{"id":24280,"date":"2022-12-04T23:58:03","date_gmt":"2022-12-04T23:58:03","guid":{"rendered":"https:\/\/davidgerard.co.uk\/blockchain\/?p=24280"},"modified":"2022-12-06T16:50:39","modified_gmt":"2022-12-06T16:50:39","slug":"crypto-collapse-ftx-headed-for-examiner-bahamas-crypto-shenanigans","status":"publish","type":"post","link":"https:\/\/davidgerard.co.uk\/blockchain\/2022\/12\/04\/crypto-collapse-ftx-headed-for-examiner-bahamas-crypto-shenanigans\/","title":{"rendered":"Crypto collapse: FTX headed for examiner, Bahamas crypto shenanigans"},"content":{"rendered":"<p><i>By <\/i><b><i>Amy Castor<\/i><\/b><i> and <\/i><b><i>David Gerard<\/i><\/b><\/p>\n<ul>\n<li aria-level=\"1\">Send us money so we can keep writing up this stuff! Our work is funded via our Patreons \u2014 here\u2019s<a href=\"https:\/\/www.patreon.com\/amycastor\"> Amy\u2019s<\/a>, and here\u2019s<a href=\"https:\/\/www.patreon.com\/davidgerard\/overview\"> David\u2019s<\/a>.<\/li>\n<li aria-level=\"1\">Our patrons can also get a couple of<a href=\"https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2021\/05\/bitcoin-it-cant-be-that-stupid.png\"> \u201cBitcoin: It Can\u2019t Be That Stupid<\/a>\u201d stickers just by messaging one of us and asking.<\/li>\n<li aria-level=\"1\">David has<a href=\"https:\/\/davidgerard.co.uk\/blockchain\/2020\/11\/26\/get-signed-copies-of-libra-shrugged-and-attack-of-the-50-foot-blockchain\/\"> signed author copies of his books<\/a> for sale.<\/li>\n<li aria-level=\"1\">Sign up on<a href=\"https:\/\/amycastor.com\/\"> Amy\u2019s blog<\/a> to see every new post she makes as it goes up, and<a href=\"https:\/\/davidgerard.co.uk\/blockchain\/#byemail\"> click here and enter your email address<\/a> for every new post on David\u2019s blog as it goes up.<\/li>\n<\/ul>\n<p>&#8220;the contagion effect of everyone noticing all the exchanges are insolvent&#8221; \u2014 SubG on SomethingAwful<\/p>\n<p>&nbsp;<\/p>\n<p><a href=\"https:\/\/davidgerard.co.uk\/blockchain\/2022\/12\/04\/crypto-collapse-ftx-headed-for-examiner-bahamas-crypto-shenanigans\/hot-dog-guy\/\" rel=\"attachment wp-att-24281\"><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-24281\" src=\"https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2022\/12\/hot-dog-guy.jpg\" alt=\"\" width=\"510\" height=\"315\" srcset=\"https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2022\/12\/hot-dog-guy.jpg 680w, https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2022\/12\/hot-dog-guy-300x185.jpg 300w, https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2022\/12\/hot-dog-guy-348x215.jpg 348w\" sizes=\"auto, (max-width: 510px) 100vw, 510px\" \/><\/a><\/p>\n<p>&nbsp;<\/p>\n<h3>Scam bank: man fried<\/h3>\n<p>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. [<a href=\"https:\/\/restructuring.ra.kroll.com\/FTX\/Home-DownloadPDF?id1=MTM1Mzg3OA==&amp;id2=-1\"><i>Doc 176<\/i><\/a><i>, PDF; <\/i><a href=\"https:\/\/www.wsj.com\/articles\/doj-watchdog-calls-for-independent-ftx-probe-in-bankruptcy-11669940711\"><i>WSJ<\/i><\/a><i>, paywall<\/i>]<\/p>\n<p>John Jay Ray III, the acting CEO of FTX since the wee hours of 11 November,\u00a0 will do some digging on his own, but an examiner is a neutral party \u2014 \u201calthough the U.S. Trustee does not question the qualifications, competence, or good faith of Mr. Ray.\u201d Vara argues that if the examiner does the digging, then Ray and his team can get on with saving the businesses.<\/p>\n<p>Vara invokes the 2008 financial crisis: \u201cLike 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\u2019 extraordinary collapse.\u201d<\/p>\n<p>Vara thinks the secret ingredient was crime. \u201cWas this an unsuccessful business or a successful fraud?\u201d He lists several news reports alleging malfeasance by FTX management, including topping up FTX\u2019s Alameda proprietary trading desk with FTX customer funds. He also lists the many failures of corporate control detailed in <a href=\"https:\/\/davidgerard.co.uk\/blockchain\/2022\/11\/17\/declaration-of-john-jay-ray-ftx-is-worse-than-enron\/\">Ray\u2019s first-day declaration<\/a>:<\/p>\n<blockquote><p>An examiner could \u2014 and should \u2014 investigate the substantial and serious allegations of fraud, dishonesty, incompetence, misconduct, and mismanagement by the Debtors, the circumstances surrounding the Debtors\u2019 collapse, the apparent conversion of exchange customers\u2019 property, and whether colorable claims and causes of action exist to remedy losses.<\/p><\/blockquote>\n<p>Vara says that FTX <i>must<\/i> 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\u2019t agree that that holds.<\/p>\n<h3>Your funds are on a holiday in the sun<\/h3>\n<p>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:<\/p>\n<ul>\n<li aria-level=\"1\">Some withdrawals from FTX were allowed for Bahamas residents.<\/li>\n<li aria-level=\"1\">Some cryptos were seized from FTX by the Bahamas government.<\/li>\n<li aria-level=\"1\">Some cryptos were hacked from FTX by unknown parties.<\/li>\n<\/ul>\n<p><b>Local withdrawals:<\/b> While the rest of the world had no access to their assets on FTX, some Bahamas entities began taking their cryptos out.<\/p>\n<p>Said FTX on November 10: \u201cPer our Bahamian HQ&#8217;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.\u201d [<a href=\"https:\/\/twitter.com\/FTX_Official\/status\/1590783569471115264\"><i>Tweet<\/i><\/a><i>, <\/i><a href=\"https:\/\/archive.ph\/6LttG\"><i>archive<\/i><\/a>]<\/p>\n<p>Some non-Bahamians even began withdrawing their FTX balances by buying NFTs from Bahamas accounts. [<a href=\"https:\/\/www.cnbc.com\/2022\/11\/12\/ftx-users-may-be-cashing-of-bankrupt-crypto-exchange-through-a-bahamas-loophole.html\"><i>CNBC<\/i><\/a>]<\/p>\n<p>The Securities Commission of the Bahamas (SCB) said that, despite FTX\u2019s claims, it had <i>not<\/i> authorized these local withdrawals. [<a href=\"https:\/\/twitter.com\/SCBgov_bs\/status\/1591577646005379074\"><i>Twitter<\/i><\/a><i>; <\/i><a href=\"https:\/\/www.coindesk.com\/policy\/2022\/11\/13\/bahamas-securities-regulator-says-it-didnt-order-ftx-to-reopen-local-withdrawals\/\"><i>CoinDesk<\/i><\/a>]<\/p>\n<p>SBF finally admitted in his recent interview with Tiffany Fong that he let the locals get their cryptos out because \u201cyou do not want to be in a country with a lot of angry people in it.\u201d [<a href=\"https:\/\/www.youtube.com\/watch?v=6DezodR9hNI\"><i>YouTube<\/i><\/a>]<\/p>\n<p><b>Bahamas seizure:<\/b> 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 \u201chacking\u201d turns out to have been part of a Bahamian government asset seizure.<\/p>\n<p>Ryne Miller, FTX US general counsel, referred to it as \u201cunauthorized access\u201d and said FTX and FTX US had moved all the funds to cold wallets to secure the assets. [<a href=\"https:\/\/twitter.com\/_Ryne_Miller\/status\/1591495429338071042\"><i>Twitter<\/i><\/a>]<\/p>\n<p>The SCB said on November 17 that it \u201ctook 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.\u201d [<a href=\"https:\/\/www.scb.gov.bs\/wp-content\/uploads\/2022\/11\/Media-Release-SCB-Assumes-Control-of-Assets-of-FTX-Digital-Markets-Ltd.pdf\"><i>Statement<\/i><\/a><i>, PDF; <\/i><a href=\"https:\/\/www.marketwatch.com\/story\/supposed-477-million-ftx-hack-was-actually-a-bahamian-government-asset-seizure-11668782216?mod=home-page&amp;link=sfmw_tw\"><i>Market Watch<\/i><\/a>]<\/p>\n<p><b>Hack:<\/b> 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 \u2014 a white hat hacker and a black hat hacker. [<a href=\"https:\/\/twitter.com\/zachxbt\/status\/1591475246250733568\"><i>Twitter<\/i><\/a>]<\/p>\n<p>In the <a href=\"https:\/\/amycastor.com\/2022\/11\/08\/crypto-collapse-j-pierpont-moneygone-ftx-rekt-bought-by-binance\/\">initial run on FTX before bankruptcy,<\/a> everyone took the most liquid cryptos out first. Bahamas insiders took out more of the liquid cryptos. Now what\u2019s 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.<\/p>\n<h3>No, Mr. Bankman, I expect you to fry<\/h3>\n<p>The next omnibus hearings in the FTX bankruptcy will be on December 16 and January 11. [<a href=\"https:\/\/restructuring.ra.kroll.com\/FTX\/Home-DownloadPDF?id1=MTM1MjYxNg==&amp;id2=-1\"><i>Doc 158<\/i><\/a><i>, PDF; <\/i><a href=\"https:\/\/restructuring.ra.kroll.com\/FTX\/Home-DownloadPDF?id1=MTM1MjYxNw==&amp;id2=-1\"><i>Doc 159<\/i><\/a><i>, PDF<\/i>]<\/p>\n<p><a href=\"https:\/\/amycastor.com\/2022\/12\/01\/crypto-collapse-blockfi-even-deader-crypto-miners-going-broke-sam-will-not-shut-up-binance-and-tether-are-fine\/\">Sam is busy spilling his guts to the press.<\/a> 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: \u201cOnce I have finished learning and reviewing what happened, I would feel like it was my duty to appear before the committee and explain. I&#8217;m not sure that will happen by the 13th,\u201d he tweeted, \u00a0while <a href=\"https:\/\/knowyourmeme.com\/memes\/were-all-trying-to-find-the-guy-who-did-this\">wearing a hot dog costume<\/a>. We suspect that won\u2019t be good enough. [<a href=\"https:\/\/twitter.com\/RepMaxineWaters\/status\/1598693811252875264\"><i>Twitter<\/i><\/a><i>; <\/i><a href=\"https:\/\/twitter.com\/SBF_FTX\/status\/1599511560384225281\"><i>Twitter<\/i><\/a>]<\/p>\n<p>In one of SBF\u2019s previous Congressional appearances, on 8 December 2021, Rep. Tom Emmer said: &#8220;Thank you, Mr. Bankman-Fried, for helping us understand the extensive guardrails FTX has in place to protect investors from fraud and manipulation.\u201d Emmer was one of the <a href=\"https:\/\/davidgerard.co.uk\/blockchain\/2022\/11\/25\/crypto-collapse-ftx-first-day-hearing-genesis-screws-dcg-silvergate-bank\/\">Blockchain Eight<\/a> who told the SEC to back off on crypto firms in March 2022, and FTX was Emmer\u2019s equal 10th place donor at $11,600 donated. Yes, just that little. [<a href=\"https:\/\/www.youtube.com\/watch?v=MpIPlb7mYTE\"><i>YouTube<\/i><\/a><i>; <\/i><a href=\"https:\/\/www.opensecrets.org\/members-of-congress\/tom-emmer\/contributors?cid=N00035440&amp;cycle=2022\"><i>Open Secrets<\/i><\/a>]<\/p>\n<p>Alameda lost $1 billion on a trade involving <a href=\"https:\/\/davidgerard.co.uk\/blockchain\/2021\/04\/08\/signal-messenger-goes-cryptocurrency-with-mobilecoin-proof-of-intel-cpu\/\">MobileCoin<\/a>, the <a href=\"https:\/\/amycastor.com\/2021\/04\/07\/signal-adopts-mobilecoin-a-crypto-project-linked-to-its-own-creator-moxie-marlinspike\/\">token of the Signal messaging app.<\/a> They seemingly had to cover someone&#8217;s position during a huge spike in its price. Let none suggest that anything about this involved money laundering. [<a href=\"https:\/\/www.ft.com\/content\/5e9dc424-aef4-4981-a4d7-e3c40e1e6085\"><i>FT<\/i><\/a><i>, <\/i><a href=\"https:\/\/archive.ph\/xts8Q\"><i>archive<\/i><\/a>]<\/p>\n<p>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\u2019s 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\u2019s deposits jumped from $10 million to $84 million in the third quarter of 2022. It\u2019s unclear how FTX was allowed to buy such a stake in the bank. [<a href=\"https:\/\/www.nytimes.com\/2022\/11\/23\/business\/ftx-cryptocurrency-bank.html\"><i>NYT<\/i><\/a>]<\/p>\n<p>Bankrupt CeFi lender Voyager Digital\u2019s assets included 4,650,000 FTT and 63,750,000 SRM (Serum) tokens \u2014 FTX\u2019s private in-house supermarket points for traders. Just like Alameda, SBF might have had no other option but to try to bail Voyager out. [<a href=\"https:\/\/fortune.com\/crypto\/2022\/09\/20\/alameda-research-voyager-digital-sam-bankman-fried-web3-blockchain\/\"><i>Fortune<\/i><\/a>]<\/p>\n<p>John Reed Stark went on Bloomberg TV to argue with the on-air crypto pumpers, who claimed that FTX was regulated in the Bahamas. \u201cFTX was not regulated.\u201d No oversight. No consumer protections. No net capital requirements. No licensure. \u201cThey are not regulated. Regulation means audits, inspections, examiners, net capital requirements.\u201d This is a very fun eight minutes. [<a href=\"https:\/\/www.bloomberg.com\/news\/videos\/2022-11-29\/ftx-was-not-regulated-john-reed-stark-video?sref=62RNSA6Q\"><i>Bloomberg<\/i><\/a>]<\/p>\n<p>(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. I<span class=\"css-901oao css-16my406 r-poiln3 r-bcqeeo r-qvutc0\">t&#8217;s important to note that the Bloomberg<\/span><span class=\"css-901oao css-16my406 r-poiln3 r-bcqeeo r-qvutc0\"> Crypto <s>newsletter<\/s> TV team (<b>update:<\/b> 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&#8217;s blatant CNBC-level crypto pumping, by people too dumb not to admit to tax crimes live on air.)<\/span><\/p>\n<p>Reuters writes about bankruptcy lawyers and their swingeing fees. \u201cYou\u2019ve got to pay the gravedigger,\u201d said Adam Levitin, a law professor at Georgetown University who specializes in bankruptcy law. \u201cThese are complicated cases with a bunch of novel issues, and it shouldn\u2019t be surprising that they are going to require a lot of attorney involvement.\u201d [<a href=\"https:\/\/www.reuters.com\/technology\/crypto-meltdown-boon-bankruptcy-lawyers-2022-12-02\/\"><i>Reuters<\/i><\/a>]<\/p>\n<h3>Media stardom<\/h3>\n<p>David went on CBC\u2019s morning drivetime show The Current with Matt Galloway to talk about \u201cthe alarming collapse of the FTX exchange.\u201d CBC also wrote up the interview as a news story. [<a href=\"https:\/\/www.cbc.ca\/listen\/live-radio\/1-63-the-current\/clip\/15949537-the-alarming-collapse-ftx-exchange\"><i>CBC<\/i><\/a><i>, audio; <\/i><a href=\"https:\/\/www.cbc.ca\/news\/business\/bankruptcy-class-action-ftx-cryptocurrency-bailout-bankman-fried-1.6655836\"><i>CBC<\/i><\/a>]<\/p>\n<p>BBC News: Experts doubt much money will be coming back. &#8220;The unfortunate news is that the money&#8217;s all gone. It&#8217;s just not there anymore. Investors should expect pennies on the dollar,&#8221; said crypto blogger and author David Gerard. [<a href=\"https:\/\/www.bbc.co.uk\/news\/technology-63624894\"><i>BBC<\/i><\/a>]<\/p>\n<p>Amy wrote about FTX for Al Jazeera. [<a href=\"https:\/\/www.aljazeera.com\/economy\/2022\/11\/23\/ftx-meltdown-threatens-to-end-wild-west-era-for-crypto\"><i>Al Jazeera<\/i><\/a>]<\/p>\n<p>David wrote about FTX for<a href=\"https:\/\/davidgerard.co.uk\/blockchain\/2022\/11\/12\/foreign-policy-cryptos-boy-king-got-dethroned-overnight\/\"> Foreign Policy<\/a> and the <a href=\"https:\/\/davidgerard.co.uk\/blockchain\/2022\/11\/15\/guardian-us-sam-bankman-fried-was-hailed-as-a-crypto-wonder-child-what-happened\/\">US edition of the Guardian.<\/a> [<a href=\"https:\/\/foreignpolicy.com\/2022\/11\/11\/ftx-crypto-bitcoin-sambankmanfried-effectivealtruism\/\"><i>Foreign Policy<\/i><\/a><i>, paywalled; <\/i><a href=\"https:\/\/www.theguardian.com\/commentisfree\/2022\/nov\/15\/ftx-cryptocurrency-sam-bankman-fried\"><i>Guardian<\/i><\/a>]<\/p>\n<br><br><div align=\"center\"><p><a href=\"https:\/\/www.patreon.com\/bePatron?u=8420236\"><img src=\"https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2021\/10\/become_a_patron_button.svg\" alt=\"Become a Patron!\" title=\"Become a Patron!\" width=217 height=51><\/a><br><p style=\"align:center;\" class=\"patreon-badge\"><i>Your subscriptions keep this site going. <a href=\"https:\/\/www.patreon.com\/bePatron?u=8420236\">Sign up today!<\/a><\/i><\/p><\/div>","protected":false},"excerpt":{"rendered":"<p>&#8220;the contagion effect of everyone noticing all the exchanges are insolvent&#8221;<\/p>\n","protected":false},"author":1,"featured_media":24281,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[1],"tags":[3131,2653,460,3332,1986,977,3333,1798,3334,3315,437,3102,2206,2491,1635,2697,2690],"class_list":["post-24280","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorised","tag-adam-levitin","tag-alameda","tag-amy-castor","tag-andrew-vara","tag-bahamas","tag-deltec","tag-farmington-state-bank","tag-ftx","tag-jean-chalopin","tag-john-jay-ray","tag-john-reed-stark","tag-maxine-waters","tag-mobilecoin","tag-sam-bankman-fried","tag-tom-emmer","tag-voyager-digital","tag-zachxbt"],"jetpack_featured_media_url":"https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2022\/12\/hot-dog-guy.jpg","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/posts\/24280","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/comments?post=24280"}],"version-history":[{"count":24,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/posts\/24280\/revisions"}],"predecessor-version":[{"id":24305,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/posts\/24280\/revisions\/24305"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/media\/24281"}],"wp:attachment":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/media?parent=24280"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/categories?post=24280"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/tags?post=24280"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}