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 Greatest 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 opinion at CNN.com.
As investigators and authorities continue to sort through the fallout from the collapse of cryptocurrency exchange FTX, the contours of the implosion are becoming clearer. It will likely take many more months to untangle the web of corporate greed and financial malfeasance at the heart of FTX’s bankruptcy. But we can say with certainty 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 crypto crash to date.
Friendly lawmakers, regulators and celebrities gave former FTX CEO Sam Bankman-Fried legitimacy, but all the while he allegedly moved client funds to prop up his related trading house, allowing him and the company to soar rise and collapse so quickly. . And it was smoke and mirrors that hid how quickly the crypto industry became part of the offshore economy, and how easily traditional offshore havens made it possible.
If anything, FTX’s stunning collapse shines a light on just how symbiotic the entire crypto industry is now with the world of offshore finance – and how open the entire industry is to fraudsters and scammers, with offshore havens vying for crooks like grants to offer, and lack of regulation, they must thrive.
Bankman-Fried, during a virtual interview at the New York Times’ DealBook Summit on Wednesday, said he “screwed up” and accepted responsibility for the failure of his company, but denied he tried to defraud investors and customers. But Bankman-Fried and FTX’s collapse is something that the crypto industry, and even those broadly familiar with the financial world, could – and probably should – have foreseen. Not only were there all kinds of red flags about FTX’s background, but Bankman-Fried also decided to base its operations in the Bahamas, one of the world’s most notorious offshore havens.
An “offshore haven” can be something of a nebulous term, but in short, it’s any jurisdiction that offers its clients enough anonymity that they can freely hide their wealth, or create entire financial operations that aren’t subject to surveillance. The Bahamas originated in the early 20th century as a place for wealthy Westerners to hide their finances – and financial fraud – from anyone who would investigate. And even though it may not be the center of the offshore world it is once was, it has recently re-emerged as a tax haven. Most importantly, “foreign” doesn’t just have to mean banking — instead, as we saw when Bankman-Fried said he was moving his headquarters to the Bahamas because of its crypto-friendly reputation, it can also refer to other industries stretch.
So when crypto emerged as a major player in its own right, it was the Bahamas that stepped up. The Bahamian government has made a conscious choice to recruit as much as possible from the growing crypto industry, with Prime Minister Philip Davis hoping to make the Bahamas an “ideal destination for [crypto] operations.” Davis got his biggest client last year when FTX announced it would be headquartered in the Bahamas, helping the islands in their efforts to recruit crypto business.
Now the Bahamas is reeling – and many are sure to have questions about the country’s regulatory oversight, or lack thereof. In a national speech late last month, the country’s attorney general defended its regulatory practices, noting the government’s shock at the “ignorance of those who claim that FTX came to the Bahamas because they did not want to submit to regulatory scrutiny not.”
And finally, questions are also being asked about the relationship between crypto and the wider world of offshore finance itself. It’s a relationship that has received surprisingly little attention compared to things like real estate, luxury yachts and works of art – thanks in large part to the oligarchs around Russian President Vladimir Putin, and how they’ve used these offshore services to stash away their wealth stab. And there’s actually been fantastic progress in trying to shut down some of these offshore services over the past year, from the US passing legislation to ban anonymous shell companies, to the UK finally moving to target the kleptocrats who stash their wealth in London property parking.
But crypto, oddly enough, hasn’t gotten nearly as much attention — or as much concern. Maybe it was all the excitement surrounding the new technology. Perhaps it was all of the get-rich-quick promise associated with early crypto-entrepreneurs. Maybe it was just the fact that several celebrities endorsed FTX.
Whatever it was, investigators and lawmakers seem to have missed the fact that crypto has become as entangled in the world of offshore finance as any other industry. Amidst its meteoric rise, the crypto market has been something of a financial free-for-all. A complete lack of regulation compared to the rest of the financial world allowed the industry to spin out of control, ending up in the kind of Ponzi scheme affairs that FTX illustrates.
Therefore, the FTX affair will not be seen as just a watershed to finally connect crypto with the world of offshore finance, but for what finally brought down the regulatory hammer on the entire industry. It remains to be seen what form those regulations will take, but figures such as Treasury Secretary Janet Yellen have already called for greater regulatory oversight.
But now the billion-dollar bill is due – a bill that Bankman-Fried’s depositors, who are still looking for their money, will not be able to pay.