Did regulators drop the ball?

As we suspected, the matter involving the dramatic fall of the FTX cryptocurrency exchange, which has its headquarters in The Bahamas, continued to unfold yesterday with the Securities Commission of The Bahamas announcing late in the day that it has frozen the assets of FTX Digital Markets Ltd. and related parties.

The commission also suspended the registration and applied to the Supreme Court of The Bahamas for the appointment of a provisional liquidator of FTX Digital Markets Ltd., the Bahamian subsidiary of FTX Trading Ltd.

That announcement came one day after Binance, the largest cryptocurrency exchange in the world, walked away from a deal to rescue its struggling rival, FTX, which is facing a liquidity crunch.

FTX is owned by Sam Bankman-Fried, who earlier this year praised The Bahamas for setting up a digital assets regulatory environment, which he said was the envy of many other jurisdictions.

Former Attorney General Allyson Maynard-Gibson, KC, led the legal team that resulted in FTX Digital Markets Ltd. becoming the first exchange to be registered under the Digital Assets and Registered Exchanges Act (DARE Act).

In April, Maynard-Gibson, Prime Minister Philip Davis, Securities Commission Executive Director Christina Rolle and other officials joined Bankman-Fried for the groundbreaking of the $60 million FTX headquarters in western New Providence.

That came after the government launched its White Paper on Digital Assets, setting out the vision and the supporting framework “to transform The Bahamas into the leading digital asset hub in the Caribbean, and a global leader in the progressive regulation of business in this profoundly innovative space”.

In a communication to Parliament on the white paper in May, Attorney General Ryan Pinder said the government was putting in place policies to safeguard the reputation of this jurisdiction and safely regulate digital assets and digital asset businesses.

“I want to be clear,” Pinder said, “our policies are designed to encourage growth while keeping bad actors out.”

At the FTX/Salt Crypotocurrency Conference at Baha Mar in April, the prime minister said “the arrival and presence of FTX underscores the readiness of The Bahamas to be a home for global leaders in the crypto space”.

That conference attracted big names like former US President Bill Clinton and ex-British Prime Minister Tony Blair, who spoke on a panel moderated by Bankman-Fried.

Rolle, the Securities Commission executive director, who was also a panelist at the conference, said regulators such as the commission will have to be “nimble” in moving with the pace of the evolutions in the digital assets space.

She explained though that companies hoping to operate in this jurisdiction under the DARE Act will be subject to thorough scrutiny.

“Expect that we should conduct robust due diligence,” Rolle said.

“They also should expect that we will conduct a thorough assessment of their operation…What we really want to see is that your operational capacity has been thought through thoroughly and that you’re able to address issues like how you’re protecting client assets from loss due to theft or fraud.”

In the wake of FTX’s unfolding troubles, many people in many places are wondering how sharp-minded regulators did not see this coming.

Naturally, there are legitimate questions about reputational damage for The Bahamas and concerns about whether there was proper oversight of FTX as it operated in our jurisdiction.

Other questions have to do with whether there could still be a viable digital assets industry in The Bahamas after this collapse.

In a column in today’s publication, Hubert Edwards, who specializes in governance, risk and compliance, accounting and finance, opines that while the potential failure of FTX represents a bump in the path of The Bahamas in its effort to establish itself as a major digital asset center, nothing about this development is anywhere near fatal.

Edwards writes, “…the vision for digital assets leadership remains viable and what is transpiring should be seen as a defining and refining of the options that are viable for pursuit.”

The Securities Commission said yesterday that since the unfolding of events involving FTX Digital Markets, the commission has “proactively dealt with the situation and continues to do so”.

We imagine that internally, the regulators are assessing what, if anything, they could have done differently to avoid the concerning and embarrassing position they and the country are in as the mess that is FTX hits the fan in astounding fashion.

Starry-eyed government officials who rolled out the red carpet for FTX must also examine whether there is a need to strengthen their much-touted policies to avoid further damage to our cherished jurisdictional brand.

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