15 FAQs ON THE DIGITAL ASSETS AND REGISTERED EXCHANGES (‘DARE’) ACT, 2020

Nassau, The Bahamas – In the first issue of GT’s News & Insights Volume 3, GrahamThompson Partner Aliya Allen and Associate Sean McWeeney Jr. review 15 FAQs on the Digital Assets and Registered Exchanges (‘DARE’) Act, 2020.

Download a PDF document of the full publication here, 15 FAQs on the Digital Assets and Registered Exchanges (‘DARE’) Act, 2020, or read the complete article which follows.

1. What is the significance of DARE?

The Digital Assets and Registered Exchanges Act (‘DARE’ or the ‘Act’) came into effect on 14 December 2020 by an appointed day notice dated 4 December 2020. DARE can be viewed as landmark legislation which regulates the issuance, sale, and trade of digital assets in (or from within) the jurisdiction. DARE also legally recognizes distributed ledger technology (e.g. blockchain), an emerging technology that can serve as a launch pad for disruptive innovation within the financial services sector, and far beyond. The Bahamas now joins only a handful of jurisdictions that have enacted comprehensive legislation aimed at regulating the digital assets industry.

2. Who or what does DARE apply to?

DARE applies to any organizer, issuer, founder, purchaser or investor (as defined by DARE) that participates in the formation, promotion, maintenance, organization, sale or redemption of an initial token offering (‘ITO’) as well as any legal entity carrying on a digital asset business, irrespective of any physical location from which the activity is carried out.[1] Further, once enacted, any person who immediately before the commencement of DARE engaged in any activity or business that is now sought to be regulated under DARE will be deemed as having engaged in the same in accordance with its provisions. Those persons are invited to apply to the Commission for registration within 90 days of the commencement of DARE accordingly to ensure full compliance.[2]

3. Who will regulate the issuance of digital assets, digital asset businesses and their activities?

The Securities Commission of The Bahamas (the ‘Commission’).[3]

The Commission will have several functions and powers in its capacity as regulator. Key functions will include: the regulation, monitoring and supervising of the issuance of digital assets and those persons conducting digital asset businesses in or from within The Bahamas; the development of rules, guidance and codes of practice with regard to the conduct of digital asset businesses and ITOs; the approval and regulation of digital asset businesses; the regulation of initial and subsequent token offers; and, enforcing the provisions and any violations of DARE.[4]

4. What is the difference between a digital asset and a digital token?

DARE defines digital assets as a digital representation of value distributed through a distributed ledger technology platform (‘DLT Platform’) where value is embedded or in which there is a contractual right of use (this includes digital tokens).[5] The most well-known type of DLT platform is the ‘blockchain’ – a digital distributed-ledger or database whereby digital asset transactions are recorded chronologically.[6]

Digital tokens are a kind of digital asset. DARE makes specific reference to four types of digital tokens: virtual currency tokens, asset tokens, utility tokens and non-fungible tokens.[7]

5. What are digital asset businesses?

Digital asset businesses (which is fundamentally an umbrella term) include:

• a digital token exchange and provision of services in connection with the same;
• payment service providers utilizing digital assets;
• digital asset service providers[8] (including DLT Platforms that facilitate exchanges between digital assets and fiat currencies, the exchange between one or more forms of digital assets, and the transfer of digital assets); and
• participants in or providers of financial services related to an issuer’s offer or sale of a digital asset.[9]

6. Must you register a digital asset business prior to commencing operations in connection with the same?

Yes. Only legal entities registered with the Commission in accordance with sections 8 and 9 of DARE will be permitted to carry on or become involved in a digital asset business in or from within The Bahamas.[10] Failure to register a digital asset business will be considered an offence and violation of DARE which can carry a penalty.[11]

7. Which legal entities are invited to apply for registration of a digital asset business?

Entities incorporated, registered, continued or otherwise established in accordance with the Companies Act (Ch. 308); International Business Companies Act (Ch. 309); the Partnership Act (Ch. 310); the Partnership Limited Liability Act (Ch. 311); and the Exempted Limited Partnership Act (Ch. 312) are deemed legal entities under DARE.[12] Such legal entities who are desirous of or who are already providing services as a digital asset business must apply to be registered under DARE via a submission of an application to the Commission.[13]

8. Is a person who intends to provide services related to a digital asset business (as an additional activity) also required to register under DARE?

Yes. Where that person is registered under the Securities Industry Act; licensed as an investment fund administrator under the Investment Funds Act; or, licensed as a financial or corporate service provider under the Financial and Corporate Service Providers Act (Ch. 369), that person must apply by way of submission of a completed Form 1 (found in Part B of the First Schedule) in accordance with DARE.[14]

9. What are some of the factors the Commission will consider when reviewing an application for registration?

The Commission, when considering whether to approve an application for registration, will need to be satisfied that the applicant is incorporated, established or registered under any law of The Bahamas; is fit and proper; and, has sufficient capacity and resources to conduct an activity provided for under DARE.[15] Further, applicants must demonstrate that it has appropriate and sufficient controls to perform its functions and manage its risks (e.g. fraud and market abuse); that it has the ability to meet solvency standards and levels of capital as may be prescribed by regulations; and has designed a digital asset framework that takes into account key components such as technology and security; governance; scalability; identified risk framework; and data protection and storage, among others.[16]

10. What data protection obligations will DARE impose on registrants?

DARE will impose a statutory obligation on registrants to implement and maintain record keeping measures to ensure the accurate collection of information and documents related to the originator and beneficiary of digital assets. These data protections measures must be in accordance with the Data Protection (Privacy of Personal Information) Act (Ch. 324).[17]

11. What is a digital token exchange (‘DTX’)?

DARE defines a digital token exchange as a marketplace in the form of a platform using distributed ledger technology (‘DLT’) for the sale, trade, or exchange of digital tokens, whether for fiat currency or one or more digital tokens.[18]

12. What is an initial token offering (‘ITO’)?

ITOs are defined as an offer made by an issuer (which is the entity contractually responsible for issuing the digital token)[19] to the public for sale of a digital token in exchange for fiat currency or another digital asset.[20] All offers in connection with digital tokens in, or from within The Bahamas must be in compliance with DARE.[21]

13. What are the general requirements of an issuer desirous of selling digital tokens through an ITO in or from within the jurisdiction?

The issuer must be fit and proper; have prepared an offering memorandum (‘OM’); and comply with any regulations, rule or guidelines provided for under DARE.[22]

14. What is the purpose of an offering memorandum (‘OM’)?

An OM is a document (e.g. a notice, circular, advertisement or whitepaper) issued to the public or accessible electronically which invites applications or offers to subscribe for, or purchase, digital assets. It may also offer digital assets for subscription or purchase.[23] Issuers will have a statutory obligation to ensure there is full and accurate disclosure contained in the OM so that potential purchasers can make an informed decision.[24] DARE’s Second Schedule provides a lengthy list of matters and format considerations that must be included and followed within the OM. Some matters that must be included are (but not limited to):

• purpose for the ITO;
• description of the characteristics and functionality of the digital assets being offered;
• challenges and risks as well as mitigating measures related to the issuer’s business;
• description of the targeted investor base;
• description of the issuer’s wallet used, etc.[25]

15. What is the application process to register an ITO with the Commission?

Prior to making an application to register an ITO, the issuer should ensure that they have identified a class or the classes of tokens they plan to make available for subscription in the OM (i.e. utility, virtual currency or asset tokens) as changing these classes requires written approval from the Commission.

An application for ITO registration must be submitted no later than 45 days prior to the commencement of the offer period and consist of: completed Form 1 (to be found in Part D of the First Schedule); an OM in the prescribed format; an attorney’s written legal opinion obtained with respect to the OM; and the application fee (to be found in the Third Schedule).[26]

The issuer should expect to receive a determination on the application by the Commission within 30 days of receipt of the same. However, where the Commission determines that the token is actually a security, the issuer must withdraw its application for digital token registration but will be permitted to apply to register the same as a token under the Securities Industry Act.[27]

Once approved by the Commission, the token will be added to a register of ITOs.

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Please note that this memorandum is intended to be general and non-exhaustive in nature and may not cover all material aspects of the DARE Act. You are encouraged to contact us at Graham Thompson should you require further specific advice on the contents of DARE.

[1] s. 3(1)(a) and (b) DARE

[2] s. 54 DARE

[3] s. 4(2) DARE

[4] s. 5(1) and (2) DARE

[5] s. 2(1) DARE

[6] ibid.

[7] ibid.

[8] Under s. 2(1) DARE, a digital asset services provider is a person under an agreement (as part of its business) may: undertake a digital asset transaction on behalf of another person; has power of attorney over another person’s digital asset; or, operates as a market maker for digital assets.

[9] s. 6 DARE; First Schedule, Part B, Form 1, Item 4 (DARE)

[10] s. 7 DARE

[11] s. 42(1) DARE

[12] s. 2 DARE

[13] s. 8(1) DARE

[14] s. 9(1)(a) DARE

[15] S. 16(2) DARE

[16] s. 16(3) DARE

[17] s. 23 DARE

[18] s.2(1) DARE

[19] s. 2(1) DARE

[20] ibid.

[21] s. 27(1) DARE

[22] s. 27(2) DARE

[23] s. 2(1) DARE

[24] s. 28(1) DARE

[25] Second Schedule, DARE

[26] S.31(1), (2) and (3) DARE

[27] s. 31(4) DARE