According to reports, one of the main causes of the FTX’s poor management and demise was the outsourcing of jurisdiction.
Over the past few weeks, FTX, a global cryptocurrency exchange, has been the subject of a lot of writing. And with good cause. It’s not every day that a firm that was once valued at $32 billion collapses in an instant. This is a tale of monumental arrogance, mismanagement, and perhaps even fraud.
However, the FTX collapse has already been thoroughly examined by others, including this magazine, therefore this piece is not an analysis of that event. Instead, I want to dig a bit further to highlight a flaw that, in my opinion, has had the most impact, particularly for crypto investors and regulators: the loss of jurisdictional authority and the significance of risks.
I’ll explain. The public saw FTX and its well-known founder Sam Bankman-Fried as being American. After becoming acquainted with the company and its creator through social media, sponsorships, and media attention, US investors invested their money in FTX—directly or through its sister company, FTX US.
The creator and CEO of FTX, known by the abbreviation SBF, was even a significant political donor in the US, which garnered him a lot of media attention. Even the late John Pierpont Morgan, the renowned investor, and creator of the named institution was likened to him. He was a force on Twitter.
However, SBF and other top executives of FTX, an offshore exchange with headquarters in the Bahamas, lived there. In other words, there was minimal control over FTX by US officials. The same is true for SBF’s trading company, Alameda Research. Although Alameda and FTX were conceptually autonomous, they really had a close relationship. The fact that Alameda routinely mismanaged FTX’s client cash and even leased them to executives like SBF without their knowledge or approval is much worse.
Compare that to Coinbase. Coinbase is a significant cryptocurrency exchange that is based in the US and publicly listed on the Nasdaq. It was founded and is run by Brian Armstrong. The US Securities and Exchange Commission’s website offers free access to Coinbase’s financial statements and disclosures. But investors saw FTX, located in the Bahamas, and Coinbase, listed on the Nasdaq, as being on par. One of the key contributing factors to the mishandling and demise of the FTX is this outsourcing of authority.
Such faultlines require constant attention from India. Through intermediaries and exchanges situated in India, Indian customers can invest in cryptocurrencies. These businesses must comply with Indian laws and norms regarding KYC, taxes, and filing reports with the union minister of corporate affairs. However, because the internet has no boundaries and crypto platforms are widely accessible via download, these consumers might simply choose to utilize foreign crypto exchanges if they so desired.
This jurisdictional arbitrage undermines TDS’ goals. TDS is an innovative tax that gives the government complete visibility into the Indian cryptocurrency industry by providing a trail of transactions. At least, that is the theory. However, the high TDS rate of 1%—applied to every transaction and having the potential to lock up a large amount of a trader’s accessible capital—has further increased opacity as customers have switched from Indian platforms that are compliant to offshore exchanges.
The FTX debacle has demonstrated that this may be extremely harmful to India’s crypto consumers, local businesses, and the nation’s economy. According to reports, a number of Indian consumers also made investments in the now-defunct FTX. In reality, the scant information about FTX’s improper handling of client cash only became public after the company filed for Chapter 11 bankruptcy in the US. However, SBF is attempting to transfer the oversight to the Bahamas, so even this tardy jurisdiction over FTX is in dispute. No matter how everything turns out, it is obvious that Indian investors who used FTX are not likely to be given top priority.
If this can occur in the West, it may also occur in India if rules are not put in place to protect Indian investors from such offshore dangers. Regulations might be implemented for exchanges and intermediaries operating in India to standardize accounting methods and disclosures, including routine, externally verified reports on the cryptocurrency they hold on behalf of their users and how they are safeguarded.
The Honorable Finance Minister is correct to note the significance of a worldwide agreement on cryptocurrency laws. Additionally, New Delhi has a great chance to lead this cooperation as it takes over the G20 Summit leadership in December.
However, India must immediately close the gaps to prevent investors from losing money in cryptocurrency businesses over which the government has little to no control. That is the most important lesson regulators can learn from the FTX debacle.
