FTX Digital Markets Ltd.: the Bahamian subsidiary and its liquidation

analysisFTX Digital Markets Ltd. was incorporated in the Bahamas on 22 July 2021 and licensed and registered as a digital asset business by the Securities Commission of the Bahamas on 10 September 2021; its liquidators state that FTX Trading Ltd. is its sole shareholder and funded its growth, and the debtors' disclosure statement likewise calls it a wholly owned subsidiary of FTX Trading. The debtors' second interim report says that in July 2021 a senior FTX Group attorney offered a former Bahamian government official, acting as an attorney, a $1 million "bonus" to obtain the licence within ten weeks, and that it was obtained in less than six; neither person is named, and the record contains no response from them and no finding on the payment. ^{1 2 3}

analysisThe liquidators list its officers as Sam Bankman-Fried (chairman and director from 22 July 2021), Ryan Salame (chief executive and director from the same day, previously at Alameda), Gary Wang (chief technology officer), Nishad Singh (director of engineering) and Constance Wang (chief operating officer), the last three from 1 January 2022, and Can Sun (legal counsel from 1 October 2022). It employed 83 staff, among them Bankman-Fried, Singh and Wang, mainly to operate the FTX International Platform; the liquidators later gave 67 of them redundancy notices. Ray's declaration says its balance sheet was consolidated into FTX Trading's, showing assets of about $149.3 million on 30 September 2022; the balance sheet the liquidators found, dated 5 October, showed $396.4 million of assets and $297.6 million of liabilities, almost all an intercompany payable they understood to be owed to FTX Trading; their summary of its position also lists $819.0 million of liabilities for funds held for customers, with customer claims still to be determined. The liquidators note that its balance sheet did not include digital assets, and the two balance sheets, of different dates, were prepared under former management before any verification. ^{1 4}

analysisAn internal policy of 16 August 2021 declared that "FDM is ultimately responsible for the safeguarding of its customers' assets" and committed the company to segregate customer fiat and virtual assets. The liquidators found that client money nevertheless appears to have been commingled, with substantial flows among its customer accounts and between FTX Digital Markets, FTX Trading and Alameda. They identified more than $5.6 billion of transfers from its custodial accounts to FTX Trading Ltd. and $2.1 billion of related-party transfers to Alameda, some possibly legitimate withdrawals; material fiat transfers between the custodial accounts of FTX Digital Markets and FTX Trading had no documented basis or approval and created no intercompany debt. Of $219.5 million they found in its accounts, about $137 million was labelled as held for customers. ¹

analysisThe liquidators' bank-statement analysis shows FTX Digital Markets receiving $200.6 million from Alameda Research LLC, $2,988.2 million from Alameda Research Ltd and $579.1 million from North Dimension Inc., and paying $5.0 million, $700.7 million and $1,400.9 million to them respectively. The liquidators use "Alameda" for all three companies together. The debtors' second interim report states that the group appears to have used FTX Digital Markets' accounts partly as a pass-through to funnel at least $5.4 billion of customer deposits to FTX Trading Ltd., tracing one chain from an Alameda account through two FTX Trading accounts to FTX Digital Markets' operating account, which received about $402 million in six transfers between September 2021 and August 2022. The liquidators disputed several of the debtors' positions until the settlement. ^{1 2 3 4}

analysisFTX Digital Markets paid for most of the group's Bahamian real estate. Its liquidators identified 52 properties costing $255.4 million, most titled to FTX Property Holdings Ltd, FTX Trading's subsidiary formed to hold property on New Providence, but funded by FTX Digital Markets and booked as its receivable: 38 titled to FTX Property for $204.5 million included 15 units at Albany ($140.4 million), an office suite at the Veridian Corporate Centre ($25.3 million) and 16 units at Ocean Terraces ($17.4 million), and $256.3 million of FTX Digital Markets' $276.2 million of confirmed intercompany receivables was owed by FTX Property. Several titles appeared to be in the names of individual employees or relatives of Bankman-Fried. The debtors' report puts real estate spending at over $243 million, at the direction of Bankman-Fried and other executives, from accounts holding commingled customer and corporate funds, including a $30 million Albany penthouse bought in January 2022 that housed senior executives. ^{1 2}

analysisThe debtors give an example of a property bought for an employee with money wired from Alameda and from FTX Digital Markets, which had received it from FTX Trading; the employee signed a promissory note to Alameda four months after the purchase, and other insiders received purported loans from Alameda without any note. In December 2022 the liquidators moved to dismiss FTX Property Holdings' Chapter 11 case; under their cooperation agreement with the debtors a Bahamian liquidation of FTX Property would be opened and the liquidators would manage the sales in coordination with the debtors. ^{3 1}

analysisBy the liquidators' account, when Binance announced that it would sell its FTT holdings the Securities Commission received a tip-off from Ryan Salame that client assets held with it had been sent to Alameda without customers' consent; the company had failed to answer the Commission's urgent queries in a timely manner. The account does not name the Alameda company or the amounts. On 10 November 2022 the Commission froze FTX Digital Markets' assets and the Supreme Court of the Bahamas appointed Brian Simms KC of Lennox Paton as provisional liquidator, joined on 14 November by Peter Greaves of PwC Hong Kong and Kevin Cambridge of PwC Bahamas; the proceeding kept FTX Digital Markets out of the Chapter 11 case. In February 2023 the liquidators reported that its licence was suspended. A Gibraltar law firm reported that the Royal Bahamas Police Force was said to be investigating with the Commission whether any criminal misconduct had occurred; no statement by the police or outcome of such an inquiry was retained. ^{1 2 3}

analysisThe liquidators sought recognition in the United States under Chapter 15 on 15 November 2022; after the case moved to Delaware, the Bankruptcy Court recognised the Bahamian proceeding as a foreign main proceeding on 15 February 2023. The $143.2 million in FTX Digital Markets' U.S. accounts could not be remitted to the liquidators without that order, and on 20 January 2023 the liquidators learned that the Department of Justice had seized the whole amount between 28 and 30 December 2022; the debtors' May 2024 disclosure statement puts the cash seized from its accounts at about $150 million, a figure not reconciled with the liquidators'. The Supreme Court of the Bahamas placed the company into official liquidation on 10 November 2023, a year after the Commission's freeze that followed the tip-off, and in a publication of 19 June 2024 the Swiss regulator FINMA announced that it had recognised the order, allowing the liquidators to recover funds held at Klarpay AG. ^{4 5 1 6 2}

analysisThe two estates soon disagreed over who owned the customer relationships. The liquidators reported that the international platform's terms of service were updated on 13 May 2022 to name FTX Digital Markets as a party, so that customers who kept using the platform were migrated to it, a migration they said still needed confirmatory data and directions from the Bahamian court; in filings reported in June 2023 they argued that anyone using an FTX.com account after that date made FTX Digital Markets the counterparty for services covering about 90% of trading, and that its accounts received and paid out $13.4 billion between January and November 2022. The debtors answered that FTX Digital Markets was a short-lived provider of limited "match-making" services on an exchange built, owned and run by FTX Trading, that over 90% of FTX.com customers had joined before it began operating and that it was "an economic nullity" that never earned third-party revenue. The liquidators also said that services under the May 2022 terms that were not FTX Digital Markets' own regulated services were delivered by FTX Trading Ltd. and LT Baskets Limited and, apart from NFT trading, did not appear to fall outside the Bahamian digital assets act, leaving open whether those companies had breached the Bahamian digital assets act; no later finding on that point was retained. ^{1 2 3}

analysisAfter a cooperation agreement of 6 January 2023, the debtors sued FTX Digital Markets and its liquidators on 19 March 2023 (Adv. Pro. No. 23-50145), seeking a declaration that it had no interest in the debtors' crypto, fiat, intellectual property or customer information, or that transfers to it were avoidable. FTX Digital Markets answered and counterclaimed and filed claims of about $7.7 billion for fraudulent transfers and $1.1 billion for indemnification, with further claims for intercompany dealings and property and corporate expenses. On 19 December 2023 the estates announced a global settlement: they would pool assets and coordinate distributions so that FTX.com customers in both proceedings receive substantially identical recoveries, with customers other than insiders able to choose where their claims were handled. The Bahamian court sanctioned it on 22 January 2024 and the Bankruptcy Court approved it later that month; under an accompanying agency agreement FTX Digital Markets became the exclusive agent for selling 35 luxury Bahamian properties. Under the debtors' plan, a loan from FTX Trading Ltd. to FTX Digital Markets made with the settlement is set off against amounts the debtors owe it. ^{4 3 1 2}