The Bahamas, FTX and the limits of offshore crypto markets

Howdy 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.”

For those who’re a crypto enterprise within the US, there’s a excessive probability this yr your administration group 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 lots of the business’s practices. For those who’re operating considered one of these companies, it’s fairly a comedown from the times when the doorways had been held open and also you had been seen as revolutionary and experimental. Now it’s a must 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 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 folks eager to ask about sources of wealth and regulatory requirements, as I found back in November — nevertheless it’s tough to dismiss the legacy Sam Bankman-Fried has left behind.

The FTX saga left a big black spot on its ambition to grow to be a hub for digital property, 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 explicit notice is a concentrate on “new regulatory frameworks”, together with one essential level: ensuring service suppliers are capable of return consumer property and keep procedures to make sure these property 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, we have now not recognized any deficiencies in our regulatory framework that would have prevented this.”

I requested the PM’s workplace this week why new laws was crucial, 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 accustomed to Bahamian rules informed me by way of e mail that “because the digital property house advanced and new dangers grew to become obvious, significantly following the crypto winter of 2022, it grew to become essential to replace the legislative framework”, including it “shouldn’t be uncommon for regulation to be reactive to rising threats”.

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

What’s your tackle The Bahamas’ contemporary strategy 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 property 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 on your move here.

Weekly highlights

From one “crypto hub” to a different: I wrote about my residence Gibraltar being pressured into the highlight by the failure of Globix, a cryptocurrency dealer included within the British Virgin Islands however whose traders had 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 could assessment the way in which it collected taxes on trades in decentralised finance, which often entails lending and staking of crypto property. 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 big Binance — deserted its proposed $1bn acquisition of property belonging to Voyager Digital, a crypto lender that went bankrupt final yr. 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 the USA”.
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 property 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 possibly can learn all concerning the case by way of 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 method.

Correspondence can also be often saved personal however Coinbase has opted to combat it out in public. This week it revealed 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 had been when the SEC allowed us to grow to be public two years in the past . . . we didn’t listing 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 corporations like Coinbase with a method to register to have the ability to do this.”

Information mining: Stablecoins in decline

International regulators have lengthy apprehensive that stablecoins might develop to a measurement the place they pose a substantial danger to monetary stability. That makes good sense after all; however proper now the stablecoin market goes within the different route.

Based on numbers offered by knowledge analytics platform CCData, the overall circulating worth of stablecoins has been declining for greater than a yr. 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 the moment greater than $80bn tethers in circulation, up from $66bn at first of the yr.

In distinction Circle’s USDC, lengthy thought of 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 way of the market final summer time.