The Bahamas, FTX and the limits of offshore crypto markets

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Hi there and welcome to the most recent version of the FT Cryptofinance e-newsletter. This week, we’re speaking about The Bahamas, as soon as everybody’s favorite “crypto hub.”

In the event you’re a crypto enterprise within the US, there’s a excessive probability this yr your administration workforce has mentioned leaving for a rustic much less hostile to what you’re making an attempt to do.

Rightly or wrongly, American authorities have clearly determined they don’t like lots of the business’s practices. In the event you’re working considered one of these companies, it’s fairly a comedown from the times when the doorways have been held open and also you have been seen as progressive and experimental. Now it’s important to show why you’re not overtly flouting federal legal guidelines.

Fortunately there are nonetheless some locations that welcome you. Final week Coinbase obtained a licence in Bermuda and this week Gemini, the alternate run by the Winklevoss twins, introduced it would launch a crypto derivatives market, open to customers in lots of international locations (however not China, the EU, UK, Japan and definitely not the US). Its location has but to be revealed.

However even these pleasant locations could not keep fairly as welcoming for lengthy. Take The Bahamas, the place FTX was primarily based and hosted a blowout, no-expense-spared conference solely a yr in the past (sure, actually!) that now defines the height of the crypto bubble.

It’s not a spot that’s significantly welcoming to individuals desirous to ask about sources of wealth and regulatory requirements, as I found back in November — however it’s troublesome to dismiss the legacy Sam Bankman-Fried has left behind.

The FTX saga left a major black spot on its ambition to develop into a hub for digital belongings, a lot in order that regulators are rewriting their crypto legal guidelines for a contemporary go round.

On Tuesday the markets regulator started a session on guidelines that “strengthens monetary and reporting necessities for digital asset companies”.

Of specific be aware is a deal with “new regulatory frameworks”, together with one essential level: ensuring service suppliers are capable of return shopper belongings and keep procedures to make sure these belongings are protected. Hindsight is a superb factor, isn’t it?

It’s one thing of an about-turn for The Bahamas, which was speeding to defend itself as FTX fell aside. Solely six months in the past Prime Minister Philip Davis mentioned: “Primarily based on the evaluation and understanding of the FTX liquidity disaster up to now, now we have not recognized any deficiencies in our regulatory framework that might have averted this.”

I requested the PM’s workplace this week why new laws was mandatory, given such a powerful defence of his nation’s legal guidelines. I didn’t obtain a response.

In reality the island had already began to look once more at its guidelines. The Securities Fee of The Bahamas mentioned it started reviewing its laws in April 2022, months earlier than FTX’s collapse. It has additionally engaged regulation agency Hogan Lovells — which can also be lobbying for Binance US’s pursuits in Washington DC — to start drafting new legal guidelines, though it didn’t say when the work started. The SCB didn’t reply to a request for remark.

An individual conversant in Bahamian rules instructed me through e-mail that “because the digital belongings area developed and new dangers turned obvious, significantly following the crypto winter of 2022, it turned essential to replace the legislative framework”, including it “shouldn’t be uncommon for regulation to be reactive to rising threats”.

That’s true; however it’s additionally a reminder that if the selection is between welcoming crypto firms and toughening your requirements to avoid wasting face internationally, there comes some extent when even probably the most “progressive” regulators raises the barrier.

What’s your tackle The Bahamas’ contemporary method to crypto guidelines? As all the time, e-mail me at scott.chipolina@ft.com.

Be a part of me and FT colleagues on the FT’s Crypto and Digital Property Summit on Might 9-10 as we focus on the place the digital belongings market is heading. Additionally showing on the occasion would be the UK’s financial secretary to the Treasury Andrew Griffith and Hester Peirce of the US Securities and Change Fee. Register to your cross here.

Weekly highlights

From one “crypto hub” to a different: I wrote about my house Gibraltar being compelled into the highlight by the failure of Globix, a cryptocurrency dealer included within the British Virgin Islands however whose traders have been principally from the British Abroad Territory. I revealed that liquidators are trying to find $43mn in lacking funds, and a minimum of one sitting member of Gibraltar’s parliament was an investor. Learn my scoop here.
On Thursday the UK mentioned it might evaluate the way in which it collected taxes on trades in decentralised finance, which often includes lending and staking of crypto belongings. The session follows a sweeping new regulatory regime proposed by the UK earlier this yr and is one other signal of the federal government’s will to show the UK right into a crypto hub.
Binance US — the American arm of offshore large Binance — deserted its proposed $1bn acquisition of belongings belonging to Voyager Digital, a crypto lender that went bankrupt final yr. The alternate tried for months to persuade regulators to present the deal the inexperienced mild, together with the Committee on Overseas Funding within the US, which was reviewing the deal for potential safety dangers. In the long run, Binance US gave up, blaming . . . you guessed it, a “hostile and unsure regulatory local weather in the USA”.
A small windfall for FTX: the bankrupt alternate has agreed to promote its futures and clearing enterprise LedgerX LLC to inventory and derivatives alternate MIAX for $50mn. One takeaway from this: LedgerX was totally US regulated, with a licence from the Commodity Futures Buying and selling Fee, making it extra viable than different components of the previous Bankman-Fried empire. John Ray III, who took over as FTX chief, said the deal was an “instance of our persevering with efforts to monetise belongings to ship recoveries to stakeholders”.
A Jack Dorsey-backed non-profit referred to as the Bitcoin Authorized Protection Fund (BLDF) is co-ordinating the defence of bitcoin builders focused in lawsuits by Craig Wright, who has claimed — with out proof — to be the id behind bitcoin’s pseudonymous creator Satoshi Nakamoto. You may learn all concerning the case through the BLDF web site here.

Soundbite of the week: Coinbase lays out its SEC defence

This yr Coinbase obtained a Wells Discover from the Securities and Change Fee, America’s chief monetary markets watchdog. These notices are uncomfortable as a result of they inform an organization that an enforcement motion might be coming its means.

Correspondence can also be often stored non-public however Coinbase has opted to struggle it out in public. This week it revealed its response, laying out why it thought the regulator is fallacious. Coinbase’s chief authorized officer Paul Grewal sums it up as:

“Coinbase is similar firm that we have been when the SEC allowed us to develop into public two years in the past . . . we didn’t record securities then, and we nonetheless don’t. We’d wish to sooner or later, however the SEC has nonetheless not complied with the regulation by offering firms like Coinbase with a approach to register to have the ability to try this.”

Information mining: Stablecoins in decline

World regulators have lengthy anxious that stablecoins might develop to a dimension the place they pose a substantial threat to monetary stability. That makes good sense in fact; however proper now the stablecoin market goes within the different course.

In accordance with numbers supplied by knowledge analytics platform CCData, the whole circulating worth of stablecoins has been declining for greater than a yr. In April, the whole stablecoin market cap fell greater than 1 per cent to $131bn, its lowest level since September 2021.

And whereas the market shrinks, Tether continues to tighten its grip. There are at the moment greater than $80bn tethers in circulation, up from $66bn in the beginning of the yr.

In distinction Circle’s USDC, lengthy thought-about Tether’s chief rival, has executed nothing however shrink (and briefly de-peg during a time of crisis). On the time of writing there are simply $30bn USDC tokens in circulation, a far cry from the $55bn flowing by the market final summer time.