Some of the world’s most important cryptocurrency exchanges — platforms like Binance and FTX — are not based in the United States. Yet their founders grew up in North America and trace their professional roots to Wall Street.
American regulations prevent these trading moguls from offering cryptocurrency investors’ favorite products, so they have gone abroad, where the rules are more permissive about the riskiest types of transactions. And they will keep moving to avoid crackdowns, Eric Lipton and DealBook’s Ephrat Livni report for The Times.
“It needed a non-U.S. base of operations,” said the FTX founder and C.E.O. Sam Bankman-Fried of his platform, which operates from Hong Kong. “The most important part for us — and I think for a lot of the industry as a whole — is derivatives,” he said. FTX specializes in this kind of transaction, which is off limits to U.S. retail traders. The exchange raised $900 million this week to fund its global expansion, at an $18 billion valuation.
Derivatives exchanges allow traders to take on a large amount of leverage, up to 101 times on FTX and up to 125 times on Binance. That transforms a small down payment into a huge bet that can pay off big or lead to forced sales that set off cascading liquidations and influence the underlying cryptocurrency’s prices. Billions of dollars’ worth of investments from customers with ties to the U.S. has reached some offshore exchanges, despite the ban, according to trading data through last year.
Exchange executives admitted leverage amplifies volatility but say few traders actually use the extreme leverage their platforms advertise. Changpeng Zhao of Binance said the numbers were a “marketing gimmick.” Bankman-Fried conceded it might be time to tone down the leverage, calling it “a double-edged sword.”
Futures vs. Spot Purchases
The largest volume of daily trades on cryptocurrency is for so-called derivatives — bets on future prices, not purchases on the so-called spot market at current prices.
Source: Kyle Soska, Carnegie Mellon University CyLab
By The New York Times
“I am not saying this is going to cause the next financial crisis,” said Timothy Massad, a former chairman of the Commodity Futures Trading Commission, which regulates derivatives. “But could this be something like the butterfly that flaps its wings in Brazil that sets off a tornado in Texas?” Derivatives of a different kind played a crucial role in the financial meltdown of 2008, of course, when highly leveraged bets on home mortgages went bad and helped cause the collapse of major financial institutions.
Regulators around the world are turning the screws. Since June, Binance has been targeted by financial officials with warnings or other enforcement actions in Britain, the Cayman Islands, Hong Kong, Lithuania, Italy, Poland and Thailand, many of them eying its high-leverage derivatives offerings. Meanwhile, with regulators in Hong Kong signaling potentially restrictive rules coming soon, Bankman-Fried said he was considering a move to Singapore. That is where his fellow crypto nomad Zhao, for now, resides.
Read the full story about crypto nomads and extended interviews with Bankman-Fried and Zhao.
HERE’S WHAT’S HAPPENING
People are traveling like it’s 2019. Spending on airlines briefly exceeded 2019 levels for the first time since the pandemic began. Ticket prices are up, too, helping airlines report mostly upbeat earnings this week, with domestic leisure travel at or above prepandemic levels but business and international travel still lagging behind.
Intel says the global semiconductor shortage could stretch into 2023. “We have a long way to go yet,” Intel’s C.E.O., Pat Gelsinger, told The Wall Street Journal. General Motors said yesterday it planned to slow production of pickup trucks because of the chip shortage.
A “pingdemic” is gripping Britain. With Covid cases surging, more than 600,000 people have been pinged by the government’s test-and-trace app asking them to isolate themselves for 10 days because they were near someone who had tested positive. That has led to staff shortages of truckers, train drivers, supermarket workers and more.
Amazon is ending its use of the arbitration process to settle customer disputes. The e-commerce giant let customers know in a five-sentence note about its updated “conditions of use.” Now, disputes will have to go to federal court, rather than the private and secret arbitration process, which critics say puts consumers at a disadvantage.
A tech firm hit by ransomware gets the key to unlock customers’ data. The breach of Kaseya this month led to extortion attempts of hundreds of the software company’s customers, prompting President Biden to call President Vladimir Putin of Russia, where the hacks originated. Kaseya said only that a “third party” had provided a key to unlock victims’ compromised systems.
Uber bets on freight
Uber announced yesterday that it would acquire the logistics tech company Transplace from TPG Capital in a deal valued at more than $2.2 billion. It’s a bet to bulk up Uber’s freight business, an important but less high-profile unit than the ride-hailing giant’s other businesses.
Uber has reshaped its business during the pandemic, which was dealt a severe blow to its core ride-hailing service. The company sold its bike and scooter business and bolstered its food-delivery division with a $2.65 billion deal to acquire Postmates, a $1.1 billion deal to buy the alcohol delivery business Drizly and, this week, a partnership with Albertsons.
Uber launched Uber Freight in 2017, and the unit raised $500 million from Greenbriar Equity Group last year at a $3.3 billion valuation. Freight accounted for less than 10 percent of Uber’s sales in the first quarter. “We are very aggressively expanding freight,” Dara Khosrowshahi, Uber’s C.E.O., said at the company’s shareholder meeting in May. “And when autonomous technology is developed and when it is fully safe, we absolutely want autonomous trucks and autonomous drivers, so to speak, to be on the freight platform.”
Can trucking help Uber achieve profitability? That’s the key question as Uber’s main consumer-facing business struggles with a driver shortage. Uber says the deal will allow it to expand into Mexico and help the loss-making freight division break even (on an operating basis) by the end of next year.
“What for most industries were hurricane-like headwinds was a pot of gold for tech.”
— Dan Ives of Wedbush Securities on how many technology companies have had a lucrative pandemic. “Tech is triumphant in a way that even its most evangelical leaders couldn’t have predicted,” The Times’s David Streitfeld writes, surveying the scene in Silicon Valley.
No one believes the bond market
The fear that the economic recovery is faltering, in part because of the Delta variant of the coronavirus, appears to have receded among stock investors. Bond buyers, though, are still spooked. The yield on 10-year Treasuries has been dropping for months and remains at just under 1.3 percent, near the lowest it has been since February, when the prospects for the economy were much shakier. Who to believe?
A drop in yields usually signals slower growth ahead, which seems at odds with what’s happening. Yes, the Delta variant has put some reopening plans on hold, but generally the economy appears to be headed up rather quickly. Most economists think 2021 growth will be the strongest since the mid-1980s.
That’s led some Wall Street strategists to conclude that the bond market is broken.
Goldman Sachs said in a note to clients yesterday that the monthslong drop in bond yields was a “conundrum,” but meaningless. Rates would reverse soon.
Vincent Deluard, a global macrostrategist at the institutional brokerage firm StoneX, says the long-held belief that bonds are somehow better able to predict the economy than stocks doesn’t make sense in our current situation. The Fed’s stimulus included a heavy dose of bond buying, distorting the market. And the popularity of target date funds, which balance stocks and bonds based on investors’ projected date of retirement, is also moving bonds for reasons unrelated to the economy. “I find it hard to take seriously that the bond market is saying that we are not going to have inflation and a hot economy,” Deluard said.
Tom Atteberry, who runs the FPA New Income bond fund, one of the most conservative around, says there is another possibility: Economic rebounds have been getting successively slower. Growth peaked around 5 percent in the 1990s, 4 percent in the mid-2000s and 3 percent before the pandemic.
The big difference this time is that the government has spent trillions to pull the economy out of a deep recession. What if that masks something fundamentally awry? What if growth has already peaked? What if the new long-term ceiling is even lower than before? Atteberry considered this, “but then I come back to ‘nah,’” he said. “Rates are going to rise and the economy is going to do a lot better than it is now.”
THE SPEED READ
The Carlyle Group is reportedly in discussions to raise a $27 billion buyout fund, which would be the industry’s largest. (Bloomberg)
Shares of the Indian food-delivery company Zomato jumped 80 percent on their first day of trading, despite worries about its punchy I.P.O. price. (BBC)
The delivery start-up Gopuff is in talks with investors, including Blackstone, to raise $1 billion. (TechCrunch)
“Grills Are the Latest Fad in a Scorching IPO Market” (WSJ)
The former baseball star Alex Rodriguez’s venture capital firm backed the online brokerage start-up Tornado in hopes of riding the retail investor frenzy. (Bloomberg)
What the U.S. can learn from Europe’s experience with national health passes. (NYT)
The White House-Facebook coronavirus battle distracts from the real problem: We don’t agree on anything. (NYT)
President Biden has installed more federal judges in his first six months than any president since Nixon. (Axios)
“Congress Shouldn’t Risk Making Inflation Worse” (Times Opinion)
Best of the rest
One of the fastest growing, and most controversial, private equity firms is made up of other private equity firms. (FT)
Twitter and Snap both beat earnings expectations, as the advertising market recovers. (NYT, CNBC)
“What’s the Price of an Uncleaned Hotel Room?” (NYT)
Crocs, the unofficial shoe of the pandemic, says sales will rise 60 percent this year. (Elle, CNBC)
Where is Larry Page? The Google co-founder has reportedly spent time on remote Fijian islands cut off from most travelers during the pandemic. (Insider)
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