Wednesday, March 22, 2023
By NEIL HARTNELL
Tribune Business Editor
The Securities Commission is anxious to resolve the ownership of $426m in FTX digital assets under its control due to the ongoing costs it is incurring to secure them, it has been revealed.
Brian Simms KC, the senior Lennox Paton attorney and partner, in a March 15, 2023, legal filings with the Supreme Court disclosed that he and his fellow joint provisional liquidators for FTX Digital Markets, the Bahamian subsidiary, had spoken several times with the Bahamian regulator’s legal representatives on when they would move to determine the ownership issue.
“The joint provisional liquidators have had several conversations with counsel for the Securities Commission of The Bahamas in relation to when the joint provisional liquidators would make an application to determine the ownership of the digital assets currently held by the Securities Commission of The Bahamas,” he stated in a draft affidavit included among the batch of documents tabled with the court.
“The Securities Commission has been concerned about the administrative costs of holding the digital assets and wishes to have the ownership issues resolved...... Another reason for the issue of this summons now is to address issues of concern to the Securities Commission, which the Securities Commission desire to be resolved.”
Mr Simms’ draft affidavit, which is subject to change, is due to be finalised and filed once he and his fellow FTX Digital Markets’ provisional liquidators, PricewaterhouseCoopers (PwC) accountants Kevin Cambridge and Peter Greaves, apply to the Supreme Court for directions to resolve the Bahamian regulator’s concerns.
The Securities Commission in mid-January 2022 was shown to have custody of $426m, out of $1.612bn, in total digital/crypto assets secured to-date for creditors of FTX’s international arm. The sum held by the Bahamian regulator represents the assets it transferred to its control, in a secure digital wallet, in early November just days after FTX Digital Markets was placed into provisional liquidation by the Supreme Court.
It obtained an emergency court Order approving the transfer amid fears that the collapsed crypto exchange was being hacked, and the assets lost or stolen, thereby depriving their rightful owners. However, exactly who are FTX Digital Markets’ clients were is among the key questions that the chief justice, Sir Ian Winder, will be asked to determine.
This will involve analysing multiple “terms of service”, which governed the relationship between FTX’s international platform and its customers, and determining which one applies and on what date. This is critical to working out when, and if, clients were migrated to FTX Digital Markets and became its customers prior to the crypto exchange’s early November 2022 collapse, or if they are clients of FTX Trading and any of the other entities in Chapter 11 protection in the US.
Another vital issue that Sir Ian will be asked to decide is whether FTX Digital Markets was holding assets, either digital, fiat or both, on trust for investors/clients in a fiduciary or escrow capacity. If it was, then assets treated in such a manner will belong to the client, but if they were not then such properties belong to the liquidation estate.
Mr Simms, in his draft affidavit, alleged that by 2022 some nine million customers worldwide had accounts with both FTX’s international and US platforms. “Possibly more than 7.5m” of these were customers of the international platform, and who were targeted for “migration” to FTX Digital Markets, the Bahamian subsidiary overseen by the Supreme Court and joint provisional liquidators.
The Lennox Paton senior partner added that it “may take another month” to analyse the data and records on FTX Digital Markets that had been released to-date by John Ray, the crypto exchange’s US chief, who controls the entities presently in Chapter 11. And he warned that the ownership issues that the Supreme Court must determine will likely be appealed all the way to the highest court in the Bahamian judicial system given the multi-billion dollar sums involved.
“The issues are complex and might well be subject to appeal from the honorable court to, eventually, the Privy Council,” Mr Simms said in his draft affidavit. “Until directions have been given by this honorable court, there will be no clarity as to the rights of users or of the assets to which FTX Digital Markets is entitled.
“The issues are complicated and are likely to take some time to unravel. Given the sums involved, as indicated above, there are also likely to be one or more appeals from the directions of this honorable court. For these reasons the joint provisional liquidators have made this application without having information that is currently in the control of the Chapter 11 debtors.”
Mr Simms promised to update “the factual position” as Mr Ray and his team released more information to the Bahamian joint provisional liquidators, and FTX Digital Markets’ position became clearer.
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