Among the many many beautiful statements made by FTX’s chief government, John J. Ray III, shortly earlier than the arrest of Sam Bankman-Fried, the disgraced founder and ex-CEO of the bankrupt Bahamas cryptocurrency change, one stood out: “Mr. Bankman-Fried, whose connections and monetary holdings within the Bahamas stay unclear to me, lately acknowledged to a reporter on Twitter, ‘F— regulators, they make every part worse,’” Ray noticed in a declaration to the U.S. Chapter Court docket for the District of Delaware.
Then got here the kicker: Bankman-Fried, ensconced in his princely Bahamas digs, cursing the regulators, had “advised the subsequent step for him,” in line with Ray, “was to win a jurisdictional battle versus Delaware.”
In different phrases, Bankman-Fried, the 30-year-old crypto wunderkind from California accused by U.S. authorities of cash laundering, defrauding clients and lenders, committing securities and commodities conspiracy, and violating campaign-finance legal guidelines, appears to have been below the impression that he may sidestep U.S. companies, regulators, and regulation enforcement from his beachy tax shelter idyll.
He seems to have been mistaken. However the story of FTX is simply the newest flashpoint in a litany of crypto controversies over the previous few years during which the monetary secrecy of tax shelters has featured prominently.
The now-defunct hedge fund Three Arrows Capital was based mostly in Singapore, however final yr it registered within the British Virgin Islands as its founders infamously plunked down $50 million for a 170-foot yacht — christened the “A lot Wow” — whereas the fund slid out of business. Earlier than the FTX debacle, one of many largest cryptocurrency flameouts of 2022 erupted when the value of Terra’s Luna token spiked, then dropped to almost zero, with its creator, Terraform Labs, working from the favored crypto tax shelter of South Korea.
Taking part in hide-and-seek amongst crypto’s toy villages, the truth is, has turn out to be a hallowed pastime. Tether and its Bitfinex cryptocurrency change, charged by the U.S. Commodity Futures Buying and selling Fee with critical regulatory violations and compelled to pay tens of hundreds of thousands in civil fines in 2021, is owned and operated by iFinex, based mostly in Hong Kong and registered within the British Virgin Islands. In the meantime, Binance additionally dodged questions for years about precisely the place it was based mostly, with many believing it was in Malta earlier than it was revealed that the crypto change was registered within the Cayman Islands. (When requested straight at a convention the place his firm was based mostly, Binance’s co-founder and CEO, Changpeng Zhao, refused to say, quipping, “That is the great thing about blockchain, proper, so that you don’t must … like, the place’s the Bitcoin workplace, as a result of Bitcoin doesn’t have an workplace.”)
The checklist of offshore crypto cataclysms traces way back to crypto itself. Nonetheless, FTX stands out as the worst but. FTX was arrange as an change in Hong Kong in 2019 earlier than shifting on to the Bahamas in 2021. However its holding firm, FTX Buying and selling Ltd., was based mostly in St. John’s, the capital of the Caribbean twin-island nation of Antigua and Barbuda, which declined to offer FTX a buying and selling license, citing regulators’ failure to grasp FTX’s enterprise mannequin. Late final yr, Antigua and Barbuda’s prime minister, Gaston Browne, stated that denying FTX a buying and selling license had “spared us some embarrassment.” All of those locations are famend crypto tax havens. Bankman-Fried’s arrest on December 12 by the Royal Bahamas Police Power and extradition to the U.S. on December 21 — the darkest day of the yr, in daylight and, arguably, for crypto — was an unqualified shambles. Astonishment gripped the courtroom as Bankman-Fried, his palms shaking, demanded to see the federal indictment towards him earlier than consenting to his extradition. His Bahamian lawyer expressed abject shock that his shopper had in some way managed to emerge from jail to make an sudden public look. Initially, Bankman-Fried and his authorized crew indicated that he would resist extradition, as Bahamian and U.S. authorities wrangled over who would take cost of the mess and FTX’s sprawling crypto belongings.
That tug of conflict is way from over, as authorities, each onshore and off, wrestle to disentangle FTX’s belongings from buyer funds following the November collapse of Bankman-Fried’s $32 billion crypto empire. Bankman-Fried returned to the U.S., the place the Federal Bureau of Investigation took him into custody, however by the brand new yr he was already out on bail and cloistered at his mother and father’ Palo Alto, California, residence, below home arrest, chatting up the likes of best-selling creator Michael Lewis, doing interviews with journalists and crypto influencers, and, in line with Ray, persevering with to make “erratic and deceptive public statements” about how his firm went pear-shaped and who’s accountable.
Final week, Bankman-Fried pleaded not responsible to all eight counts of the U.S. felony prices leveled towards him. A trial has been set for October. The Securities and Change Fee and the Commodity Futures Buying and selling Fee additionally introduced prices, with the SEC accusing him of defrauding traders and clients alike, and the CFTC alleging his actions led to the estimated lack of $8 billion of buyer deposits. Excessive-level executives at FTX who labored carefully with Bankman-Fried have pleaded responsible to federal felony prices in reference to the FTX collapse and have agreed to cooperate with prosecutors as key witnesses to the alleged crimes. If convicted on all prices, Bankman-Fried faces as much as 115 years in jail.
With the indefatigable Bankman-Fried girding for a struggle and FTX’s information spotty at greatest, this case might drag on for years. Ray, an insolvency lawyer who’s labored on a few of the largest company failures in historical past (from Nortel Networks to Enron), has known as the FTX chapter “unprecedented” in his 40 years of authorized and restructuring expertise, citing “an entire failure of any inside controls or governance by any means.” Data have been so horrendous at FTX, he informed lawmakers throughout his December congressional testimony, that “we’re, in lots of respects, ranging from near-zero when it comes to the company infrastructure and record-keeping that one would look forward to finding in a multibillion-dollar worldwide enterprise.”
The scope of the investigation is big, with Ray assembling a crew of forensic analysts, investigators, tax consultants, and cybersecurity specialists to trace cash flows and asset transfers amongst FTX’s convoluted net of entities spanning the globe, which Ray stated contains billions of particular person transactions and dozens of terabytes of knowledge. With the FTX corporations situated in so many far-flung locations, his crew is particularly centered on cross-border recoveries, defending digital belongings towards the chance of theft and unauthorized transfers whereas additionally maximizing the worth of the belongings recovered for FTX traders and clients. “We’re working across the clock to find and safe the property of the property, a considerable portion of which can be lacking, misappropriated, or not readily traceable because of the lack of correct record-keeping,” he stated.
The mix of crypto — a phrase actually derived from the phrase “crypt,” which means “secret” or “hidden” — and tax shelters, which supply monetary secrecy, tax optimization, and, as typically as not, questionable authorized malleability for the correct value, proves a poisonous brew when crypto corporations go below. Regulators are loath to confess it, nevertheless it’s a near-impossible job to unwind the Gordian knot. “It’s going to take properly over a decade to scrub this mess up,” James Angel, an affiliate professor of finance at Georgetown College who focuses on international monetary markets, informed Institutional Investor. “Whereas lots of people try to observe the foundations, some will go to the jurisdictions the place the regulators will ask the fewest questions, whether or not you’re operating an unlawful tax shelter or an almost-legitimate crypto scheme.”
Within the case of FTX, the November chapter filings confirmed 134 entities and associates based mostly in tax havens resembling Delaware and South Dakota, but additionally low-to-no-tax secrecy jurisdictions throughout the globe, together with the British Virgin Islands, Antigua and Barbuda, the Bahamas, the Cayman Islands, Panama, the Seychelles, Turkey, Nigeria, Australia, Singapore, South Korea, Japan, Hong Kong, and others.
FTX’s entities had extremely advanced possession constructions and have been deeply intertwined — a lot in order that when Bankman-Fried signed over management of what he known as FTX’s “high corporations” to Ray as FTX’s new CEO, the spelling of the identify of one of many seven entities didn’t match the spelling in different paperwork filed (the entity appeared as Cedar Grove Applied sciences Providers Ltd. on Bankman-Fried’s signing web page and as Cedar Grove Know-how Providers Ltd. within the company possession assertion). Whereas there’s nothing inherently suspicious a few misspelling, it reveals simply how jumbled the checklist of even FTX’s high corporations acquired.
When grouped into 4 silos representing FTX’s predominant enterprise traces, all have been managed by Bankman-Fried, Ray acknowledged in his declaration to the U.S. Chapter Court docket. The truth that this intricate hierarchy, fastidiously traced, leads again to Bankman-Fried and his inside circle of colleagues — lots of them residing offshore in a luxurious resort along with their palms on the levers — highlights why the secrecy of crypto and tax shelters, taken collectively, is a harmful pairing. “FTX Group’s collapse seems to stem from absolutely the focus of management within the palms of a really small group of grossly inexperienced and unsophisticated people who did not implement just about any of the techniques or controls which might be crucial for an organization that’s entrusted with different individuals’s cash or belongings,” Ray informed lawmakers in his testimony.
Every of FTX’s 4 traces of enterprise, Ray defined, are embroiled within the quagmire. They’re: FTX U.S., a spot buying and selling and digital asset change serving an estimated 1 million American customers; Alameda Analysis LLC, FTX’s crypto hedge fund, which claimed belongings of $13.5 billion on the finish of September (this determine Ray doesn’t belief, as FTX’s information have been poor); FTX entities Clifton Bay Investments LLC and FTX Ventures Ltd., which housed personal investments totaling greater than $2 billion on the finish of September (one other determine Ray stated he doesn’t belief, as some information are lacking); and FTX’s Bahamas digital asset buying and selling platform and change, run by FTX Buying and selling Ltd., based mostly in St. John’s in Antigua and Barbuda.
Whereas particulars stay scant, Ray’s early findings present that the Bahamas-based cryptocurrency change, working offshore below the model identify FTX.com, was behind a lot of the difficulty, dipping into billions of {dollars} of buyer funds for use for discretionary buying and selling and investments by FTX’s crypto hedge fund, Delaware-based Alameda Analysis, based in 2017 and FTX’s unique entity. Each have been managed by Bankman-Fried, in line with Ray, with transactions involving almost 500 investments from FTX funds and belongings missing full documentation.
As is well-known throughout Wall Avenue, taking clients’ funds with out their permission or information is a 3rd rail for any monetary agency. It cannot solely completely wreck one’s profession, but additionally result in a prolonged jail sentence, such because the one Bankman-Fried is now dealing with. FTX, below the path of Bankman-Fried, is accused of commingling buyer cash with FTX’s personal company funds for years, with Alameda “borrowing” funds held at FTX.com, in line with Ray, “to be utilized for its personal buying and selling or investments with none efficient limits.” That is how one of many world’s largest cryptocurrency exchanges left an estimated 1 million collectors world wide dealing with billions of {dollars} in losses.
“The dimensions of the misuse of buyer funds right here is unprecedented,” says Campbell Harvey, a professor of finance who focuses on blockchain and decentralized finance at Duke College. “As a result of a lot of it’s a paperless path, it’s extraordinarily troublesome to do the forensics on this. That is offshore, so there’s mainly no oversight, nevertheless it’s not essentially a problem of being offshore as a lot because it being opaque.”
All through the chapter proceedings, Ray made no secret of his mistrust of Bahamian authorities, a lot to their chagrin. His references to Bankman-Fried’s “connections” and “monetary holdings” within the Bahamas in his declaration to the U.S. Chapter Court docket was a tacit acknowledgement of his comprehensible concern that Bankman-Fried’s erstwhile billions might have had some sway over the island nation’s authorities and regulators. Certainly, the Bahamian authorities acquired info as early as November 9, two days earlier than FTX filed for chapter within the U.S., about FTX’s commingling of buyer funds when the previous co-CEO of FTX Digital Markets, Ryan Salame, informed Christina Rolle, government director of the Securities Fee of the Bahamas, throughout a cellphone name that buyer funds have been getting used to “cowl monetary losses of Alameda,” in line with a court filing. However Bankman-Fried’s arrest within the Bahamas happened greater than a month later, solely after the U.S. lawyer for the Southern District of New York shared a sealed indictment with the Bahamian authorities.
The Securities Fee of the Bahamas suspended FTX Digital Markets’ license and, reportedly with Bankman-Fried’s help, seized the Bahamas-based change’s digital belongings, consisting of FTX tokens, Ethereum, and different cryptocurrencies. The Bahamas regulators valued the haul at $3.5 billion in mid-November, however FTX’s new management within the U.S. issued a statement final week claiming the quantity had in some way shrunk to $167 million, based mostly on spot costs of the belongings, and did “not have substantial worth.” FTX’s management demanded that the Securities Fee of the Bahamas “clear up any confusion created by their latest statements and supply the general public with correct info in regards to the cryptocurrency seized and the way it was valued.”
It’s price noting that Bahamas-based FTX Digital Markets was one of many solely solvent subsidiaries of the Antigua-based FTX Buying and selling Ltd. holding firm on the time of FTX’s November chapter submitting — therefore the tussle between the Bahamas and the U.S., each of that are jockeying to guard billions of {dollars} of buyer funds and belongings.
This is likely one of the nice drawbacks of utilizing an offshore crypto change, warns Duke’s Harvey. Whereas offshore hedge funds and different corporations cater to high-end purchasers who can afford to do their due diligence, change traders and clients might not have the identical luxurious. “Should you’re a buyer investing in an offshore, unregulated change and there’s no insurance coverage, no protections, why would you need to take that threat?” he says.
Mounting tensions between the U.S. and the Bahamas got here to a head amid hacks and the theft of a whole lot of hundreds of thousands of {dollars} at FTX because it filed for chapter, with Ray accusing the Bahamian regulators of violating U.S. chapter procedures and the Securities Fee of the Bahamas complaining that Ray’s public feedback had “the impression of selling distrust of public establishments within the Bahamas.” The 2 sides lastly got here to a détente on the finish of final week, agreeing to cooperate to maximise the restoration of belongings for traders, change clients, and different stakeholders. Whereas the deal was topic to the approval of each the U.S. Chapter Court docket and the Supreme Court docket of the Bahamas, Ray stated it supplied a “path ahead” to resolve excellent variations, though “there are some points the place we don’t but have a gathering of the minds.”
This week, FTX’s legal professionals told the decide presiding over the Delaware chapter that greater than $5 billion of money and different liquid belongings have been situated at FTX, with the corporate additionally planning to promote greater than 300 different non-strategic investments price a further $4.6 billion. The belongings mirror a e book worth courting again to FTX’s chapter submitting in November, so could also be topic to alter. They’re additionally separate from an estimated $425 million of belongings held by the Bahamian authorities, FTX’s legal professionals stated. How a lot all of it is going to be price by the point the liquidations and fireplace gross sales have been accomplished is anyone’s guess.
All of that is to be anticipated when so many tentacles of a crypto empire reside offshore. Contemplating how a lot was hidden from view, Georgetown’s Angel argues that if Bankman-Fried had made a killing offshore by way of FTX, minting billions as a substitute of shedding them, it’s potential nobody would have been the wiser.
“As an engineer from a tech college myself, I can sort of sympathize with a bunch of individuals from very sharp colleges who assume they know every part,” Angel says. “The issue even sensible individuals have is that they don’t know what they don’t know. These guys have been shifting so quick, nobody was trying over their shoulder. If Sam Bankman-Fried’s bets had labored out, he would have been hailed as a visionary.”
