One Of FTX's Biggest Victims Could Be The Bahamas' Finance Reputation
The island nation created a one-stop regulatory shop that gave crypto companies wide latitude.
(Bloomberg Businessweek) -- Years before Sam Bankman-Fried became a household name by building and blowing a billion-dollar cryptocurrency empire, he was on the hunt for a new corporate home in the Caribbean. In April 2019, his company, FTX Trading Ltd., registered in Antigua and Barbuda, a nation of tiny, idyllic islands 1,400 miles southwest of Florida.
But when FTX applied for permits to operate its flagship crypto exchange, the government balked. “Regulators here took the decision that they didn’t quite understand the business model,” Prime Minister Gaston Browne told local news outlets in November, shortly after FTX’s collapse. “Apparently it was a one-man operation — so they never proceeded to license it.”
Antigua’s reluctance now looks wise. Questions are swirling around the Bahamas’ attempt to establish itself as a crypto hub with a regulatory structure that allowed entrepreneurs to quickly register and gave them wide latitude once operational. The rules sought to filter out illicit actors such as money launderers. In hindsight, though, they failed to account for seemingly well-intentioned entrepreneurs such as Bankman-Fried, whose actions — whether criminal or simply careless — would bankrupt his company, imperil countless others and cause billions in customer and investor losses. The reputation of the Bahamas and its crypto ambitions could be among his most prominent victims.
Known as much for its beaches as its private banking and wealth management services, the Bahamas became an ideal next option for FTX’s jurisdiction shopping. The island nation had been trying to attract some of the new financial technology services, says Gowon Bowe, chief executive of Fidelity Bank (Bahamas) Ltd., and crypto seemed to fit the bill. After Hurricane Dorian in 2019 and the pandemic in 2020 ravaged the country, officials sought to modernize its financial architecture as one way to jolt the economy. “While the nation’s financial-services sector had evolved over time,” says Bowe, stakeholders across the Bahamas posed one question: “Have we evolved with it?”
That quest gave birth in 2020 to the Digital Assets and Registered Exchanges (DARE) Act and the Financial and Corporate Service Providers Act. The measures, developed primarily by the Securities Commission of The Bahamas, the main markets regulator, opened the door for FTX and other crypto companies to claim the nation as their home. The laws covered everything from issuing tokens to operating exchanges, which could seek licenses for both spot and derivatives trading. While many other countries, including the US, weren’t prepared to legitimize the booming industry with separate rules, “we were taking a calculated risk,” says Derek Smith, a Bahamian expert on governance, risk and anti-money-laundering laws.
As the DARE Act was being adopted, “We didn’t envision, nor could have even imagined, that a crypto giant like FTX would be attracted to the Bahamas,” says Christina Rolle, executive director of the securities commission, in her first interview since FTX’s collapse. As she sees it, the Bahamas “didn’t have the choice to say no,” given its position as a financial center. “Either we were going to ban a crypto player from coming into our jurisdiction, or we were going to have to force it to fit into a regulatory framework,” she says. “And we were not up to banning it.”
The DARE Act operated in tandem with banking laws in place since the late 1970s and decade-old data privacy laws that helped the Bahamas become an offshore banking and internet services powerhouse. Like other island nations in the region, it competes aggressively in the financial-services industry and takes pride in being a pioneer. That spirit was on display when the country launched the world’s first functioning central bank digital currency, the Sand Dollar, also in 2020.
Rolle wrote in a 2022 manifesto that the law’s holistic approach gave digital assets their “own space without boxing them in.” The report said her agency would aim to complete the registration process for crypto applicants within 30 days. The central tenet was that transparent rules would present no surprises to entrepreneurs, consumers or investors. Such clarity would help vault one of the world’s wealthiest island nations into a lead spot in the global race to attract crypto startups. Eight crypto companies, including FTX, have now registered under the act, according to the commission’s website.
In a Jan. 17 speech in Washington, Prime Minister Philip Davis hailed the crypto law for being agile enough to allow the Bahamas to move more quickly than even the US to preserve FTX customers’ and creditors’ assets. “I dare say that, perhaps, our regulatory regime in respect to this space is probably more modern” than the US’s.
The OKX crypto exchange received a license under the DARE Act on Nov. 3, just days before FTX collapsed, says Tim Byun, the global government relations officer for the exchange’s parent, OK Group. A former US Federal Reserve bank examiner, Byun says that getting a crypto exchange license in the US would have involved dozens of entities and a hodgepodge of state regulations. “The DARE Act, in essence, placed all crypto activities under one consistent regime,” he says. “And it designated one regulator. Not 58, but one.” He says the rules are as stringent as anything offered on the global marketplace, with aggressive reporting and reserve requirements.
Yet in the case of FTX, the securities commission only had jurisdiction over a local entity, FTX Digital Markets Ltd. That meant it was blind to the extent of FTX’s financial problems without visibility into dozens of other related units, including FTX Trading Ltd., the parent of FTX Digital Markets. Because it didn’t oversee Alameda Research, Bankman-Fried’s hedge fund, the regulator was in the dark when he began using customer money to cover trading losses, despite the DARE Act’s requirement that FTX have “effective arrangements in place to protect client assets and money.” And because of its limited scope, the agency couldn’t monitor whether the exchange and other units took steps to avoid conflicts of interest.
Under the Bahamas’ rules, “customers had no way of knowing” whether exchanges and crypto firms were healthy, or what the state of their total assets and liabilities were, says Howard Fischer, a New York-based partner at law firm Moses & Singer and a former senior trial counsel at the US Securities and Exchange Commission. “Being regulated means undergoing examinations for financial health by regulators, which would potentially limit the ability of less stable operators to take and lose customer assets.”
The Bahamas’ FTX affair is more than an object lesson in the risks of being a first mover. FTX, once valued at $30 billion, lacked internal controls and failed basic governance tests, such as having independent directors to oversee Bankman-Fried, who is accused of raising billions from unsuspecting crypto investors and siphoning off customer funds to prop up Alameda and purchase luxury real estate.
Bankman-Fried was arrested in the Bahamas last month and extradited to the US, where he has pleaded not guilty to criminal charges. He was released on bail to his parents’ California home while he awaits trial. The trail of financial ruin he left behind may take years to clean up, and it’s not clear if the company’s victims will ever be fully compensated.
The DARE Act has attracted a lot of criticism, including from Michael Pintard, the opposition political leader, and other influential locals. “Regulators are taking a more accommodative than regulatory posture,” wrote Lindon Nairn, who occasionally pens columns for the Nassau , after FTX’s implosion. The law should be amended to include “disallowing any entity from conducting both exchange and broker functions; minimizing the likelihood of circular dealing; and requiring the publication of quarterly information and annual audited reports for all exchanges and digital assets.”
The crypto framework has its defenders, including Bahamas Foreign Affairs Minister Fred Mitchell, who says it shouldn’t be judged by one bad actor. After all, the US has had some spectacular financial scandals, including the 1980s savings and loan blowup, the 2001 Enron accounting scandal, Bernie Madoff’s massive Ponzi scheme in 2008 and the collapse of investment banks such as Lehman Brothers, which triggered the 2008 global financial crisis — and yet it still draws global business. “There are going to be dishonest characters no matter what you do,” Mitchell says.
Kriston Moore, an executive at the Bahamas Financial Services Board, which promotes the country as an international financial center, says the island nation will likely continue to attract crypto firms by stepping up scrutiny of new ones and policing existing ones better. “We have to earn anew the trust of the global investor community,” he says.
Byun, with OK Group, is more cautious. “The world has changed for crypto. It’s almost like we just saw Lehman Brothers go down, or we just read about this massive schemer called Bernie Madoff, and it just happened right under our nose,” he says. “The entire industry is shocked. The entire ecosystem needs to heal.”
Rolle won’t say what regulatory lessons an upcoming report will outline, other than that “we will make changes to enhance the DARE Act.” But for now, she says, crypto is one of those products that “really is not suited for the retail investor.”
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.