The Economist Special Report: How CZ, SBF, Armstrong, and Hayes Became the Most Powerful Figures in the Crypto Space?

Original Title: 《THE MOST POWERFUL PEOPLE IN CRYPTO》

Compiled by: Taishan, Chain Catcher

The Hong Kong office of cryptocurrency exchange FTX is a high-end financial hub mixed with youth culture. It is now 7:30 PM, and employees dressed in shorts and T-shirts are still working late, weaving between desks equipped with six screens each. Alcohol, boxes, and various trash are scattered everywhere, with guitars and badminton rackets lying around. Takeout tempts the hungry; traders and developers face off on a wooden chessboard. In this trench, FTX's founder Sam Bankman-Fried plays the role of the club king or Uncle Sam. When Bitcoin prices soar, they play poker in a messy conference room.

Founded two years ago, FTX is now one of the most powerful companies in the crypto space. In October of this year, FTX raised $420 million from a number of star investors, including the world's largest asset management company BlackRock and venture capital giant Sequoia. This led to a valuation increase from $18 billion to $25 billion by Sequoia just three months after the last funding round.

After signing a series of sponsorship agreements worth hundreds of millions of dollars this year, its name shone brightly at the Miami Heat's main arena and EBUA, and it also appeared in Super Bowl advertisements. Additionally, FTX will soon sponsor the Mercedes F1 team. It is stealing market share from competitors, and now FTX ranks as the fourth largest exchange. Sam Bankman-Fried, known in the industry as SBF, has an estimated net worth of over $22 billion. And he is only 29 years old.

Source: Kaiko, The Economist

Since the beginning of 2020, the total market value of the crypto universe has increased twelvefold, reaching $2.3 trillion (as of mid-December 2021). In this epic competition, the young SBF is one of the four main contributors. He has overshadowed Zhao Changpeng, the 44-year-old CEO of the largest cryptocurrency exchange Binance. Three years ago, Zhao, known as CZ, replaced Arthur Hayes (co-founder of BitMex).

Coinbase is the only publicly listed and regulated exchange in the U.S., and its CEO Brian Armstrong is introverted and serious. He hopes that, as a long-term player and the most "upstanding" exchange, he can attract investors who trade in unregulated offshore exchanges and are cautious.

These four companies have accumulated billions of dollars in wealth and generated significant influence in just a few years. In traditional finance, where daily lending, consumption, and savings are dominated by intermediaries like bankers, payment companies, and asset custodians, the powerful voice is now held by exchange owners who provide trading tools and venues for speculators, aiming to abolish the strong intermediaries.

They initially viewed regulation as not a threat; however, when local regulators began to take action, most institutions would jump from one "comfort zone" to another. Inevitably, some outsiders doubted their sincerity; others attributed their success to timing rather than entrepreneurial vision.

Believers marvel at their ability to navigate a wildly volatile market, although some question how long they can sustain it. Little is known about their personal lives, beliefs, and aspirations.

Through interviews with three founders and insiders, The Economist learned about the necessary conditions to become the most powerful people in the crypto space and what they might leave behind after they depart. Hayes is facing charges in the U.S. for failing anti-money laundering controls and is awaiting trial; he declined an interview, but reporters spoke with some of his acquaintances. He simultaneously denies his wrongdoing.

Their parents are all highly educated middle-class individuals, mostly from excellent backgrounds and performed well in school. SBF is the son of a Stanford law professor and claims to be "very strong" in mathematics. CZ's father became a geophysics teacher after fleeing the Chinese Cultural Revolution, and CZ ranked in the top ten in a national math competition in Canada. Armstrong's mother is from California and holds a Ph.D. in bioinformatics. Hayes's parents worked for General Motors in Buffalo and Detroit, but he preferred chemistry and economics, earning a scholarship to a private school.

The Square Root of Success

From an early age, they exhibited signs of restless entrepreneurial spirit. In high school, Armstrong taught himself coding and created an e-commerce platform dedicated to trading used computers, selling about 50 units. He was not the only one who found university life impractical. CZ said, "In fact, I struggled with math and physics because they were too theoretical." As a second-generation immigrant, CZ always wanted to learn how to achieve "financial freedom."

This pursuit of money-driven freedom began during CZ's coding days at a trading tech company. Hayes and SBF started to make their mark on Wall Street. Armstrong joined Airbnb, like hitting the lottery; the company is now valued at $115 billion. Like all other employees, he received shares in the company. Dan Romero, one of Coinbase's first employees, noted that Armstrong's choice to leave Airbnb early indicated his confidence in cryptocurrency.

For Armstrong, the entrepreneurial trigger was a trip to Argentina after graduating from college. There, the reckless money printing fueled rampant inflation. For Hayes, he was fired from a bank and then read about Bitcoin on the financial blog Zerohedge, captivated by its inherent scarcity. As a proponent of the gold standard, he immediately became very interested in Bitcoin, believing that limited supply could increase its value like gold. CZ also realized that Bitcoin "functions in finance like the internet does for information." For SBF, it was simply seeing an "opportunity for a good business."

The lofty visions of these founders have yet to be realized: although Bitcoin's price has soared from $700 in 2016 to $50,000 by mid-December this year, it is rarely used as a payment tool. However, they firmly believe that over time, it will promote "economic freedom," provide an alternative to poorly managed "fiat" currencies, enhance financial inclusion, lower cross-border payment costs, and enable startups to raise funds anywhere. CZ predicts that 80% of people will accept cryptocurrency payments within five to ten years. Two years ago, when asked if one could buy a bottle of wine with cryptocurrency, he felt it was "rude." But not anymore.

Given their proclaimed tenets, it seems strange that these founders are not running payment companies; at least from the skeptics' perspective, they are running large digital casinos. At that time, Bitcoin was highly priced in China, so Hayes would buy Bitcoin overseas and sell it for cash in China, crossing borders with bags of cash, thus starting his crypto career.

He co-founded BitMex in 2014, a pioneer of crypto "derivatives," which allow investors to bet on the future price performance of digital assets. The 100x leverage it offered meant that a $10,000 account on BitMax could turn into a $1 million contract account.

After that, FTX and Binance raised the leverage limits even higher. U.S. regulators prohibit exchanges from offering such high-risk derivatives to non-professional investors; even so, users can still use cheap "VPNs" to change their IPs and evade restrictions. Today, the trading volume of derivatives far exceeds that of actual cryptocurrency trading.

The founders believe this is not contradictory. When Armstrong launched Coinbase, he thought that building a trustworthy exchange would help make the then-marginal product easier and safer to use. Coinbase did not launch derivative products but has applied for relevant licenses. Nine years later, his original intention remains unchanged. CZ stated that his vision is not "low enough to just make money, nor high enough to save the world": but to provide people with more choices.

Image Author: Kristian Hammerstad Source: The Economist

Whether for personal purposes or profit, everyone is working hard. Armstrong describes himself as a "night owl," starting work at 10 AM and going until midnight. Working from home, CZ holds remote meetings with his deputies six days a week. The lazy sofa next to his desk is SBF's bed, where he takes breaks for 4-5 hours a day between back-to-back meetings. His biological clock has no breakfast or dinner; he is most aware of "which restaurants are open for takeout." On the day he was interviewed by The Economist, his last meeting was at 5 AM.

No Time to Roll the Dice

Intelligence, speculative idealism, and good health seem to be key factors for success in the cryptocurrency field. However, in these three areas, the four founders are distinctly different, and these areas can determine not only who becomes wealthier but also who ultimately shapes and dominates the future of the industry.

In terms of management style, those familiar with SBF describe him as detail-oriented and capable of multitasking, whether it's issues with the exchange or some programming projects (including Solana). He also claims to be hands-on. In contrast, CZ jokingly says he is a "bad manager" and prefers to delegate power. Binance dominates the crypto futures trading market, but CZ is rarely involved in its management. In 2018, Binance acquired the crypto wallet Trust, and when The Economist interviewed him, he mentioned he hadn't spoken to the current head of Trust in six months.

Armstrong's dedication lies somewhere between the two, while he leads in openness and humility, consistent with his "straight-A student" image. He requires his executives to each nominate six potential successors so that his company can "withstand the test of time." He encourages employees to complain, although his promise to reward those providing the "most honest, most negative" feedback with $20 (in cryptocurrency) seems a bit stingy.

Hayes is the most likely among the four to become a "star executive." He is charismatic, muscular, and knows how to present himself in various shows. Rich Rosenblum, co-founder and president of the cryptocurrency trading platform GSR, said, "Hayes acts like James Bond managing this company." He also resembles a self-proclaimed visionary, publishing an article every two weeks contemplating the present and future of digital finance.

Hayes's high-quality lifestyle is undoubtedly one of the most Bond-like aspects. In 2018, he drove a bright orange Lamborghini to a crypto trade show and later tweeted to his followers, "Did you notice my ride today?" He skis in Hokkaido, plays squash in amateur leagues in Hong Kong, practices yoga daily, and has recently taken up kite surfing. He wears tight T-shirts and luxury watches. However, his favorite drink is "minimal intervention" wine, which is quite different from Bond's favorite "shaken, not stirred" martini.

In 2018, he outfitted BitMEX's flagship office in Hong Kong with a massive aquarium, housing sharks, making him seem more like a Bond villain. His disdain for caution sharply contrasts with the more subdued temperaments of the other founders, none of whom own cars, prestigious assets, or predatory fish. SBF shares an apartment with friends from previous jobs. CZ lives in a rented apartment room. However, he does enjoy splurging on gadgets; Hayes's desk is adorned with six iPhones.

Hayes's flamboyance may help explain why U.S. regulators are unfriendly toward him. A third point that distinguishes him from other crypto platform owners is his attitude toward authority, which is also the biggest reason for his irritation of regulatory bodies. In 2020, U.S. regulators accused Hayes and his two BitMEX co-founders of failing to run proper anti-money laundering controls on the platform. His indictment angered cryptocurrency enthusiasts. They argue that Hayes, as a pioneer, is paying the price when rules have yet to be established.

But many outsiders believe he painted a target on his back. In 2016, he stated that BitMex's strategic focus was on "depressed gamblers." At that time, the company boasted that "registration takes less than 30 seconds" for potential U.S. customers. When asked why BitMex was legally registered in the Seychelles in 2019, he pointed out that bribing U.S. regulators was more expensive, and the islands were "coconut prices." Supporters dismissed such taunts, viewing them as a show by a visionary entrepreneur. The FBI clearly did not appreciate the joke; a year later, its New York head warned that Hayes and his comrades "will soon find out that tropical fruits cannot pay for the crimes they are accused of."

In contrast, Armstrong's business model is predicated on becoming the most trusted and compliant exchange. He said that from the beginning, he thought that as the scale of cryptocurrency grew, there would be "a lot of scrutiny." Among the initial ten employees, he hired a lawyer and a compliance officer, even "dressing in a suit" to meet with regulators.

He said it is "sometimes painful" to watch what those competitors do at will. His intuition has been validated. In recent months, regulators around the world have exploded in their focus on cryptocurrencies, beginning to tighten the noose. China announced that all virtual currency transactions are illegal, and the U.S. SEC is seeking new powers to regulate what its chairman called the "Wild West" of cryptocurrency.

Armstrong now states that he hopes to be a "model" for regulators, implying that he will influence the rule-making process. This is not something other founders' offshore exchanges can easily achieve. For SBF, he acknowledges that local crackdowns could soon have a real impact on FTX, "If Hong Kong follows in the footsteps of mainland China, FTX may have to relocate most of its employees, which could likely happen in 'a few years'."

The Endgame

The uncertain outlook has led the founders to ponder many questions, especially what impact stricter regulatory crackdowns or a prolonged Bitcoin slump might have on their wealth. On paper, their wealth is enormous, but Armstrong is the only one with liquid assets (he sold $292 million worth of Coinbase stock during its IPO in April 2021). CZ holds all his assets in cryptocurrency, with only a few thousand dollars in cash for short-term expenses. SBF's wealth mainly consists of shares in his private company. According to early investors who sued BitMex in 2019, Hayes allegedly partnered with his co-founders to withdraw $140 million from the company. (The lawsuit was settled out of court in December 2020).

It is equally unpredictable what their quartet might leave behind. Once they are gone, will one or more of them become benchmarks for global finance (like Jamie Dimon of JPMorgan), change our way of life (like Steve Jobs, who brought smartphones to everyone), or even reshape rocket science (like Elon Musk or Jeff Bezos)?

Armstrong is an admirer of Musk, and he shares a similar spirit with him. He says he is putting most of his capital into "moonshot projects" or "charitable causes." Reports suggest he is interested in "longevity" and biology, and like Tesla's boss, he enjoys learning from knowledgeable experts in fields he does not understand. He recently met with the founders of WhatsApp to learn how they "built a global product."

Meanwhile, CZ has no grand plans to squander wealth in space or spend it on anything else: "I don't need anything that costs more than $100 million." He intends to donate the remaining money to medical research and charitable organizations. SBF may do something similar. As a vegetarian, he values causes such as treating tropical diseases, promoting epidemic prevention, and improving animal welfare.

However, the cryptocurrency race is far from over. Like high-stakes poker players, these four founders have so far kept their most important cards hidden in their pockets, only placing big bets when the returns seem worth the risk. But to take all their chips to gamble on the other side of crypto prosperity, they will need more than just innate intelligence and self-discipline. Because winning an entire poker game often relies not on skill, but on enduring luck.