• Regulator spent over $3m dealing with collapse

• Wants to regain $3m; some $2.57m ‘recoverable’

• ‘Unprecedented challenge’ from exchange’s failure

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

FTX’s implosion consumed 21 percent of the Securities Commission’s near-$15m operating expenses last year as it raced to preserve client assets and tackle the legal and regulatory fall-out.

The capital markets regulator’s just-released 2022 annual report disclosed that it incurred some $3.15m in costs dealing with the crypto currency exchange’s collapse as fraud and other multiple corruption-related allegations were levied against Sam Bankman-Fried, its founder, and his closest associates.

However, with Chief Justice Ian Winder subsequently ruling that the Securities Commission is entitled to recover “reasonable costs” associated with actions such as securing, and safeguarding, FTX customer assets, the regulator has estimated that 82 percent of its $3.15m costs - some $2.57m - is recoverable and has included this in its accounts receivables.

“The Commission experienced a major test of the DARE (Digital Assets and Registered Exchanges) legislation in November 2022 with the collapse of FTX Digital Markets,” the 2022 annual report said. “The Commission exercised its regulatory powers to seize the entity’s assets for the protection of its customers and creditors.

“Asset custody, legal and other expenses incurred for the seizure of the assets and the associated liquidation proceedings totalled $3.15m, representing 21 percent of operating expenses in 2022. The Supreme Court issued an order that entitled the Commission to indemnification for reasonable costs associated with the liquidation proceedings.

“Management estimated that reimbursement of $2.57m was highly probable. This lead to the 76 percent increase in accounts receivable and the 58 percent increase in other income when compared to 2021.” The Securities Commission’s 2022 financial statements, audited by PricewaterhouseCoopers (PwC), revealed that the regulator had sought to recover $2.986m of its expenses.

“Of this amount, $2.566m was recorded as a receivable for reimbursement of those expenses for the year ended December 31, 2022, based on management’s estimate of the highly probable amount to be recovered,” the financial statements added.

“The Commission subsequently received a Supreme Court Order confirming full reimbursement of those expenses sought, and the variable consideration amount of $419,721 was not recorded as of December 31, 2022, related to these ongoing licensee liquidation proceedings. [It] will be recognised in 2023.” This reimbursement will also cover all costs incurred by the Securities Commission in its role as trustee of FTX Digital Markets’ customers assets.

K Neville Adderley, the former Supreme Court judge who now chairs the Securities Commission, said FTX’s collapse had presented the Bahamian regulator with an “unprecedented challenge”. He wrote: “In November 2022, the Commission faced an unprecedented challenge with the collapse of FTX Digital Markets, at that time one of the world’s largest crypto currency exchanges.

“The event proved the Commission’s foresight to put in place a regulatory framework for digital assets, and to have carved out robust enforcement powers as well as the legal powers to freeze and seize assets to protect customers, and its expertise, as it reacted swiftly and decisively in exercising those powers.

“That event, along with the preceding ‘crypto winter’, brought into sharp focus the need for global standards and co-operation with respect to crypto regulation. The Commission is committed to using its full investigative and regulatory powers to address these types of events, and to continue to develop and improve the regulatory framework to meet the challenges of the evolving digital assets space.”

Christina Rolle, the Securities Commission’s executive director, said the regulator is “limited” in what it can say about FTX on the grounds that the crypto currency’s failure is being dealt with by the court system in both The Bahamas and Delaware. However, she pledged that it will “learn” from the experience and share its findings when all investigations are completed.

“In November 2022, FTX Digital Markets, one of the largest crypto-broker-dealers in the world, suffered a liquidity crisis that triggered the Commission to use its regulatory powers to freeze and secure client assets, and set off a series of events, which have rocked the crypto world as FTX floundered globally and ultimately collapsed,” Ms Rolle wrote.

“The event, which had iterations and implications for FTX operations across the globe, tested the consumer and investor protection provisions embedded in the DARE Act 2020, and the Commission’s commitment and ability to use the enforcement tools at its disposal.

“It confirmed that the DARE regulatory framework, and the Commission’s regulatory experience, worked under the most difficult conditions to identify and swiftly act to safeguard assets in The Bahamas licensed entity – FTX Digital Markets, which was headquartered in New Providence,” she added.

“The Commission is limited in what it may speak to about the details of the FTX case while the matter remains under investigation and before the courts. However, we seize the opportunity to learn from the event and deepen our understanding of operational and other risk factors in the evolving digital asset industry.

“The Commission is leveraging this learning (both knowledge and insights) to improve digital asset regulation in The Bahamas, and ultimately to benefit and shape digital asset regulation globally. We look forward to being able to share the lessons we have learned from the FTX matter when our investigations are complete and the surrounding legal environment permits.”