A Bahamas securities regulator froze the assets of struggling cryptocurrency exchange FTX's local business on Thursday.
The Bahamas Securities Commission also took the initial move toward pushing the local subsidiary, FTX Digital Markets (FDM), into what is known as provisional liquidation, in which assets will be secured for the time being rather than distributed to creditors.
The regulator said in a statement that it was aware of "public statements suggesting that clients' assets were mishandled, mismanaged and/or transferred to Alameda Research."
Sam Bankman-Fried, the CEO of FTX, founded the trading firm Alameda. A leaked balance sheet from the company showed it held significant amounts of FTX Token (FTT), the native token of the FTX exchange. Rumors that it was funding trades with FTX user funds caused a "bank-run" on FTX, which resulted in a liquidity crisis for the exchange.
The regulator has canceled FDM's registration, which gave the business unit permission to operate in The Bahamas, in an effort to "proactively" address the rapidly evolving issue, according to a statement from the regulator.
FDM is a Bahamian division of parent company FTX Trading Ltd., which also owns and runs FTX writ-large. FTX.US, the US division of CEO Sam Bankman-Fried's businesses is not part of FTX and its subsidiaries.
The move comes after reports that FTX and sister trading firm Alameda Research were commingling assets - namely, the exchange's native FTT coin - to shore up Alameda's financial sheet. Since then, industry participants and regulators have been debating whether FTX has been inappropriately trading customer cash through Alameda.
According to the commission's first findings, the arrangement appears to be possibly illegal without customer approval, according to the watchdog. As a result, the regulator hired Brian Simms, senior partner and head of litigation and insolvency at LennoxPaton, to lead its investigation.
FDM executives, including Bankman-Fried, have been removed of operational authority, and assets belonging to both FTX and its clients are not permitted to be moved without the prior approval of Simms.
"The commission determined that the prudent course of action was to put FDM into provisional liquidation to preserve assets and stabilize the company," the statement said.
"The commission is committed to working with the provisional liquidator to endeavor to obtain the best possible outcome for the customers and other stakeholders of FTX."
The FTX crisis has attracted the attention of U.S. regulators as well. Maxine Waters, the chair of the House of Representatives Financial Services Committee, has called for increased consumer protection and increased government regulation of cryptocurrency trading platforms.
