Caribbean & Central America - February 2023

If you are a small Caribbean Island jurisdiction which is heavily reliant on tourism, the arrival of a multi-billion dollar crypto exchange, bringing in new revenues and firing up the local tech start-up community sounds like it has to be a good thing. But if that exchange is called FTX and it goes bankrupt in spectacular fashion, the calculation of costs and benefits begins to look rather different.

FTX moved its global headquarters to The Bahamas in 2021. After an initial and extended honeymoon period, during which the company invested heavily in local start-ups, things went suddenly sour. In 72 hours of panic in November, some US$6bn of investor funds were withdrawn. A rescue package by Binance, a rival crypto exchange, failed. Bahamas and US-based FTX companies and subsidiaries, including Alameda Research, filed for bankruptcy. Company founder Sam Bankman-Fried was arrested in The Bahamas in December, accused of orchestrating an “epic” fraud and is now facing criminal charges in the US. The company’s overall finances remain opaque, but the latest estimates are that after being valued at US$32bn in 2021, a total of around US$8bn of customer funds remain “missing”. For comparison, the entire GDP of The Bahamas, which has a population of 410,000 people, is around US$11bn.

One immediate problem posed by the collapse is whether local companies and suppliers – everyone from hoteliers and real estate agents through to luxury car salespeople - have been left with massive unpaid bills. Resolving this has not been helped by mutual mistrust and animosity between US-based and Bahamian liquidators. At one stage the Bahamian authorities claimed seized assets on the islands totalled US$3.5bn, while US lawyers and liquidators said they were as little as US$170m. It also matters whether assets were held in trust (which means they must be returned to their rightful owners) or were beneficially owned by FTX (meaning they can be sold to help pay off creditors). Initial research by Bahamian journalists suggests the number of suppliers left out of pocket is in reality manageable, but there could still be unpleasant surprises.

For the Bahamian government there are at least three levels of reputational risk to consider. One is whether crypto exchanges like FTX are simply beyond the pale and should never have been welcomed into the country in the first place.  One exponent of that view is economist Nouriel Roubini, a professor of economics at Stern School of Business, New York University, in the US, whose searing opinion is: “Literally 99% of crypto is a scam. A criminal activity. A total real-bubble Ponzi scheme that is going bust”. If that is true, the Bahamian government made a major misjudgement. At a second level, however, FTX can be seen as “one bad apple” in a “new frontiers” industry which is going through growing pains but can still offer real world benefits. Indeed, in the current global “crypto winter” the sector may retrench around stablecoins and other less volatile assets. If that’s true, Bahamians can still claim to have positioned themselves to benefit from a high-growth, hi-tech sector. At a third level Bahamian regulators could be deemed essentially untainted by the crash – after all, a certain proportion of companies always fall into bankruptcy even in the best managed and regulated jurisdictions.

Not surprisingly perhaps, the authorities in Nassau believe their regulatory approach has been adequate.  Since 2020 the industry has been regulated by the Digital Assets and Registered Exchanges (DARE) Act which sets the rules for dealing in crypto, including AML/CFT (Anti-Money Laundering/Combating the Financing of Terrorism) measures. It has also experimented with a CBDC (Central Bank Digital Currency) known as the Sand Dollar. Prime Minister Philip Davis said in November that DARE remained valid and that current rules empower regulators to take “immediate steps in order to protect the interests of clients, creditors, and other stakeholders globally.” He added he was confident Bahamas would emerge from the FTX affair “with an enhanced reputation as a solid digital assets jurisdiction”.

Opposition sceptical

Leader of the opposition Michael Pintard has nevertheless questioned whether sufficient due diligence was conducted on FTX, and whether the company developed an unhealthy relationship with local politicians.