FTX ‘jurisdiction shopped’ to locate in lax regulatory environment

The collapse of Sam Bankman-Fried’s FTX Trading has become an international dispute, highlighting complications when an industry operates globally with little or no regulation.

“Investor confidence is markedly down as of late in no small part because of lack of regulatory clarity across the industry,” said Aaron Kaplan, CEO and co-founder of Prometheum, a U.S-based SEC and FINRA-regulated digital asset securities trading platform.

A bankruptcy court in Delaware is scheduled to address the issue Tuesday. U.S.-based FTX Trading wants the court to consolidate a provisional liquidation proceeding in the Bahamas into the U.S. case.

Provisional liquidators for FTX’s Bahamas entity filed a Chapter 15 petition last week, challenging the validity of the U.S.-based entitys Chapter 11 bankruptcy filing. Provisional liquidators are appointed when it appears likely a company will not be able to pay its debts and needs to settle up with creditors. The court filing said Bahamas-based FTX Digital is presently cash flow insolvent and is likely to be balance sheet insolvent.

Sam Bankman-Fried, CEO of FTX US Derivatives, testifies on Capitol Hill in May 2022

From right, Terrence A. Duffy, CEO of the Chicago Mercantile Exchange, Sam Bankman-Fried, CEO of FTX US Derivatives, Christopher Edmonds, chief development officer of the Intercontinental Exchange, and Christopher Perkins, president of CoinFund, testify before the House Agriculture Committee, in Washington, May 12, 2022.


Kaplan told FOX Business it is no surprise Bankman-Fried registered his company in the island nation.


“FTX.com jurisdiction shopped and chose arguably one of the least restrictive regulatory regimes and this choice certainly was a major factor in the events that have unfolded over the past week or so,” he said.

Similar international disputes may arise elsewhere if other cryptocurrency companies fail, creating difficulties for customers and other out-of-the-money creditors.

Kaplan said that even if crypto exchanges are required to register under local banking and securities laws, centralized exchanges and platforms often jurisdiction shop, meaning relocating from one location to another in order to optimize profits at the expense of compliance and ultimately the customer, which is very difficult to prevent.

“The unfortunate reality is that without comprehensive and robust crypto regulation across all jurisdictions and without strict limits on jurisdiction shoppingwhereby crypto firms choose to relocate to a jurisdiction with less stringent laws and regulationsthe onus will fall on the customer to evaluate many aspects of an exchange, including its location,” Kaplan said.

He explained that the best way to return users’ confidence, in major markets such as the United States, Hong Kong, Singapore and Japan, is to adopt and apply the most stringent regulatory regimes rules and frameworks.

Such laws would protect investors and ensure proper separation and treatment of customer funds and assets. In the U.S. this is done through federal securities laws.


Reuters contributed to this report.