Editor’s note: Casey Michel is a writer and investigative journalist covering kleptocracy and dark money networks around the world. He is the author of American Kleptocracy: How the US Created the World’s Largest Money Laundering Scheme in History and is working on a book examining foreign lobbying in Washington. The opinions expressed in this article are his own. Read more reviews at CNN.com.
As investigators and authorities continue to sort through the fallout from the collapse of cryptocurrency exchange FTX, the contours of the explosion are becoming clearer. Untangling the web of corporate greed and financial abuse at the heart of FTX’s collapse will likely take many more months. But what’s safe to say is that the company owes billions of dollars to creditors and, according to sources, at least $1 billion to customers in what appears to be the biggest cryptocurrency crash to date.
Friendly lawmakers, regulators and celebrities gave former FTX CEO Sam Bankman-Fried legitimacy, but all the while he was funneling client funds to prop up the related trading house, allowing him and the company to rise so high and fall so quickly. . It was smoke and mirrors that hid the cryptocurrency industry becoming part of the offshore economy and how easily traditional offshore havens made it possible.
FTX’s stunning collapse highlights how symbiotic the entire crypto industry is with the offshore financial world right now, and how open the entire industry is to fraudsters and scammers, with offshore havens racing to offer all kinds of perks to fraudsters. and lack of regulation, they must evolve.
On Wednesday, during a virtual interview at the New York Times’ DealBook Summit, Bankman-Fried said she accepted responsibility for the company’s failure and was “broken” but denied trying to mislead investors and customers. But the implosion of Bankman-Fried’s and FTX is something that the cryptocurrency industry and even those familiar with the financial world can and probably should have seen. Not only were there all sorts of red flags about FTX’s past, but Bankman-Fried decided to base its operations in the Bahamas, one of the world’s most notorious offshore ports.
“Offshore haven” can be a vague term, but in a nutshell, it is any jurisdiction that offers its clients enough anonymity to freely hide their wealth or create all their financial transactions that are not subject to supervision. The Bahamas emerged in the early 20th century as a place for wealthy Westerners to hide their finances and financial scams from anyone investigating. And although it is not the center of the offshore world it was once, has recently re-emerged as a tax haven. Crucially, “offshore” doesn’t just mean banking — instead, it can encompass other industries, as we saw when Bankman-Fried said it was moving its headquarters to the Bahamas because of its crypto-friendly reputation.
So when cryptocurrency emerged as a major player in its own right, the Bahamas got a boost. The Bahamian government has made a conscious choice to embrace the booming cryptocurrency industry as much as possible, with Prime Minister Philip Davis hoping to make The Bahamas an ‘ideal place to work’ [crypto] operations”. Davis arrived last year when his biggest client, FTX, announced it would be headquartered in the Bahamas, helping the islands in its efforts to recruit crypto businesses.
Now, the Bahamas is reeling — and no doubt many have questions about the country’s regulatory oversight, or lack thereof. In a national address late last month, the country’s attorney general defended its regulatory practices and expressed shock at the government’s “ignorance of those who claim that the FTC is coming to the Bahamas because they don’t want to be subject to regulatory scrutiny.”
And finally, questions are being asked about the relationship between cryptocurrency and the wider world of offshore finance. It’s a surprisingly low-profile relationship compared to things like real estate, luxury yachts and artwork — thanks in large part to the oligarchs surrounding Russian President Vladimir Putin and how they use these offshore services to hide their wealth. There’s been really fantastic progress over the past year in trying to shut down some of these offshore services, from the US legislation banning anonymous shell companies to the UK.
But cryptocurrency, oddly enough, hasn’t received nearly as much attention or concern. Perhaps it was the excitement surrounding the new technology. Perhaps it was the get-rich-quick promise associated with early cryptocurrency entrepreneurs. Perhaps it was the fact that various celebrities supported FTX.
Regardless, investigators and lawmakers have missed the fact that cryptocurrency is just as entangled in the world of offshore finance as any other industry. Amidst its meteoric rise, the cryptocurrency market has been a financial free-for-all. The complete lack of regulation compared to the rest of the financial world has allowed the industry to spiral out of control, resulting in the types of Ponzi scheme businesses described by FTX.
The FTX case will therefore be seen not just as a turning point to finally connect cryptocurrency with the world of offshore finance, but as finally bringing the regulatory hammer down on the entire industry. It remains to be seen what form these rules will take, but figures such as Treasury Secretary Janet Yellen have already called for greater regulatory oversight.
But now, it’s time for the billion-dollar bill—a bill that Bankman-Fried’s depositors can’t pay, still looking for their money.