The collapse of cryptocurrency exchange FTX has opened a hornet’s nest of strife between foreign governments and their new US chief, John J. Ray III.
In Cyprus, the country’s securities regulator complains that Mr Ray’s decision to declare FTX bankrupt hampered investigations and prevented European customers from getting their money back. Officials in the Bahamas, where FTX moved its headquarters last year, have accused Mr. Ray of making false statements and suggest his team is motivated by the prospect of hefty legal fees. In Turkey, authorities have seized the assets of FTX’s local subsidiary in an affront to Mr. Ray’s efforts to get FTX’s assets into Delaware’s Chapter 11 trial.
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Such disputes reflect a disconnect between the global aspirations of cryptocurrencies and the hard facts of the law, whose powers often do not extend beyond a country’s borders. Proponents say the cross-border nature of crypto makes sending money to someone on the other side of the world as easy as sending an email, and many crypto firms have offered their services to clients around the world and are headquartered in offshore established jurisdictions. But laws designed to protect customers when things go wrong – and the bankruptcy regime in particular – are closely tied to national borders, and cross-border cooperation is never a guarantee.
And the bankruptcy of no crypto company has been more global than that of FTX. The company’s original bankruptcy filing listed more than 130 subsidiaries in countries ranging from Canada to Ghana to Japan. FTX generated about 95% of its revenue outside the United States, according to financial statements filed with the Wall Street Journal and FTX employees.
The outcome of the international disputes will decide how FTX clients could recover some of the billions of dollars in missing funds owed to them. Regulators in different countries are striving to ensure their citizens get healthy again. A broken result can result in some customers getting their entire money back while others get pennies on the dollar.
A spokeswoman for FTX entities that have filed for Chapter 11 said that since assuming control, the Debtors have developed cooperative relationships with many regulators in jurisdictions where FTX has operated and that they are working with the handful of regulators that have assumed , foreclosure actions have been working on a way forward since the company filed for bankruptcy.
On November 28, the head of the Cyprus Securities and Exchange Commission expressed his concerns about the bankruptcy process in a letter to Mr Ray, a copy of which was provided to the Journal. FTX’s European arm, FTX EU Ltd., was licensed in Cyprus, which allowed the crypto exchange to offer services elsewhere in the European Union’s single market.
More than a year before its collapse, FTX moved its headquarters to the Bahamas, a country that was working to attract crypto companies to its shores. So what makes the nation attractive to crypto? And how might FTX’s demise change that? Pictured: Adele Morgan
The head of the regulator, George Theocharides, wrote that his agency is investigating FTX for possible violations of securities laws. However, because FTX’s European staff were unable to access data from the exchange’s trading platform, now controlled by Mr. Ray, the Cypriot agency was unable to obtain the information needed for its investigation, nor respond to requests from other European regulators conducting their own Investigations, wrote Mr. Theocharides.
As of November 15, FTX EU had €47 million in client funds, equivalent to around US$49 million, Mr Theocharides said. The Cyprus securities regulator has ordered the company to return the money to customers, but the company has been unable to comply as its bank accounts are frozen by the Chapter 11 procedure, the chairman said.
Mr Theocharides also reminded Mr Ray “that the unlawful use of client funds could constitute a criminal offence”.
“CySEC’s priority is to protect investors while these investigations continue and ensure the proper return of appropriate client funds,” said a spokesman for the agency.
Mr. Ray was also embroiled in a diplomatic scuffle with regulators in the Bahamas who were attempting to handle FTX’s bankruptcy themselves.
On November 10, the Securities Commission of the Bahamas took steps to liquidate FTX Digital Markets, the entity that controls the company’s international exchange. The liquidators later ordered the entity’s crypto assets to be transferred to a digital wallet controlled by the Bahamian government.
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That didn’t sit well with Mr. Ray, whose lawyers effectively charged officials in the Bahamas with theft, saying that cryptos snatched from the Bahamas should belong to the FTX companies he currently controls. In court filings, they cited “credible evidence that the Bahamian government is responsible for directing unauthorized access… for the purpose of acquiring digital assets.”
The Bahamian government countered that Mr. Ray was making baseless allegations and said it would proceed with liquidating the FTX exchange. Officials in the Bahamas questioned his motives and ability to lead.
“It is possible that the prospect of multimillion-dollar charges is driving their legal strategy and improper statements,” Bahamas Attorney General Ryan Pinder said during a recent televised address.
Former FTX chief Sam Bankman-Fried – who faces multiple investigations into the loss of billions of dollars in client funds – has apparently sided with Bahamian officials. Mr Bankman-Fried said he had no intention of committing fraud and he did not knowingly commingle FTX client funds with Alameda Research, a crypto hedge fund he founded in 2017.
Problems could also be brewing for Mr. Ray in Turkey, where regulators have already decided to scrutinize the winding-up of FTX’s domestic subsidiary. On Nov. 19, Mr. Ray said FTX had identified a number of subsidiaries with valuable concessions that could be sold to raise money for the company’s creditors. One of them was FTX’s wholly-owned Turkish subsidiary, FTX Turkey Teknoloji Ve Ticaret AS, where the company found nearly $3.1 million in assets when it filed for bankruptcy, according to court documents.
Four days later, however, the Financial Crimes Agency of Turkey’s Ministry of Finance said it had seized FTX Turkey’s assets on suspicion that customer deposits were being transferred or taken abroad through fraudulent transactions and that non-existent crypto assets were being sold to customers. Istanbul’s chief prosecutor launched a criminal investigation into Mr Bankman-Fried and others linked to FTX, the ministry said.
—Elvan Kivilcim contributed to this article.
Write to Alexander Osipovich at [email protected], Alexander Saeedy at [email protected], and Alexander Gladstone at [email protected]
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