Crypto collapse: FTX headed for examiner, Bahamas crypto shenanigans

By Amy Castor and David Gerard

“the contagion effect of everyone noticing all the exchanges are insolvent” — SubG on SomethingAwful



Scam bank: man fried

As was fairly obvious would happen: Andrew Vara, the U.S. Trustee in the FTX bankruptcy, wants to appoint an examiner to find out what on earth was going on inside FTX. [Doc 176, PDF; WSJ, paywall]

John Jay Ray III, the acting CEO of FTX since the wee hours of 11 November,  will do some digging on his own, but an examiner is a neutral party — “although the U.S. Trustee does not question the qualifications, competence, or good faith of Mr. Ray.” Vara argues that if the examiner does the digging, then Ray and his team can get on with saving the businesses.

Vara invokes the 2008 financial crisis: “Like the bankruptcy cases of Lehman, Washington Mutual Bank, and New Century Financial before them, these cases are exactly the kind of cases that require the appointment of an independent fiduciary to investigate and to report on the Debtors’ extraordinary collapse.”

Vara thinks the secret ingredient was crime. “Was this an unsuccessful business or a successful fraud?” He lists several news reports alleging malfeasance by FTX management, including topping up FTX’s Alameda proprietary trading desk with FTX customer funds. He also lists the many failures of corporate control detailed in Ray’s first-day declaration:

An examiner could — and should — investigate the substantial and serious allegations of fraud, dishonesty, incompetence, misconduct, and mismanagement by the Debtors, the circumstances surrounding the Debtors’ collapse, the apparent conversion of exchange customers’ property, and whether colorable claims and causes of action exist to remedy losses.

Vara says that FTX must be put under examination under section 1104(c)(2) of the bankruptcy code, which mandates the appointment of an examiner when a debtor has over $5 million of unsecured debt. But he asks the judge to permit the assignment of an examiner even if he doesn’t agree that that holds.

Your funds are on a holiday in the sun

A few weird things happened in early November straight after the Bahamas court issued an order directing that FTX Digital be placed into provisional liquidation:

  • Some withdrawals from FTX were allowed for Bahamas residents.
  • Some cryptos were seized from FTX by the Bahamas government.
  • Some cryptos were hacked from FTX by unknown parties.

Local withdrawals: While the rest of the world had no access to their assets on FTX, some Bahamas entities began taking their cryptos out.

Said FTX on November 10: “Per our Bahamian HQ’s regulation and regulators, we have begun to facilitate withdrawals of Bahamian funds. As such, you may have seen some withdrawals processed by FTX recently as we complied with the regulators.” [Tweet, archive]

Some non-Bahamians even began withdrawing their FTX balances by buying NFTs from Bahamas accounts. [CNBC]

The Securities Commission of the Bahamas (SCB) said that, despite FTX’s claims, it had not authorized these local withdrawals. [Twitter; CoinDesk]

SBF finally admitted in his recent interview with Tiffany Fong that he let the locals get their cryptos out because “you do not want to be in a country with a lot of angry people in it.” [YouTube]

Bahamas seizure: Hours after Ray filed for bankruptcy on 11 November, creditors watched in horror as $372 million in funds were mysteriously siphoned out of FTX. At least some of this “hacking” turns out to have been part of a Bahamian government asset seizure.

Ryne Miller, FTX US general counsel, referred to it as “unauthorized access” and said FTX and FTX US had moved all the funds to cold wallets to secure the assets. [Twitter]

The SCB said on November 17 that it “took the action of directing the transfer of all the digital assets of FTX Digital Markets Ltd. to a digital wallet controlled by the commission, for safekeeping.” [Statement, PDF; Market Watch]

Hack: After some of the funds were moved, various low-volume altcoins were immediately swapped on decentralized exchanges for ETH. ZachXBT pointed out there were actually two groups involved in the November 11-12 hack — a white hat hacker and a black hat hacker. [Twitter]

In the initial run on FTX before bankruptcy, everyone took the most liquid cryptos out first. Bahamas insiders took out more of the liquid cryptos. Now what’s left to distribute to creditors is flotsam and jetsam. Any real dollars will be used to pay the remaining employees and the expensive bankruptcy professionals.

No, Mr. Bankman, I expect you to fry

The next omnibus hearings in the FTX bankruptcy will be on December 16 and January 11. [Doc 158, PDF; Doc 159, PDF]

Sam is busy spilling his guts to the press. So Congresswoman Maxine Waters, chair of the House Committee on Financial Services, has invited him to please do so in a Congressional hearing on 13 December. Sam says: “Once I have finished learning and reviewing what happened, I would feel like it was my duty to appear before the committee and explain. I’m not sure that will happen by the 13th,” he tweeted,  while wearing a hot dog costume. We suspect that won’t be good enough. [Twitter; Twitter]

In one of SBF’s previous Congressional appearances, on 8 December 2021, Rep. Tom Emmer said: “Thank you, Mr. Bankman-Fried, for helping us understand the extensive guardrails FTX has in place to protect investors from fraud and manipulation.” Emmer was one of the Blockchain Eight who told the SEC to back off on crypto firms in March 2022, and FTX was Emmer’s equal 10th place donor at $11,600 donated. Yes, just that little. [YouTube; Open Secrets]

Alameda lost $1 billion on a trade involving MobileCoin, the token of the Signal messaging app. They seemingly had to cover someone’s position during a huge spike in its price. Let none suggest that anything about this involved money laundering. [FT, archive]

Farmington State Bank was a tiny one-branch bank in Washington state, with three employees, very little business, and a net worth of $5.7 million. FTX invested $11.5 million into the bank’s parent company, FBH, which bought Farmington in 2020. FBH is chaired by Jean Chalopin, who our regular readers will know as the chairman of Deltec Bank, the Bahamas bankers to the Tether stablecoin. Farmington’s deposits jumped from $10 million to $84 million in the third quarter of 2022. It’s unclear how FTX was allowed to buy such a stake in the bank. [NYT]

Bankrupt CeFi lender Voyager Digital’s assets included 4,650,000 FTT and 63,750,000 SRM (Serum) tokens — FTX’s private in-house supermarket points for traders. Just like Alameda, SBF might have had no other option but to try to bail Voyager out. [Fortune]

John Reed Stark went on Bloomberg TV to argue with the on-air crypto pumpers, who claimed that FTX was regulated in the Bahamas. “FTX was not regulated.” No oversight. No consumer protections. No net capital requirements. No licensure. “They are not regulated. Regulation means audits, inspections, examiners, net capital requirements.” This is a very fun eight minutes. [Bloomberg]

(The best bit of this segment is when Bloomberg Crypto anchor Matt Miller admits to committing tax fraud with crypto at 2:52, right there on-air, live on television. It’s important to note that the Bloomberg Crypto newsletter TV team (update: TV team is actually separate from newsletter team! Apologies to the newsletter team) is not in fact a sober review of the ups and downs of a financial instrument. This TV segment shows how it’s blatant CNBC-level crypto pumping, by people too dumb not to admit to tax crimes live on air.)

Reuters writes about bankruptcy lawyers and their swingeing fees. “You’ve got to pay the gravedigger,” said Adam Levitin, a law professor at Georgetown University who specializes in bankruptcy law. “These are complicated cases with a bunch of novel issues, and it shouldn’t be surprising that they are going to require a lot of attorney involvement.” [Reuters]

Media stardom

David went on CBC’s morning drivetime show The Current with Matt Galloway to talk about “the alarming collapse of the FTX exchange.” CBC also wrote up the interview as a news story. [CBC, audio; CBC]

BBC News: Experts doubt much money will be coming back. “The unfortunate news is that the money’s all gone. It’s just not there anymore. Investors should expect pennies on the dollar,” said crypto blogger and author David Gerard. [BBC]

Amy wrote about FTX for Al Jazeera. [Al Jazeera]

David wrote about FTX for Foreign Policy and the US edition of the Guardian. [Foreign Policy, paywalled; Guardian]

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2 Comments on “Crypto collapse: FTX headed for examiner, Bahamas crypto shenanigans”

  1. Does one dare to hope that once it becomes clear it was all scams all the way down Ray may be allowed to stop trying to salvage the non-existent legitimate business? Probably not. This is cryptocurrency where blatant fraud just means a pat on the back and “be a bit more subtle next time”. Ban cryptocurrency today, how’s that for regulatory clarity?

  2. I went from going ‘How the f- do you lose a billion dollars on someone’s MobileCoin bet?’ to reading 2021 posts where who FTX are has to be explained and on MobileCoin’s creation and go ‘Oh yeah, choosing to be on the other side of highly leveraged bets on an illiquid centralised altcoin that someone can manipulate the price of…’

    It would be fascinating to see if whoever paid FTX to list it were linked to the people making the bet.

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