WEBVTT - Why The FTX Collapse Shook The Bahamas

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<v Speaker 1>I'm Stacy Marie Ishmel, Managing editor of Crypto for Bloomberg News,

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<v Speaker 1>and this is Bloomberg Crypto, a daily Bloomberg ihod podcast.

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<v Speaker 1>It's Monday, March sixth. It's been three months since one

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<v Speaker 1>of the most influential crypto exchanges in the world collapsed

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<v Speaker 1>into bankruptcy. Ftx's demise brought with it a wave of

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<v Speaker 1>financial uncertainty and frankly distress in the crypto industry, and

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<v Speaker 1>it also had a very significant effect on the small

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<v Speaker 1>islands where the crypto exchange had established its headquarters, the

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<v Speaker 1>island nation of the Bahamas. To be clear, this is

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<v Speaker 1>not the Caribbean's first financial crisis, and history suggests it

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<v Speaker 1>won't be the last. But it is perhaps one of

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<v Speaker 1>the highest profile losses experience to date, and potentially the

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<v Speaker 1>most damaging so far. And it comes just as islands

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<v Speaker 1>in the region try to diversify away from tourism revenue.

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<v Speaker 1>The Bahamas had high hopes that an ambitious financial sector

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<v Speaker 1>would help it achieve its goals. Crypto was a big

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<v Speaker 1>part of that game plan, and now FTX has gone.

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<v Speaker 1>Can the Bahamas fill the gap left in its financial sector?

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<v Speaker 1>Will the nations still be a hub for digital assets.

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<v Speaker 1>Bloomberg's Katanga Johnson has been reporting all about this, and

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<v Speaker 1>he joins me, now, Katanga, welcome to the podcast. It's

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<v Speaker 1>so good to be here. I'm kind of happy that

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<v Speaker 1>you're still talking to me because I feel like the

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<v Speaker 1>last time I called you, then you were like in

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<v Speaker 1>a place for a very long time, perhaps unexpectedly. This

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<v Speaker 1>is one of the downsides of saying yes to the

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<v Speaker 1>crypto team. Chaotic things happened. What happened exactly. What happened

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<v Speaker 1>in the Bahamas was essentially a nation's attempt to rebrand

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<v Speaker 1>itself not just as the long standing financial haven that

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<v Speaker 1>welcomed banks and insurance companies and realtors and all sorts

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<v Speaker 1>of other institutions, but one that could welcome new entrants

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<v Speaker 1>to the financial industry with a set of rules, albeit

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<v Speaker 1>rules that were still immature, that still needed room to grow.

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<v Speaker 1>But it was an opportunity. Right, you have the perfect

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<v Speaker 1>company that made its way to the shores, as well

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<v Speaker 1>as the set of regulation that preceded the company's arrival.

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<v Speaker 1>That company, of course, was FTX right and the Behaman government,

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<v Speaker 1>financial professionals and the regulatory from clients space as well

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<v Speaker 1>as everyday Behamans who many of who might have spent

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<v Speaker 1>some time like learning about crypto because they were exposed

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<v Speaker 1>to it in the United States, or others who were

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<v Speaker 1>just hopeful that maybe this could be the new frontier finance.

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<v Speaker 1>A lot of people welcomed it for different reasons, and

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<v Speaker 1>what happened was this, essentially, as people described to me

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<v Speaker 1>during my seven almost eight weeks there, there was a

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<v Speaker 1>lot of hope put into FTX, its promises, its investments

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<v Speaker 1>as being a part of the future, and then realistically

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<v Speaker 1>sort of a reckoning with realizing that, oh, the right

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<v Speaker 1>checks and balance is to make sure that this company

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<v Speaker 1>could thrive and could be successful. Essentially, we're not We're

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<v Speaker 1>not quite there. Why was it so important to the

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<v Speaker 1>Bahamas to try to attract companies like FTX in the

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<v Speaker 1>first place. There is this long standing understanding of the

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<v Speaker 1>Bahamas being a financial paradise, and I think over time

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<v Speaker 1>over the last perhaps we can say from the last

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<v Speaker 1>financial crisis and the ways in which they may or

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<v Speaker 1>may not have been tie ups with companies that were

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<v Speaker 1>headquartered there, the country was trying to change its reputation

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<v Speaker 1>to become a more stringent financial haven. If you will,

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<v Speaker 1>or more like tax friendly rather than just being a

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<v Speaker 1>tax haven, if you will. That subtle change meant that

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<v Speaker 1>the regulations that the dear Act your Last Sets and

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<v Speaker 1>Regulated Entities Act, Regulated Exchanges Act rather that Act was

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<v Speaker 1>meant to be this sort of premier unveiling of how

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<v Speaker 1>they were over the past decade serious about changing its

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<v Speaker 1>reputation in the marketplace as well as a race to

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<v Speaker 1>the finish. Larger industrialized nations like the US, of course

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<v Speaker 1>hadn't quite come to a consensus about whether there was

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<v Speaker 1>a need for regulations entirely, and of course other nations

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<v Speaker 1>were also attempting to ready their own regulations, and I

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<v Speaker 1>think the Bahamas caught wind of that and thought we're

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<v Speaker 1>we're going to be first, and was successful in that regard.

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<v Speaker 1>As you say, you mentioned the DARE Act, right the

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<v Speaker 1>Digital Assets and Registered Exchanges. When was that introduced and

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<v Speaker 1>what was it designed to really achieve? The DARE Act

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<v Speaker 1>was introduced in twenty twenty, and essentially it was designed

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<v Speaker 1>to be just a bare bones framework to show that

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<v Speaker 1>the Bahamas was willing to welcome what would be a

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<v Speaker 1>sort of an exchange, a dialogue between registered you know,

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<v Speaker 1>digital asset providers and crypto companies in thinking through like, so,

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<v Speaker 1>here are the regulations in response to this, how do

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<v Speaker 1>you cryptocompany X y Z plan to help enhance this

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<v Speaker 1>suite of regulations and show that with regulations you can

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<v Speaker 1>do what's right. Essentially, that you can be innovative and

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<v Speaker 1>you can make commitments and carry on carry on in

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<v Speaker 1>that way. And we had an opportunity to speak to

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<v Speaker 1>the Chair of the Security Commission of the Bahamas, Christina

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<v Speaker 1>who Role, who described it as robust, but essentially it

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<v Speaker 1>was it was still very much immature. That is to say,

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<v Speaker 1>it needed room to grow, and that's only possible when

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<v Speaker 1>faced with certain risks. The derect though, she made clear,

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<v Speaker 1>and others came well before FDx started to court the Bahamas,

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<v Speaker 1>and it really was away for the country to sort

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<v Speaker 1>of race to the finish in trying to beat out

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<v Speaker 1>its counterparts in the region. But essentially it was meant

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<v Speaker 1>to be a suite of regulations that would, over time,

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<v Speaker 1>with the regulators sort of inspections and examinations of the

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<v Speaker 1>companies that would fall under it, help improve it helped

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<v Speaker 1>him get better. In fact, there was already a preparation

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<v Speaker 1>this year that started, I guess last year to sort

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<v Speaker 1>of enhance it. There's a draft, there's a mock up

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<v Speaker 1>of an amendment to it. And that was what the

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<v Speaker 1>country pointed to as showing that it was already starting

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<v Speaker 1>to take into account, not just FTX, but other I

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<v Speaker 1>think they were at the time, maybe eight there were

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<v Speaker 1>a registered That number of course fluctuates depending on a

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<v Speaker 1>company's standing, but they were hoping to make it better

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<v Speaker 1>and make it robust. But they made it clear that

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<v Speaker 1>it was the welcoming post, but it would only be

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<v Speaker 1>fortified over time. When you were there and you know,

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<v Speaker 1>talking to folks who had either non Bankmen Freed no

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<v Speaker 1>and other folks from FTX or had been affected by

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<v Speaker 1>the collapse because they had local employees. For instance, what

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<v Speaker 1>was the sentiment of the people who were trying to

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<v Speaker 1>figure out what had happened when the company said that

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<v Speaker 1>they had gotten approval to allow withdrawals for clients in

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<v Speaker 1>the Bahamas. That approval, they described was really an exchange

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<v Speaker 1>between the regulator and the company, and I think Bankmen

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<v Speaker 1>Freed sent the email on behalf of the company to

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<v Speaker 1>say that if you do not respond to this request,

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<v Speaker 1>and this would have been the Thursday before the major withdrawals,

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<v Speaker 1>if you will, or into the midnight of Friday morning

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<v Speaker 1>that Friday morning, November twelfth. If I'm not mistaken, this

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<v Speaker 1>exchange just said that if you don't respond to this note,

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<v Speaker 1>then we will carry on with this plan to allow

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<v Speaker 1>clients in the Bahamas to withdraw because we don't want to.

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<v Speaker 1>And I think the language was spoke to the fact

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<v Speaker 1>that the sentiment was we don't want to piss off

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<v Speaker 1>the Behaman government or in any way ruin the relationship

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<v Speaker 1>we have with our clients and the people here. But

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<v Speaker 1>that wasn't a direct nod by the regulator, to be

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<v Speaker 1>fair of them saying yes, you can allow that. But

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<v Speaker 1>the understanding I think at the time, though before this

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<v Speaker 1>was made public, was that is bankman freed in cahoots

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<v Speaker 1>with the Behaming government or with the regulator or both.

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<v Speaker 1>Did clients in the Bahamas get special privileges that clients

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<v Speaker 1>all around the country, part of me, all around the

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<v Speaker 1>United States, all around certain parts of Asia and elsewhere

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<v Speaker 1>didn't get? And if so, why is that? We now

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<v Speaker 1>know what that exchange looked like. But at the time

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<v Speaker 1>it was a point of contention. There were reports of

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<v Speaker 1>people flying in on private jets trying to bribe those

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<v Speaker 1>clients in the Bahamas to help other clients, these global

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<v Speaker 1>clients sort of like offload or you know, withdraw their funds.

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<v Speaker 1>There were even discussions about whether certain banks were involved

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<v Speaker 1>in allowing that during that particular window. But I think

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<v Speaker 1>that confusion, that lack of clarity, particularly around those withdrawals,

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<v Speaker 1>is still a sore point for a lot of people

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<v Speaker 1>who feel as if they were short changed. Even if,

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<v Speaker 1>like if we take what explanations bank man Freed is

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<v Speaker 1>given around the decision making about mismanaging funds, people, still

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<v Speaker 1>that particular window of time is still a sore point

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<v Speaker 1>for a lot of people on the ground. Up next,

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<v Speaker 1>you'll hear more from Bloomberg report to Katanga Johnson on

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<v Speaker 1>what's happening with the Bahamas post FTX. We'll be right

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<v Speaker 1>back now. When you went to the Bahamas, and you know,

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<v Speaker 1>I remember we were like, hey, can you go to

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<v Speaker 1>the apartment, Hey, can you find can you find the jail? Hey?

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<v Speaker 1>It was just this like wackable of assignments. What things

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<v Speaker 1>like stood out to you in terms of the first

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<v Speaker 1>few days, particularly before he was officially arrested and then afterwards,

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<v Speaker 1>like as people as it was sort of sinking in

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<v Speaker 1>for more and more people in the island that this

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<v Speaker 1>was real and happening. It was remarkable that the layman,

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<v Speaker 1>the everyday Bahamian really did communicate to me at least

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<v Speaker 1>that they thought, oh, this is all some big misunderstanding.

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<v Speaker 1>It can be the case this person is truly hiding

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<v Speaker 1>after being so public and engaged in the community. Right,

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<v Speaker 1>former employees had it, you know, they were singing a

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<v Speaker 1>different tone. The people were cautious in talking to me,

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<v Speaker 1>but generally the consensus was, whatever the issue was here,

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<v Speaker 1>there must be an explanation around where the funds are.

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<v Speaker 1>So even if even if there's a concern about whether

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<v Speaker 1>Sam's complying or not or what happened, that there must

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<v Speaker 1>be some bigger explanation. And I think as I look back,

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<v Speaker 1>it really speaks to the fact that what had gone

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<v Speaker 1>on was in fully communicated to staff at a certain level,

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<v Speaker 1>even among the compliance staff that were on the ground,

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<v Speaker 1>many of whom were Behamian. The company made a lot

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<v Speaker 1>of good faith efforts in terms of and there've been

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<v Speaker 1>reports about this. Right people would talk about the sort

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<v Speaker 1>of parties they hosted and how people were invited to

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<v Speaker 1>attend those parties at a staff level, and they were

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<v Speaker 1>so extravagant. People were recounted the ways in which many

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<v Speaker 1>of the employees might have left like really good civil

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<v Speaker 1>servant jobs, or left their jobs at other financial stitutions

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<v Speaker 1>and like double their salary by working there, or you know,

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<v Speaker 1>people would describe knowing that, oh, here was the beginning

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<v Speaker 1>of what seemed to be a company that I think

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<v Speaker 1>up to sixty of the say one hundred and twenty

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<v Speaker 1>staff members were Behamians, or there was like equity in

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<v Speaker 1>that way, and they were well paid and they were

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<v Speaker 1>able to expense meals or grocery in the life. These

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<v Speaker 1>are the kinds of things people described, and they would

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<v Speaker 1>they would describe it in a way to say that

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<v Speaker 1>it's a company that puts a value on its staff,

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<v Speaker 1>and its reputation in this way is unlike other financial institutions.

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<v Speaker 1>So it's it's that the novelty of crypto almost makes

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<v Speaker 1>it seem cool and exciting, not just because of the

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<v Speaker 1>product itself, but because of the culture. So they felt

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<v Speaker 1>taken care of. People felt taken care of indeed, and

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<v Speaker 1>they felt that because of that, whatever was happening with

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<v Speaker 1>respect to these withdrawals and the funds. It could all

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<v Speaker 1>be explained. But that quickly changed, didn't it, especially among

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<v Speaker 1>people who didn't There were even people in the Bahamas

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<v Speaker 1>who didn't benefit from being able to withdraw their funds,

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<v Speaker 1>and those people were the most adamant that something didn't

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<v Speaker 1>quite smell right, as they'd say, and people would even

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<v Speaker 1>point to some signals from the Crypto Bahamas conference that

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<v Speaker 1>took place months prior, but didn't quite understand what it was.

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<v Speaker 1>They too, were perplexed given what they knew about the

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<v Speaker 1>company and its culture, what they knew about the cast

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<v Speaker 1>of characters at the highest level, and what was happening now.

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<v Speaker 1>You reported on the jail and the detention conditions that

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<v Speaker 1>bankun Freed was in. Was there any perception in the

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<v Speaker 1>Bahamas after he was arrested that he was also getting

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<v Speaker 1>kind of a different tier of I don't know, cozy

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<v Speaker 1>custody than might have been afforded to local residents. But

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<v Speaker 1>the onset it seemed that he would be treated like

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<v Speaker 1>everyone else the night he was arrested, but that quickly

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<v Speaker 1>changed the next day when he appeared at his arrayment,

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<v Speaker 1>hearing one distinct moment that comes to mind is that

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<v Speaker 1>the hearing it started on time he appeared, and before

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<v Speaker 1>he was even able to introduce himself, there was a

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<v Speaker 1>question about whether his nights stay was pleasing or suitable

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<v Speaker 1>for him, and the judge, the presiding judge, so that question,

0:12:49.559 --> 0:12:52.320
<v Speaker 1>like you know, sort of mind is blown. Was your

0:12:52.320 --> 0:12:55.080
<v Speaker 1>stay in prison, okay, sir? Your stay in prison okay?

0:12:55.120 --> 0:12:56.800
<v Speaker 1>Just you know, just for that evening before we even

0:12:56.800 --> 0:12:58.280
<v Speaker 1>get to the heart of the matter. And and then

0:12:58.280 --> 0:13:01.680
<v Speaker 1>there was this pause, you know, even described meeting certain

0:13:01.679 --> 0:13:06.439
<v Speaker 1>medicine for his ADHD for I think perhaps other conditions

0:13:06.480 --> 0:13:09.920
<v Speaker 1>that might have included insomnia and then his allergies, and

0:13:10.600 --> 0:13:13.000
<v Speaker 1>one of them was prescribed that I think the other

0:13:13.040 --> 0:13:16.480
<v Speaker 1>two were not. The ADHD was prescription was for dropping

0:13:16.520 --> 0:13:19.160
<v Speaker 1>out the allergy and the insomnia prescription. And the hearing

0:13:19.240 --> 0:13:21.240
<v Speaker 1>was held. There was a recess called for about an

0:13:21.280 --> 0:13:23.280
<v Speaker 1>hour hour and a half so that his family members

0:13:23.280 --> 0:13:26.680
<v Speaker 1>who were with him could be accompanied by police to

0:13:26.800 --> 0:13:29.880
<v Speaker 1>drive across town maybe thirty minutes away maybe last right,

0:13:29.920 --> 0:13:33.480
<v Speaker 1>if you're in a police murdicate or caravan to get

0:13:33.480 --> 0:13:35.439
<v Speaker 1>his medicine so that he can be able to take

0:13:35.480 --> 0:13:38.000
<v Speaker 1>it before it starts and that's in many ways a

0:13:38.040 --> 0:13:41.400
<v Speaker 1>basic human right. But it stands in stark contrast to

0:13:41.960 --> 0:13:44.040
<v Speaker 1>the prison in the Bahamas, where of course there have

0:13:44.080 --> 0:13:48.360
<v Speaker 1>been complaints even as high as the US government sort

0:13:48.360 --> 0:13:50.720
<v Speaker 1>of criticizing the country in some ways for the conditions

0:13:50.720 --> 0:13:52.920
<v Speaker 1>of the prison, and people kind of pointed out how

0:13:52.920 --> 0:13:55.320
<v Speaker 1>his treatment was much different even though there were these

0:13:55.360 --> 0:13:58.679
<v Speaker 1>allegations against him at this point, you know, weeks into

0:13:58.920 --> 0:14:02.360
<v Speaker 1>the initial news breaking would have gone. So that was

0:14:02.440 --> 0:14:06.200
<v Speaker 1>one interesting tidbit. Over the course of the next week

0:14:06.360 --> 0:14:09.760
<v Speaker 1>or so, with various hearings, however, things did what one

0:14:09.840 --> 0:14:12.839
<v Speaker 1>might have expected with that sort of initial theatrics, though

0:14:13.120 --> 0:14:15.480
<v Speaker 1>at the end of the day didn't didn't he his

0:14:16.120 --> 0:14:18.920
<v Speaker 1>you know, Baer request was denied, and right, it seems

0:14:18.960 --> 0:14:21.400
<v Speaker 1>now like it was all just a funny, funny joke

0:14:21.480 --> 0:14:23.920
<v Speaker 1>to to sort of start the day. What an interesting

0:14:23.960 --> 0:14:27.720
<v Speaker 1>time now, I find because I am from an island

0:14:27.720 --> 0:14:31.360
<v Speaker 1>in the Caribbean, Trinidad, that most people think they understand

0:14:31.360 --> 0:14:35.360
<v Speaker 1>would have like extremely narrow, you know, definitions of like

0:14:35.400 --> 0:14:36.720
<v Speaker 1>this is what this island was like, this is what

0:14:36.720 --> 0:14:38.480
<v Speaker 1>Trinidadian is like, this is what the Caribbean is like.

0:14:39.160 --> 0:14:44.680
<v Speaker 1>What for you was the most common misconception about the

0:14:44.680 --> 0:14:47.000
<v Speaker 1>Bahamas or about the people in the Bahamas are about

0:14:47.040 --> 0:14:51.880
<v Speaker 1>regulators that you had to attempt to dispel in the

0:14:51.920 --> 0:14:56.000
<v Speaker 1>process of your reporting on this story, states Marie. Like you,

0:14:56.280 --> 0:14:58.520
<v Speaker 1>I am also from a nation in the West Indies,

0:14:58.560 --> 0:15:00.640
<v Speaker 1>I'm from the Bahamas, which made the story so exciting,

0:15:01.040 --> 0:15:02.800
<v Speaker 1>you know, But first informist. I see myself as a

0:15:02.800 --> 0:15:06.520
<v Speaker 1>remember the press, as someone who is pursuing truth, and

0:15:06.600 --> 0:15:09.080
<v Speaker 1>I went in with that particular like understanding of what

0:15:09.120 --> 0:15:10.880
<v Speaker 1>I was doing and tried to engage with people, even

0:15:10.920 --> 0:15:14.920
<v Speaker 1>people I knew, in the same way. One observation I made, though,

0:15:15.040 --> 0:15:18.080
<v Speaker 1>was that in some ways you may think of the

0:15:18.080 --> 0:15:21.520
<v Speaker 1>Bahamas as a place that's sleepy and quiet, and that

0:15:21.600 --> 0:15:24.560
<v Speaker 1>people are not as informed of maybe their risks of

0:15:25.000 --> 0:15:27.160
<v Speaker 1>dancing with the devil, if you will, right, sort of

0:15:27.880 --> 0:15:30.960
<v Speaker 1>not taking seriously what could go wrong when you're courting

0:15:31.840 --> 0:15:34.080
<v Speaker 1>such a novel, you know, engaging in such a novel

0:15:34.120 --> 0:15:37.200
<v Speaker 1>industry and going further than even again, as we established, right,

0:15:37.440 --> 0:15:40.160
<v Speaker 1>even the US went in terms of codifying regulations around

0:15:40.280 --> 0:15:42.640
<v Speaker 1>around crypto. I think it kind of shows, and this

0:15:42.720 --> 0:15:44.560
<v Speaker 1>is the nation's fiftieth year of independence, it kind of

0:15:44.640 --> 0:15:48.080
<v Speaker 1>shows that the nation's ready to be bold and sort

0:15:48.120 --> 0:15:50.040
<v Speaker 1>of take off the training wheels, and that comes with

0:15:50.080 --> 0:15:52.120
<v Speaker 1>a big risk. And this hopefully is a learning lesson.

0:15:52.160 --> 0:15:55.160
<v Speaker 1>But the way I see it, based on just the

0:15:55.280 --> 0:15:57.760
<v Speaker 1>dozens of people I spoke to and continued to engage with,

0:15:58.200 --> 0:16:00.200
<v Speaker 1>I think it's turning out to be that this might

0:16:00.200 --> 0:16:01.480
<v Speaker 1>have been the best thing that ever happened to the

0:16:01.520 --> 0:16:03.840
<v Speaker 1>Mohammas to help it mature in a way that it

0:16:03.880 --> 0:16:07.320
<v Speaker 1>had hoped it would. By even welcoming FDx to begin with, Katanga,

0:16:07.320 --> 0:16:08.640
<v Speaker 1>has been such a pleasure having you on the show.

0:16:08.680 --> 0:16:10.560
<v Speaker 1>Thank you so much for joining us, Thanks for having me.

0:16:11.720 --> 0:16:14.640
<v Speaker 1>That was Bloomberg Reporto Katanga Johnson. You can find more

0:16:14.680 --> 0:16:16.920
<v Speaker 1>of his reporting on the Bloomberg Terminal and on Bloomberg

0:16:17.000 --> 0:16:19.320
<v Speaker 1>dot com, and of course, be sure to check out

0:16:19.320 --> 0:16:28.440
<v Speaker 1>our twice weekly crypto newsletter, Bloomberg Crypto. This is Bloomberg Crypto,

0:16:28.640 --> 0:16:32.520
<v Speaker 1>a daily podcast from Bloomberg and iHeartRadio. For more shows

0:16:32.520 --> 0:16:36.720
<v Speaker 1>from iHeartRadio, visit the iHeartRadio app, Apple Podcasts, or wherever

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0:16:40.320 --> 0:16:43.320
<v Speaker 1>suggestions for the show to Crypto at Bloomberg dot net.

0:16:46.520 --> 0:16:50.240
<v Speaker 1>The supervising producer of Bloomberg Crypto is Vicky Vergalina. Our

0:16:50.280 --> 0:16:54.120
<v Speaker 1>senior producer is Janet Babin. Our producers are Mohammed Faroup

0:16:54.160 --> 0:16:57.560
<v Speaker 1>and Sharon Barrero. Our associate producers are Ty Butler and

0:16:57.640 --> 0:17:02.280
<v Speaker 1>Moses on Desto wonder Ad is our engineer. Original music

0:17:02.440 --> 0:17:07.160
<v Speaker 1>by Leo Sidron. I'm Stacy Mariagemaal. We'll be back tomorrow