Although the situation is still unfolding, there will be numerous casualties in the downfall of the crypto exchange, FTX. In being headquartered in The Bahamas, and one of the locations for bankruptcy proceedings, The Bahamas will be trying to manage the fallout to its credibility, whilst also trying to establish its legitimacy, as digital assets leader.

 

Even if you have just a passing interest in cryptocurrency, the odds are you have heard of the collapse of FTX, the crypto exchange that is incorporated in Antigua and Barbuda and headquartered in The Bahamas. At its peak, FTX was the third-largest crypto exchange by volume, but in a few short weeks, it went from a much-lauded company and the darling of investors to one that has filed bankruptcy in The Bahamas and in Delaware in the United States (US).

Although the actions and activities leading to the demise of FTX are still being uncovered and examined, and the fallout is far from over, as the impact on investors, customers and other companies still need to be determined, a battle already seems to be brewing among regulators. Essentially, a global investigation is reportedly underway, as FTX and more than 100 affiliated companies filed for Chapter 11 bankruptcy protection in Delaware (Source:  Ars Technica). However, with at least 100,000 creditors (and some estimate that figure could be as high as one million) worldwide, dozens of US and international regulators are taking an interest in the investigations.

So far, the centre of this investigation is The Bahamas and Delaware. However, although FTX filed for bankruptcy first in The Bahamas (on 10 November), and then in Delaware (on 11 November), it appears that Bahamas liquidators may find their authority being overlooked by US investigators processing the Chapter 11 filing in the US.

 

Containing a difficult and embarrassing situation

Over the past few years, The Bahamas has been positioning itself as a global fintech hub. It has been promulgating legislation to foster an enabling environment for fintech development and acceleration, and has been actively courting investors and businesses to establish a presence in its jurisdiction, the most prominent of which was FTX.

FTX’s demise is likely to have repercussions for The Bahamas, if at the very least by association. Last week, fintech leaders in the Bahamas acknowledged that there might be some reputational damage to the country arising out of the failure of FTX, but it would not be fatal to The Bahamas’ focus on becoming a digital assets leader (Source: Eyewitness News), as the strategy does not revolve around just one player (Source:  The Tribune). However, in light of new developments since those opinions were shared, and what could possibly emerge, the country and the Securities Commission of The Bahamas may be more adversely affected than initially believed.

 

Accusations and mud-slinging may have begun

As much as it is about three weeks since it became apparent that FTX was in trouble – though the signs would have been evident much earlier – it is likely there will be more twists and turns as the scope of the mismanagement is understood. However, what is already beginning to emerge is that those who were in a position to oversee FTX’s operations and ask questions, such as investors and arguably regulators, did not do so, as everyone was enamoured with the company and its leaders. Hence, there is likely to be a lot of finger-pointing, as the investigations continue.

So far, it appears that FTX may be among the first to try to challenge The Bahamas’ authority in leading the bankruptcy proceedings, as the company has accused the Bahamian government “…of directing unauthorized access to FTX’s systems in order to withdraw assets after the company filed for Chapter 11 bankruptcy in the U.S…” (Source: CoinDesk). This accusation could be incredibly damaging to The Bahamas, as it suggests that standard legal and regulatory procedures were not followed. Hopefully, The Bahamas is able to swiftly and decisively refute these allegations, to leave no doubt that it has conducted itself judiciously and lawfully, and will continue to do so as it manages the bankruptcy proceeding.

 

Demonstrating effective regulatory oversight

One of the ways The Bahamas can reduce the fallout is to be seen to be proactive, transparent and following established procedures in managing the situation at hand. As a small, developing country, with a population of nearly 400,000, the odds are that The Bahamas is considered by developed countries a lightweight and without the requisite technical capacity to handle complex subjects, such as crypto and fintech. Moreover, its credibility may already be questioned due to being recently blacklisted by the European Union as a tax haven.

Hence, the petition to a court in New York City, by The Bahamas liquidators, to recognise the bankruptcy proceeding in The Bahamas over that which was subsequently filed in the US (Source:  Reuters), would be critical in putting The Bahamas in the forefront. More importantly, it provides the country with an opportunity to demonstrate its competency, leadership and legitimacy in handling such a high-visibility and complex case.

 

To a considerable degree, the collapse of FTX, and the scrutiny that The Bahamas will be under, will test the framework it has put in place, and the extent to which it has access to the expertise needed to properly oversee the digital assets industry that it wants to become a core economic pillar. Further, there may be opportunities for the country to forge strategic partnerships, cognisant that regulators worldwide are keenly observing the situation, conducting their own investigations, and may also initiate their own proceedings in the future.

 

 

Images credit:  Melinda Gimpel (Unsplash);  Sergei Tokmakov, Esq. (Pixabay);  Kurious (Pixabay);  Kanchanara (Unsplash)