FTXs lingering ties remind Hong Kong of the bullet it dodged and risks ahead to regain edge as As
Hong Kong so far appeared to have dodged the bullet. Local investors speaking with the South China Morning Post said they either passed on, or missed, opportunities to invest in FTX and its related derivatives trading firm Alameda Research. The Securities and Futures Commission (SFC) previously said Hong Kong’s exposure to FTX was “immaterial.”Still, regulators feel compelled to put up some guard rails to protect local investors, as they acknowledge that Hong Kong’s open economy and convertible currency leave crypto fans vulnerable to fraud and misadventures elsewhere. Financial Secretary Paul Chan Mo-po reiterated Hong Kong’s FinTech Week commitment to building a well-regulated digital assets market. The SFC said that week that it would unveil a public consultation for local retail investors to dabble in virtual assets.
“The FTX debacle points to exactly why Hong Kong regulators need to bring virtual asset trading back in a well-regulated market for investors,” said Richard Douglas, Hong Kong CEO of Saxo Markets. “The Securities and Futures Ordinance is a well-structured regulatory framework, [with] very detailed and specific guidelines around how client money and client securities should be treated, which all licensed entities have to adhere to, and is designed to prevent exactly this type of situation.”
The Ordinance, which regulates all financial instruments from bonds to equities and funds, does not cover the crypto tokens traded by Alameda on FTX. That is why both companies, based in Hong Kong until September 2021, did not come under the purview of the SFC.
FTX’s remaining links to Hong Kong now present regulators with a chance to prove that it can corral the wild-west crypto market as it joins other jurisdictions to find out where the exchange’s money has gone.
At the time of Alameda’s collapse, former CEO Caroline Ellison was reported by The New York Times to be in Hong Kong, where she travelled from her new home in the Bahamas. She did not answer multiple calls placed to her mobile phone.
FTX owes money to an estimated 1 million creditors, investors and staff, according to bankruptcy filings in the US state of Delaware. About 3 per cent of customers were in Hong Kong, even if the FTX website barred non-professional investors from certain products. Mainland China, which banned crypto mining outright in 2021, still made up 8 per cent of FTX’s customers, according to the filings.
As regulators mull their next move, some local investors are breathing a sigh of relief at not having given in to FTX’s overtures.
In May 2021, SBF and FTX’s head of product Ramnik Arora held multiple meetings with potential investors in Hong Kong to raise US$500 million, valuing the company at US$20 billion.
At the time, FTX was doing “exceptionally well”, according to an email by Arora, a former Facebook research scientist for the Libra stablecoin project. “Last week was cray cray [sic] in crypto but very positive for FTX.”Kenetic Capital’s founder Jehan Chu was a seed investor in FTX, which raised US$8 million in August 2019, according to data by Crunchbase.“Though some material personal funds were lost on FTX, Kenetic had no direct exposure, as the company had already exited our seed investment in FTT tokens,” Chu said.
Among Hong Kong investors, only New Huo Technology, formerly known as Huobi Technology, publicly quantified its loss from FTX, which it put at US$18.1 million deposited with the exchange.
Back in 2019, FTX and Alameda occupied office space at the Pacific Place in Admiralty, within walking distance from the US and UK consulates.
Today, the only sign of any physical presence in Hong Kong is an address on Wan Chai’s Lockhart Road of Cottonwood Grove Limited, a subsidiary of Alameda’s British Virgin Islands entity, which was registered in 2018.
The office appeared vacant. Not even the hallway lights were turned on. The floor was not listed on the building’s directory, but a property agent confirmed that it was still occupied.
FTX Hong Kong Limited, another related entity, was registered on September 22, sharing the same address as the corporate services firm FastLane Consulting in Sheung Wan district.
Ellison, who stepped down this month as Alameda’s CEO, appeared to have kept more ties to Hong Kong than SBF. Before her LinkedIn page was removed, Ellison’s profile picture showed her against a backdrop of the city’s green hills and high-rise apartment buildings.
She moved last year to Nassau, capital of the Bahamas, where she shared a US$30 million penthouse with nine other senior FTX staff, including SBF, with whom she was at times romantically involved, according to media reports.
Ellison was also active in Hong Kong’s rationalist community, a loosely organised group of people interested in statistics-based decision-making, which overlaps with effective altruism, the philosophically-driven ethos that guided her and SBF to make as much money as possible to give away to charities they believed would help the most people.
In September 2021, Ellison attended a meeting for readers of the newsletter Astral Codex Ten (ACX), the successor to the popular rationalist blog Slate Star Codex written by the psychiatrist Scott Alexander Siskind, according to an attendee, who asked not to be named. Ellison was not at this year’s ACX Hong Kong meet-up, the person said.
A WhatsApp group for the event included Ellison’s US phone number registered by her mother Sara Ellison, an economist at the Massachusetts Institute of Technology, according to Twilio’s caller identification information. Calls to the number ended up in the former Alameda CEO’s voice mail box.
FTX’s move to the Bahamas in 2019 was once seen as an indictment of Hong Kong’s stricter regulations around crypto, which drove the industry offshore to Singapore, the United Arab Emirates and the Bahamas.
Now, it seems like a blessing in disguise, vindicating Hong Kong’s conservative approach, some analysts said. Just before FTX’s collapse, Hong Kong’s regulators were in talks to establish the framework for a regulated crypto exchange to reclaim its status as Asia’s digital assets hub, according to several people familiar with the matter.“We recognise that [virtual assets], cryptos, are unstoppable new financial innovations,” Financial Secretary Chan said on November 25 in a dialogue with the Hong Kong Association of Banks, adding that the collapse of certain exchanges are causing concerns. “We need to embrace them. We therefore set out our vision for [virtual assets] to enable this sector to thrive in Hong Kong, progressively and sustainably.”As FTX’s bankruptcy proceedings begin, more about the fallout could be revealed, claiming more than the plan for the city’s own crypto exchange, which now hangs in suspense.
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