The turf war over FTX’s bankruptcy

The Bahamas bests Delaware in many ways: sunshine, beaches, the number of people who know it exists, snorkelling, and so on. Now it wants to claim crypto bankruptcy cases, too.

The Bahamian securities regulator said late Thursday that it moved some of FTX’s digital assets into cold storage last week. “ For safekeeping .”

The full text of Thursday’s press release , with our emphasis and addition:

On 12 November 2022 , the Securities Commission of The Bahamas (“the Commission”), in the exercise of its powers as regulator acting under the authority of an Order made by the Supreme Court of The Bahamas, took the action of directing the transfer of all digital assets of FTX Digital Markets Ltd. (“FDM”) to a digital wallet controlled by the Commission, for safekeeping. Urgent interim regulatory action was necessary to protect the interests of clients and creditors of FDM.

Under the Digital Assets and Registered Exchanges Act, 2020 (“DARE Act”), the Commission has the authority to apply for a judicial order to protect the interests of clients or customers of a registrant of the Commission under the DARE Act.

It is not the understanding of the Commission that FDM is a party to the US Chapter 11 Bankruptcy proceedings [in Delaware].

Over the coming days and weeks, the Commission will engage with other regulators and authorities, in multiple jurisdictions, to address matters affecting the creditors, clients and stakeholders of FDM globally to obtain the best possible outcome.

In the most generous possible light, this could look like an assurance that the Bahamas has secured “all digital assets” held by FTX’s local subsidiary, after a several-hundred-million-dollar hack last weekend.

But generosity seems dangerously naive in crypto. Especially after the guy who did Enron’s restructuring said FTX is worse than Enron . Why include the paragraph about the Chapter 11 bankruptcy case in Delaware? And why are they just now announcing that they seized crypto last week?

It probably has something to do with the fight over whether lawyers and advisers will get to duke this out in Delaware or New York/the Bahamas.

SBF told a Vox journalist in Twitter DMs this week that his grand plan to bring FTX back depends on their “ability to win a jurisdictional battle vs Delaware”.

At the time this seemed kind of absurd. Bankman-Fried already signed the papers signing over control of FTX and more than 100 subsidiaries to John J Ray III, who is representing them in Delaware bankruptcy court.

Except! Bahamas-based FTX Digital Markets Ltd is not part of that group. Bahamian regulators assigned a trio of lawyers to oversee the company during its liquidation. And those liquidators filed for bankruptcy in the Southern District of New York, not Delaware.

To be clear, jurisdictional fights are very common. But like everything else in this godforsaken bankruptcy, there’s some weird stuff.

Ray filed a motion (after the Vox piece was published, natch) asking the Delaware judge to assert jurisdiction over the SDNY case. He argued that the liquidators knew the US-based restructuring process would happen in Delaware, but chose to file in SDNY instead to try to keep assets away from creditors in other parts of the company:

It is distressing that the [Bahamas-appointed liquidators] . . . for FTX DM chose to file the Chapter 15 Case in the SDNY rather than the District of Delaware, where these Chapter 11 Cases are pending . . . 

The filing of the Chapter 15 Case without advance notice and in the SDNY is a blatant attempt to avoid the supervision of this Court and to keep FTX DM isolated from the administration of the rest of the Debtors, which constitute the vast majority of the remainder of the FTX group. Under normal circumstances, that would be inappropriate and grounds for transfer to this Court. But these are not normal circumstances.

The Bahamas liquidators don’t seem especially eager to co-operate with Delaware lawyers. From a November 15 filing in the SDNY case:

I did not authorise or approve — in writing or otherwise — any of FTX Digital’s officers, management or employees to file, or cause to be filed, the Delaware Petition. Based on my years of experience practising law in the Bahamas and information that has been provided to me by inter alia the Securities Commission of The Bahamas, and pending further analysis, I reject the validity of any purported attempt to place FTX Affiliates in bankruptcy insofar as such filing required FTX Digital’s officers, directors, or management to approve and authorise such action.

In the US, filing for bankruptcy imposes automatic stay on a company , and essentially hits the pause button on all sorts of cash disbursements, other lawsuits, etc. But in this case, the first bankruptcy filing was November 11, which means the Bahamas transferred the money after the stay went into place. A quick Google search shows the enforceability of these stays across international borders is, at best, patchy.

Yesterday the Delaware bankruptcy judge scheduled a November 22 hearing about jurisdiction for the SDNY case. Then the Bahamas announced that it doesn’t consider FTX Digital to be part of the Chapter 11 proceedings.

All of this raises another question: what’s the size of the pot that Bahamas Securities Regulators want keep away from the Delaware proceedings? The SDNY Chapter 15 bankruptcy filings don’t even ballpark the figure. You can find liquidator declarations here , here and here .

In a footnote in the Delaware first-day declaration , Ray estimates that FTX Digital has about $150mn in assets:

The balance sheet for non-Debtor FTX Digital Markets Ltd. is consolidated to Debtor FTX Trading Ltd’s balance sheet. The September 30, 2022 Balance Sheet of non-Debtor FTX Digital Markets Ltd. reflects an asset position of $149,336, as follows: Cash and Cash Equivalents ($82,564), Restricted Cash ($10,000), US Dollar Denominated Stablecoins ($63), Related Party Receivables ($45,944), Prepaid Expenses and Other Current Assets ($4,922), Property and Equipment, Net ($5,565) and Other Non-Current Assets ($278) (amounts in thousands of US Dollars).

Are the $46mn in receivables above from companies in the Delaware bankruptcy case? If so, can we really count on them being, uh, received? Ray also found the Bahamian arm of FTX owes $30mn to companies in the Delaware case.

Remember this $150mn asset tally doesn’t include customer crypto, either. The data simply isn’t good enough, Ray says, so those sums “are not presented”.

We can still make some extremely rough estimates, though. Early blockchain analysis from Elliptic found that $473mn was transferred during the hack on November 12, as our colleagues reported. Ray cites $372mn as being stolen in the bankruptcy filing. So if a total of $473mn was indeed moved, that could mean $101mn was transferred into a wallet for Bahamas securities regulators.

Using extremely speculative arithmetic, that would put the assets of the Bahamas business at around $251mn, right? When there’s an $8bn shortfall to fill, every bit helps.