The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

FTX’s collapse into provisional liquidation is a warning that The Bahamas should “not build the whole financial services recovery” on digital assets, a prominent Bahamian accountant said yesterday.

Kendrick Christie, president of the Association of Certified Fraud Examiners Bahamas chapter (ACFE), told Tribune Business the crypto exchange’s plight further exposed how volatile the still-evolving digital assets industry is and why The Bahamas should not solely rely on this niche to revive the financial services sector.

Speaking before the Securities Commission obtained Supreme Court permission for Brian Simms KC, the Lennox Paton partner and head of its litigation practice, to be installed as FTX’s provisional liquidator, he added that this week’s developments likely mean enhanced scrutiny and due diligence will be applied to new digital assets players entering The Bahamas to establish a physical presence and/or conduct business.

Asserting that this, and FTX’s uncertain fate, is likely to “rattle the cage” of new entrants, Mr Christie told this newspaper that much depends on how The Bahamas handles the crypto exchange’s predicament if it is to avoid any lasting damage to its financial brand, integrity and reputation.

“This was designed to grow the crypto industry and also the financial services, which has been declining,” he added of the country’s digital assets strategy. “It’s a very volatile type of business, tokens can be withdrawn or lose value in a matter of seconds. We need to look at various types of business that present less risk and volatility for us going forward.

“Crypto issues can happen in a minute. Yet it’s one of the things that can assist us and it’s here to stay. But it’s not something we want to build the whole financial services recovery on. If we didn’t know that before, we realise it now.”

The Davis administration has made much of The Bahamas’ flagship digital assets regulatory regime, headed by the Digital Assets and Registered Exchanges (DARE) Act, and used it to promote this jurisdiction in a bid to attract compliant, well-regulated operators to domicile here and grow their businesses. Until this week, FTX was the flagship investment that was being employed to attract others, such as fellow crypto exchange, OKX.

“I think one can say we have a very good regulatory system,” Mr Christie added. “This crypto event may not have happened here before, but we’ve had any number of issues with companies that we’ve had to respond to. Right now we’re not seeing so much focus on The Bahamas, but that’s something we have to prepare for. We have the ability to investigate ourselves.”

FTX, while domiciled in Antigua and Barbuda, is headquartered in The Bahamas so much global attention will now be focused here - especially since the local registrant, FTX Digital Markets, has been placed into provisional liquidation. “I would not deny that this is something that is going to rattle the cage further with companies coming in,” Mr Christie said of the Securities Commission’s response to FTX’s fate.

“I think definitely we may have to subject them to increased scrutiny, and they may be increased requirements for audits of their assets to confirm they have what they say they have before they come in. Some more due diligence may be done as part of the requirement to be licensed. It’s a bit of a lesson learned, but I don’t think we have to respond to every bit of criticism that comes in.

“I think we can point to one of the best regulatory systems in the world, and the legislation we have, and just attract more quality business and ensure we do proper due diligence. I’m sure at the moment that the Securities Commission is going to be very mindful of any new licensees, and also exchanges, that come here as a result of this shake up. I think there will be increased regulation, especially in the short-term, around these companies.”

For The Bahamas, Mr Christie said much now depends on how it deals with the FTX collapse from here. “I wouldn’t classify it as major damage should we handle the situation appropriately,” he added. “I’m sure the regulators were aware of this and working with the US Securities & Exchange Commission (SEC) should a liquidation take place.

“It’s certainly troublesome. It’s something we cannot ignore. It’s not going to go away right now. We certainly need to go into damage control, be very careful in our response and let the regulators work with the SEC. These kind of things happen, but in the crypto world they happen very fast. I would not say this does not create a little friction in the way we move ahead, but I don’t see it as something that is linked to our country or that we had a part in this.”

Sam Bankman-Fried, the billionaire FTX founder, issued a series of rambling Twitter tweets yesterday morning that verged between a ‘mea culpa’ and acceptance of full responsibility for the debacle together with promising that he was still working on a bail-out plan to cover the $8bn funding shortfall.

However, his explanation was likely to have further unnerved crypto investors and the wider market, as he admitted to miscalculating both the level of debt (leverage) obtained from the exchange by FTX clients and its ability to meet withdrawals (liquidity). Effectively, Mr Bankman-Fried admitted to have been asleep at the wheel or not minding the shop as the crisis enveloping his company developed - something that is hardly likely to restore confidence in him and FTX.

“I’m sorry. That’s the biggest thing,” Mr Bankman-Fried wrote. “The full story here is one I’m still fleshing out every detail of, but as a very high level, I f----- up twice.”

Due to “poor internal labelling of bank-related accounts”, he said he “was substantially off” in his calculations of the sums the exchange had leant out to users to let them make leveraged bets – borrowing money to trade with, magnifying potential gains and losses.

That meant that he thought FTX had enough money on hand to pay out 24 times the normal daily withdrawals, but it did not have enough to even pay out all the withdrawals on Sunday alone. “We saw roughly $5bn of withdrawals on Sunday – the largest by a huge margin,” he added.

But Mr Bankman-Fried said that while FTX was suffering a liquidity crunch, it was not insolvent and still held more assets than the total value of all the customer deposits – albeit in a form that could not be easily converted to cash.