The Bahamas, FTX and the limits of offshore crypto markets

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

In case you’re a crypto enterprise within the US, there’s a excessive likelihood this 12 months your administration staff has mentioned leaving for a rustic much less hostile to what you’re attempting to do.

Rightly or wrongly, American authorities have clearly determined they don’t like most of the trade’s practices. In case you’re working one in every 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 modern and experimental. Now it’s important to show why you’re not brazenly 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 change run by the Winklevoss twins, introduced it would launch a crypto derivatives market, open to customers in lots of nations (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 12 months in the past (sure, actually!) that now defines the height of the crypto bubble.

It’s not a spot that’s notably welcoming to folks eager 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 recent go round.

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

Of specific observe is a concentrate on “new regulatory frameworks”, together with one essential level: ensuring service suppliers are capable of return consumer belongings and preserve procedures to make sure these belongings are protected. Hindsight is an excellent factor, isn’t it?

It’s one thing of an about-turn for The Bahamas, which was dashing to defend itself as FTX fell aside. Solely six months in the past Prime Minister Philip Davis stated: “Primarily based on the evaluation and understanding of the FTX liquidity disaster to this point, we have now 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 obligatory, given such a powerful defence of his nation’s legal guidelines. I didn’t obtain a response.

In truth the island had already began to look once more at its guidelines. The Securities Fee of The Bahamas stated it started reviewing its laws in April 2022, months earlier than FTX’s collapse. It has additionally engaged legislation agency Hogan Lovells — which can 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 acquainted with Bahamian laws instructed me through electronic mail that “because the digital belongings house developed and new dangers turned obvious, notably following the crypto winter of 2022, it turned essential to replace the legislative framework”, including it “is just not 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 save lots of face internationally, there comes some extent when even probably the most “progressive” regulators raises the barrier.

What’s your tackle The Bahamas’ recent method to crypto guidelines? As at all times, electronic mail me at scott.chipolina@ft.com.

Be part of me and FT colleagues on the FT’s Crypto and Digital Belongings Summit on Could 9-10 as we talk about 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 Trade Fee. Register in your go 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 integrated within the British Virgin Islands however whose buyers have been largely from the British Abroad Territory. I revealed that liquidators are trying to find $43mn in lacking funds, and not less than one sitting member of Gibraltar’s parliament was an investor. Learn my scoop here.
On Thursday the UK stated it might assessment the best way it collected taxes on trades in decentralised finance, which normally includes lending and staking of crypto belongings. The session follows a sweeping new regulatory regime proposed by the UK earlier this 12 months 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 big Binance — deserted its proposed $1bn acquisition of belongings belonging to Voyager Digital, a crypto lender that went bankrupt final 12 months. The change tried for months to persuade regulators to offer the deal the inexperienced mild, together with the Committee on International Funding within the US, which was reviewing the deal for potential safety dangers. Ultimately, Binance US gave up, blaming . . . you guessed it, a “hostile and unsure regulatory local weather in america”.
A small windfall for FTX: the bankrupt change has agreed to promote its futures and clearing enterprise LedgerX LLC to inventory and derivatives change MIAX for $50mn. One takeaway from this: LedgerX was absolutely US regulated, with a licence from the Commodity Futures Buying and selling Fee, making it extra viable than different elements 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 known 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’ll be able to learn all concerning the case through the BLDF web site here.

Soundbite of the week: Coinbase lays out its SEC defence

This 12 months Coinbase obtained a Wells Discover from the Securities and Trade 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 approach.

Correspondence can be normally saved personal however Coinbase has opted to combat it out in public. This week it printed its response, laying out why it thought the regulator is flawed. 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 listing securities then, and we nonetheless don’t. We’d prefer to sooner or later, however the SEC has nonetheless not complied with the legislation by offering firms like Coinbase with a technique to register to have the ability to do this.”

Knowledge mining: Stablecoins in decline

International regulators have lengthy fearful 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 information analytics platform CCData, the overall circulating worth of stablecoins has been declining for greater than a 12 months. In April, the overall 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 present greater than $80bn tethers in circulation, up from $66bn at first of the 12 months.

In distinction Circle’s USDC, lengthy thought-about Tether’s chief rival, has completed 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 way of the market final summer time.