Trouble in paradise: Bahamas fears FTX crash could hurt its rep
The collapse of Sam Bankman-Fried’s (SBF) FTX may have serious repercussions for the Bahamas as a financial services jurisdiction and its ongoing efforts to be seen as a legitimate jurisdiction for crypto exchanges.
Politicians and regulatory authorities in the region are certainly aware of this risk and there’s a consistent air of panic in their statements on the subject. And who can blame them when the stakes are so high.
Last week, member of parliament James Kwasi Thompson made a statement in support of the attorney general’s comments on FTX. He also criticized the Bahamian government for causing “irreputable damage” to the country with its silence.
Thompson also praised the Digital Assets Registration Exchange Act (DARE), which his government presented to parliament in 2020. He claimed that the registration of FTX in the Bahamas and its collapse happened under the current government’s watch.
Factually, Thompson is correct, however, a report from Fortune Magazine alleges that FTX had moved to the Bahamas from Hong Kong specifically because it found Bahamian laws on crypto exchanges more attractive.
A law with no standards
The previous Bahamian administration, led by prime minister and finance minister Huber Minnis, launched DARE with great pomp and confidence. The country’s Securities Commission even described the law as innovative legislation that meets the highest international standards.
A quick look at the law itself shows that it’s very difficult to find any standards and safeguards that protect consumers and investors. Most of the presumed standards provided by the law are assigned to the Securities Commission at its own discretion, leaving the crypto exchange with incredible flexibility around how it operates.
Unlike laws proposed in the US and the current EU MiCA law, DARE places no obligation on crypto exchanges to match clients’ funds with an equal amount of reserves.
The defensive attorney general
The Bahamas’ attorney general Ryan Pinder, who also happens to be the minister of legal affairs and a member of parliament, gave a very defensive statement on the collapse of FTX. Pinder said that the Bahamas only had jurisdiction over what happened with FTX and not with Alameda Research, given that only FTX is registered in the country.
He also explicitly blamed FTX’s bankruptcy on a bank run and liquidity crunch that started when Binance decided to sell its FTT tokens. Pinder praised the Securities Commission for its swift action in suspending FTX’s activities and freezing its assets on November 10. He also claimed that the Bahamas was the first state to take action on FTX.
It’s difficult to distinguish the political and legal message from Pinder’s statement but it’s clear that he wants to give assurances that the authorities are doing their job and that the DARE act works. However, he makes no mention of criminal investigations, even though SBF and FTX co-founder Gary Wang are under investigation by the Bahamian Financial Crimes Unit.
It’s also highly questionable how the attorney general came to his conclusion on how events transpired to cause the bankruptcy of FTX.
Read more: FTX bankruptcy: A complete failure, worse than Enron
What’s at stake?
It’s quite clear what the fear is all about. The Bahamas is an international financial jurisdiction and, according to its Central Bank, its financial services and banking sector comprises 10-15% of the country’s economy and is the second biggest sector after tourism.
As of 2021, banks had a total of $149 billion in deposits and another $153 billion were held as fiduciary assets in banks and financial institutions. Total assets managed by insurance firms exceed $2 billion. Then there are another $50 billion in investment funds. There are also 214 banks and trusts in the Bahamas and another 100 financial institutions.
FTX seems to have been the only crypto exchange that has registered with DARE. The other licensees offering digital assets had registered separately with the commission because they’re not crypto exchanges and don’t offer crypto exclusively as part of their products and services.
The Bahamas carries a historic reputation for tax evasion and money laundering, however, in recent years, efforts have been made by the authorities in the country to clean up this bad image. The Bahamas was ‘grey listed’ by the Financial Action Task Force but was eventually removed from the list in December 2020 after efforts were made to implement anti-money-laundering measures.
However, the battle for its reputation is still ongoing. The Bahamas was added to the EU’s list of non-cooperative jurisdictions on tax evasion and money laundering.
FTX as the bad apple or just the tip of the iceberg?
The authorities and politicians in the Bahamas have so far not made any statement that may allude to any wrongdoing by FTX. There’s clearly a widespread defensive approach by authorities and the political class over the financial services sector and saying anything remotely negative about even one player may be perceived as negative to their overall reputation.
But there are other questions that should be posed. SBF was on a political lobbying spree in the US in a bid to influence regulators and legislators alike. So, did he try to do the same in the Bahamas?
Read more: Bermuda-based insurer Relm distances itself from FTX fallout
What next?
The US has an extradition treaty with the Bahamas and can very easily have SBF extradited if charges are filed against him in a US court. However, the Bahamas is currently reeling from a reputational blow that could last for years to come.
Many people could, as a result, become wary of using a crypto-exchange based in the region but this will be insignificant next to the increased scrutiny and oversight of international regulators and authorities on the Bahamas as a financial services jurisdiction.
After coming out of an economic crisis brought about by the Covid crash, a reputational crisis in its financial services sector would hit the economy hard.
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