Bahamas Regulators Seize FTX Funds as Jurisdictional Battle Looms
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Bahamas Regulators Seize FTX Funds as Jurisdictional Battle Looms

Created 1yr ago, last updated 1yr ago

Bahamas regulators seek to take partial if not total control of the proceedings from U.S. courts, outraging FTX’s newly appointed restructuring management team.

Bahamas Regulators Seize FTX Funds as Jurisdictional Battle Looms

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The Securities Commission of The Bahamas said it has seized a huge chunk of bankrupt crypto exchange FTX’s funds as it seeks to take partial if not total control of the proceedings from U.S. courts, outraging FTX’s newly appointed restructuring management team.

Revelations that the Securities Commission of The Bahamas quietly seized funds belonging to one part of Sam Bankman-Fried’s sprawling FTX empire on Saturday are adding confusion and chaos to an already unsettled bankruptcy process.

That appears to have outraged the new management of the main FTX Group responsible for guiding Bankman-Fried’s more than 130 companies (including FTX and FTX US exchanges and trading firm Alameda Research) through bankruptcy to distribute what is left of customers’ money.

Under Bankman-Fried, FTX allegedly illegally loaned billions of dollars of client funds in its custody to Alameda Research, which then lost the money.

In a Nov. 17 press release, the Commission said that acting under an order issued by the Supreme Court of The Bahamas, it “took the action of directing the transfer of all digital assets of FTX Digital Markets Ltd. ("FDM") to a digital wallet controlled by the Commission, for safekeeping. Urgent interim regulatory action was necessary to protect the interests of clients and creditors of FDM.”

It could be as much as $186 million.

That action was taken on Saturday, Nov. 12, a chaotic day in which allegations that FTX had allowed someone in the Bahamas to reopen withdrawals after they had been frozen were at the time seen as a potential move by company insiders to empty their own accounts. FTX at the time said it had been done at the order of Bahamian authorities.

Who’s in Charge?

On Nov. 12, the Securities Commission of The Bahamas (SCB), tweeted a statement saying that it had “not directed, authorized or suggested to FX Digital Markets Ltd. the prioritization of withdrawals for Bahamian clients.”

The SCB also said it would not prioritize that company’s clients, saying that doing so could “be characterized as voidable preferences under the insolvency regime and consequently result in clawing back funds from Bahamian customers.”

Two days later, the SCB called the bankruptcy proceedings “multijurisdictional in nature” and expressed its claim that it is “the lead authority in The Bahamas conducting the investigations into the events and parties, including, but not limited to, FTX Digital Markets Ltd. (a regulated entity), FTX Trading Ltd., Alameda Research Ltd. and other related entities… located in The Bahamas.”
The situation was confused further by what has been called a major hack on Nov. 12 that saw some $477 million stolen and move around in what experts have called a “panicky” fashion as an inexpert thief tries cover their tracks and exchange the stolen crypto for more liquid tokens — suggesting that the two fund drains are not related.

A total of $663 million was taken from FTX digital wallets at that time, and it was not clear what happened to the remaining $186 million.

The SCB has not said how much it seized.

Confusing the Issue

Things blew up on Nov. 16, when the SCB’s court-appointed liquidators filed a separate bankruptcy case in New York’s Southern District for FTX Digital Markets only. That was under Chapter 15 of the U.S. bankruptcy code — which asks the court to recognize foreign proceedings.

FTX Group’s new leadership under restructuring expert John Ray III filed an angry brief with the Delaware bankruptcy court on Nov. 17 asking it to take over that case, calling the Chapter 15 filing “a blatant attempt to avoid the supervision of this Court and to keep [FTX Digital Markets] isolated from the administration of the rest of the Debtors, which constitute the vast majority of the remainder of the FTX group.”

It also accused Bankman-Fried of supporting The Bahamas’ move.

Noting that Ray has called the state of FTX unprecedentedly chaotic to the point where it isn’t even sure how much and what kind of assets the company has, the company accused the SCB of “directing unauthorized access to the Debtors’ systems for the purpose of obtaining digital assets of the Debtors” — noting that the seizure took place after the Delaware Bankruptcy Court ordered all asset frozen.

The Bahamas has “flaunted” the Delaware court’s earlier stay freezing all assets of FTX, it complained, adding that jurisdictionally, FTX Digital Markets is a subsidiary of FTX Trading, which is registered in a different country, Antigua and The Barbudas.

Different Priorities

On Nov. 17, the SCB announced in a release that acting under an order by the Supreme Court of The Bahamas it had seized the FTX Digital Markets assets, saying two things.

First, that it acted to “protect the interests of clients and creditors” of FTX Digital Markets.

Second, it said that it “is not the understanding of the Commission that [FTX Digital Markets] is a party to the US Chapter 11 Bankruptcy proceedings.”

Meaning that the SCB wants to keep that case — and the assets it has seized — separate in order to “to obtain the best possible outcome” for the creditors, clients and stakeholders of [FTX Digital Markets].”

As opposed to the rest of FTX’s customers.

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