office in Kowloon in March 2021, staff handed out French macarons decorated with FTX’s logo.

The ‘kimchi premium’

Genesis Block started in 2017 and flourished during the trading frenzy buying crypto in Hong Kong and then selling it at a profit in Korea and Japan, called the “kimchi premium”, according to former employees. That same arbitrage made Bankman-Fried’s early fortune.

Bankman-Fried met Genesis Block executives in 2018 on a trip to Macau, a nearby city to Hong Kong that rivals Las Vegas as the world’s biggest gambling hub.

Links between Genesis Block and FTX ran deep. Alameda Ventures, a subsidiary of the eponymous trading firm, took a stake in 2020. At the time of FTX’s crash, the companies shared the same Hong Kong office block. Cottonwood Grove, a subsidiary wholly owned by Alameda Research, was registered a floor below Genesis Block’s Wan Chai offices.

Genesis Block co-founder Clement Ip was a director of FTX’s Hong Kong business while Charles Yang’s LinkedIn shows him as a partner at Genesis Block and he appeared at events this year as a Alameda Research “principal”.

Two people familiar with Genesis Block operations described the company, which also ran a network of bitcoin ATMs across Asia, as being integrated into FTX and Alameda. Genesis Block also offered alternative coins to customers, said two other people with knowledge of the company. Some Genesis Block compliance employees and traders also went to work directly for FTX.

Genesis Block had such belief in FTX that it took the company’s native FTT tokens as part of the payment for equity, people familiar with the matter said. The FTT tokens were an important part of FTX’s liquidity crunch because they were used as collateral for loans but turned out to be worth nothing.

“There is maximum trust between Alameda and FTX and Genesis Block just because we have been working with them for so long,” said Genesis Block’s Yang to a podcast in July 2020.

“We have good partnerships with money exchanges, again a grey area business,” said Yang, adding that the business traded in places where other investors would not be confident, such as Cambodian peer-to-peer markets.

The founders also mined crypto in China, giving them connections with mainland and allowing them to exchange more renminbi for crypto deals than rivals.

According to Yang, Genesis Block had a “network” of 50 to 100 linked bank accounts, which people familiar with the company said would have been attractive for Alameda as it offered an “on and off ramp” to hard currency.

“[We] have a whole network of what we call satellite bank accounts in our control . . . it’s a very grey area I’m not going to lie, it could sound shady to some people,” Yang said on the podcast.

Ip, Yang, Genesis Block, Bankman-Fried and FTX did not immediately respond to a request for comment.

Close ties with wealthy family offices

The company also cultivated ties with wealthy families in Hong Kong, many of whom subsequently invested in FTX.

Members of the Hong Kong crypto community describe Bankman-Fried’s workaholic lifestyle — where he existed on vegan delivery and boasted of sleeping on a beanbag in Hong Kong — as helping to build a “personality cult” around him, adding to his “mystic appeal”.

“He was such the boy genius, people were falling over themselves to get allocation,” said one crypto focused hedge fund manager, who estimated most equivalent funds had lost an average of up to 20 per cent in the FTX meltdown.

Hong Kong has for years had an on-off relationship with crypto, yet recently it has taken steps towards legalising retail trading of crypto assets. The city’s Securities and Futures Commission said fund managers licensed to invest in virtual assets had “immaterial” exposure to the FTX collapse. However, fund managers pointed out that there were other venture capital firms, family offices or hedge funds that were not part of the SFC licensing regime.

A number of former FTX executives returned to Hong Kong after the fall of FTX, with many having family ties in the city. The US has halted its extradition treaty with Hong Kong in 2020 after China’s crackdown on the Hong Kong protests.

But at Genesis Block’s Kowloon office in Hong Kong, staff worked to distance themselves from FTX. “We are not wearing FTX jackets, right?” said one of the workers.

Additional reporting by William Langley and Stephanie Findlay in Hong Kong

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