Why The FTX Collapse Shook The Bahamas

into bankruptcy. Ftx's demise brought with it a wave of financial uncertainty and frankly distress in the crypto industry, and it also had a very significant effect on the small islands where the crypto exchange had established its headquarters, the island nation of the Bahamas. To be clear, this is not the Caribbean's first financial crisis, and history suggests it won't be the last. But it is perhaps one of the highest profile losses experience to date, and potentially the

most damaging so far. And it comes just as islands in the region try to diversify away from tourism revenue. The Bahamas had high hopes that an ambitious financial sector would help it achieve its goals. Crypto was a big part of that game plan, and now FTX has gone. Can the Bahamas fill the gap left in its financial sector? Will the nations still be a hub for digital assets. Bloomberg's Katanga Johnson has been reporting all about this, and he joins me, now, Katanga, welcome to the podcast. It's

so good to be here. I'm kind of happy that you're still talking to me because I feel like the last time I called you, then you were like in a place for a very long time, perhaps unexpectedly. This is one of the downsides of saying yes to the

crypto team. Chaotic things happened. What happened exactly. What happened in the Bahamas was essentially a nation's attempt to rebrand itself not just as the long standing financial haven that welcomed banks and insurance companies and realtors and all sorts of other institutions, but one that could welcome new entrants to the financial industry with a set of rules, albeit rules that were still immature, that still needed room to grow.

But it was an opportunity. Right, you have the perfect company that made its way to the shores, as well as the set of regulation that preceded the company's arrival.

That company, of course, was FTX right and the Behaman government, financial professionals and the regulatory from clients space as well as everyday Behamans who many of who might have spent some time like learning about crypto because they were exposed to it in the United States, or others who were just hopeful that maybe this could be the new frontier finance.

A lot of people welcomed it for different reasons, and what happened was this, essentially, as people described to me during my seven almost eight weeks there, there was a lot of hope put into FTX, its promises, its investments as being a part of the future, and then realistically sort of a reckoning with realizing that, oh, the right checks and balance is to make sure that this company could thrive and could be successful. Essentially, we're not We're

not quite there. Why was it so important to the Bahamas to try to attract companies like FTX in the first place. There is this long standing understanding of the Bahamas being a financial paradise, and I think over time over the last perhaps we can say from the last financial crisis and the ways in which they may or may not have been tie ups with companies that were headquartered there, the country was trying to change its reputation

to become a more stringent financial haven. If you will, or more like tax friendly rather than just being a tax haven, if you will. That subtle change meant that the regulations that the dear Act your Last Sets and Regulated Entities Act, Regulated Exchanges Act rather that Act was meant to be this sort of premier unveiling of how they were over the past decade serious about changing its reputation in the marketplace as well as a race to

the finish. Larger industrialized nations like the US, of course hadn't quite come to a consensus about whether there was a need for regulations entirely, and of course other nations were also attempting to ready their own regulations, and I think the Bahamas caught wind of that and thought we're we're going to be first, and was successful in that regard. As you say, you mentioned the DARE Act, right the Digital Assets and Registered Exchanges. When was that introduced and

what was it designed to really achieve? The DARE Act was introduced in twenty twenty, and essentially it was designed to be just a bare bones framework to show that the Bahamas was willing to welcome what would be a sort of an exchange, a dialogue between registered you know, digital asset providers and crypto companies in thinking through like, so, here are the regulations in response to this, how do you cryptocompany X y Z plan to help enhance this

suite of regulations and show that with regulations you can do what's right. Essentially, that you can be innovative and you can make commitments and carry on carry on in that way. And we had an opportunity to speak to the Chair of the Security Commission of the Bahamas, Christina who Role, who described it as robust, but essentially it was it was still very much immature. That is to say, it needed room to grow, and that's only possible when

faced with certain risks. The derect though, she made clear, and others came well before FDx started to court the Bahamas, and it really was away for the country to sort of race to the finish in trying to beat out its counterparts in the region. But essentially it was meant to be a suite of regulations that would, over time, with the regulators sort of inspections and examinations of the companies that would fall under it, help improve it helped

him get better. In fact, there was already a preparation this year that started, I guess last year to sort of enhance it. There's a draft, there's a mock up of an amendment to it. And that was what the country pointed to as showing that it was already starting to take into account, not just FTX, but other I think they were at the time, maybe eight there were a registered That number of course fluctuates depending on a company's standing, but they were hoping to make it better

and make it robust. But they made it clear that it was the welcoming post, but it would only be fortified over time. When you were there and you know, talking to folks who had either non Bankmen Freed no and other folks from FTX or had been affected by the collapse because they had local employees. For instance, what was the sentiment of the people who were trying to figure out what had happened when the company said that they had gotten approval to allow withdrawals for clients in

the Bahamas. That approval, they described was really an exchange between the regulator and the company, and I think Bankmen Freed sent the email on behalf of the company to say that if you do not respond to this request, and this would have been the Thursday before the major withdrawals, if you will, or into the midnight of Friday morning

that Friday morning, November twelfth. If I'm not mistaken, this exchange just said that if you don't respond to this note, then we will carry on with this plan to allow clients in the Bahamas to withdraw because we don't want to. And I think the language was spoke to the fact that the sentiment was we don't want to piss off the Behaman government or in any way ruin the relationship we have with our clients and the people here. But that wasn't a direct nod by the regulator, to be

fair of them saying yes, you can allow that. But the understanding I think at the time, though before this was made public, was that is bankman freed in cahoots with the Behaming government or with the regulator or both. Did clients in the Bahamas get special privileges that clients all around the country, part of me, all around the United States, all around certain parts of Asia and elsewhere didn't get? And if so, why is that? We now know what that exchange looked like. But at the time

it was a point of contention. There were reports of people flying in on private jets trying to bribe those clients in the Bahamas to help other clients, these global clients sort of like offload or you know, withdraw their funds. There were even discussions about whether certain banks were involved in allowing that during that particular window. But I think that confusion, that lack of clarity, particularly around those withdrawals, is still a sore point for a lot of people

who feel as if they were short changed. Even if, like if we take what explanations bank man Freed is given around the decision making about mismanaging funds, people, still that particular window of time is still a sore point for a lot of people on the ground. Up next, you'll hear more from Bloomberg report to Katanga Johnson on what's happening with the Bahamas post FTX. We'll be right back now. When you went to the Bahamas, and you know, I remember we were like, hey, can you go to

the apartment, Hey, can you find can you find the jail? Hey? It was just this like wackable of assignments. What things like stood out to you in terms of the first few days, particularly before he was officially arrested and then afterwards, like as people as it was sort of sinking in for more and more people in the island that this

was real and happening. It was remarkable that the layman, the everyday Bahamian really did communicate to me at least that they thought, oh, this is all some big misunderstanding. It can be the case this person is truly hiding after being so public and engaged in the community. Right, former employees had it, you know, they were singing a

different tone. The people were cautious in talking to me, but generally the consensus was, whatever the issue was here, there must be an explanation around where the funds are. So even if even if there's a concern about whether Sam's complying or not or what happened, that there must

be some bigger explanation. And I think as I look back, it really speaks to the fact that what had gone on was in fully communicated to staff at a certain level, even among the compliance staff that were on the ground, many of whom were Behamian. The company made a lot of good faith efforts in terms of and there've been reports about this. Right people would talk about the sort of parties they hosted and how people were invited to attend those parties at a staff level, and they were

so extravagant. People were recounted the ways in which many of the employees might have left like really good civil servant jobs, or left their jobs at other financial stitutions and like double their salary by working there, or you know, people would describe knowing that, oh, here was the beginning of what seemed to be a company that I think up to sixty of the say one hundred and twenty staff members were Behamians, or there was like equity in that way, and they were well paid and they were

able to expense meals or grocery in the life. These are the kinds of things people described, and they would they would describe it in a way to say that it's a company that puts a value on its staff, and its reputation in this way is unlike other financial institutions. So it's it's that the novelty of crypto almost makes it seem cool and exciting, not just because of the product itself, but because of the culture. So they felt

taken care of. People felt taken care of indeed, and they felt that because of that, whatever was happening with respect to these withdrawals and the funds. It could all

be explained. But that quickly changed, didn't it, especially among people who didn't There were even people in the Bahamas who didn't benefit from being able to withdraw their funds, and those people were the most adamant that something didn't quite smell right, as they'd say, and people would even point to some signals from the Crypto Bahamas conference that took place months prior, but didn't quite understand what it was.

They too, were perplexed given what they knew about the company and its culture, what they knew about the cast of characters at the highest level, and what was happening now. You reported on the jail and the detention conditions that bankun Freed was in. Was there any perception in the Bahamas after he was arrested that he was also getting kind of a different tier of I don't know, cozy

custody than might have been afforded to local residents. But the onset it seemed that he would be treated like everyone else the night he was arrested, but that quickly changed the next day when he appeared at his arrayment, hearing one distinct moment that comes to mind is that the hearing it started on time he appeared, and before he was even able to introduce himself, there was a question about whether his nights stay was pleasing or suitable

for him, and the judge, the presiding judge, so that question, like you know, sort of mind is blown. Was your stay in prison, okay, sir? Your stay in prison okay? Just you know, just for that evening before we even get to the heart of the matter. And and then there was this pause, you know, even described meeting certain medicine for his ADHD for I think perhaps other conditions that might have included insomnia and then his allergies, and one of them was prescribed that I think the other

two were not. The ADHD was prescription was for dropping out the allergy and the insomnia prescription. And the hearing was held. There was a recess called for about an hour hour and a half so that his family members who were with him could be accompanied by police to drive across town maybe thirty minutes away maybe last right, if you're in a police murdicate or caravan to get his medicine so that he can be able to take it before it starts and that's in many ways a

basic human right. But it stands in stark contrast to the prison in the Bahamas, where of course there have been complaints even as high as the US government sort of criticizing the country in some ways for the conditions of the prison, and people kind of pointed out how his treatment was much different even though there were these allegations against him at this point, you know, weeks into the initial news breaking would have gone. So that was

one interesting tidbit. Over the course of the next week or so, with various hearings, however, things did what one might have expected with that sort of initial theatrics, though at the end of the day didn't didn't he his you know, Baer request was denied, and right, it seems now like it was all just a funny, funny joke

to to sort of start the day. What an interesting time now, I find because I am from an island in the Caribbean, Trinidad, that most people think they understand would have like extremely narrow, you know, definitions of like this is what this island was like, this is what Trinidadian is like, this is what the Caribbean is like. What for you was the most common misconception about the Bahamas or about the people in the Bahamas are about regulators that you had to attempt to dispel in the

process of your reporting on this story, states Marie. Like you, I am also from a nation in the West Indies, I'm from the Bahamas, which made the story so exciting, you know, But first informist. I see myself as a remember the press, as someone who is pursuing truth, and I went in with that particular like understanding of what I was doing and tried to engage with people, even

people I knew, in the same way. One observation I made, though, was that in some ways you may think of the Bahamas as a place that's sleepy and quiet, and that people are not as informed of maybe their risks of dancing with the devil, if you will, right, sort of not taking seriously what could go wrong when you're courting such a novel, you know, engaging in such a novel industry and going further than even again, as we established, right,

even the US went in terms of codifying regulations around around crypto. I think it kind of shows, and this is the nation's fiftieth year of independence, it kind of shows that the nation's ready to be bold and sort of take off the training wheels, and that comes with a big risk. And this hopefully is a learning lesson.

But the way I see it, based on just the dozens of people I spoke to and continued to engage with, I think it's turning out to be that this might have been the best thing that ever happened to the Mohammas to help it mature in a way that it had hoped it would. By even welcoming FDx to begin with, Katanga, has been such a pleasure having you on the show. Thank you so much for joining us, Thanks for having me.

That was Bloomberg Reporto Katanga Johnson. You can find more of his reporting on the Bloomberg Terminal and on Bloomberg dot com, and of course, be sure to check out our twice weekly crypto newsletter, Bloomberg Crypto. This is Bloomberg Crypto, a daily podcast from Bloomberg and iHeartRadio. For more shows from iHeartRadio, visit the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts. Send us your comments, questions or suggestions for the show to Crypto at Bloomberg dot net.

The supervising producer of Bloomberg Crypto is Vicky Vergalina. Our senior producer is Janet Babin. Our producers are Mohammed Faroup and Sharon Barrero. Our associate producers are Ty Butler and Moses on Desto wonder Ad is our engineer. Original music by Leo Sidron. I'm Stacy Mariagemaal. We'll be back tomorrow