DIGITAL ASSET BUSINESSES: AN UPDATE ON REGULATORY DEVELOPMENTS IN THE BAHAMASApril 25, 2022 Download PDF
Nassau, The Bahamas – GrahamThompson Partner Aliya Allen provides an update on the impact of regulatory developments in The Bahamas, on digital asset businesses, in the latest edition of the firm’s Legal Updates: GT News & Insights, Vol 4 Issue 4. The full text of her review follows. A PDF copy can be downloaded here, An Update on Regulatory Developments in The Bahamas Impacting Digital Asset Businesses.
The Digital Assets and Registered Exchanges Act, 2020 (“DARE”), was passed at the end of 2020, the first year of the COVID-19 global pandemic. As expected in that context, DARE came into force without much fanfare, but in 2021, with much publicity, FTX, one of the largest crypto-exchanges in the world by trading volume, became the first digital asset exchange registered under the new framework.
More and more countries are following The Bahamas and other early mover jurisdictions’ lead, announcing the forthcoming formulation of their regulatory frameworks. They, and indeed The Bahamas, have answered the question that I initially posed in my white paper entitled: “The Bahamas’ Place in a Cryptographic World”, written in early 2018:
“So here we are again at the crossroads, or perhaps a precipice (depending on your outlook), one which is currently not adequately addressed by law or regulatory policy and prior to any significant implosion in this hemisphere at least. Do we allow it to develop as a wholly unregulated activity in The Bahamas almost accidentally, or do we seek to craft common-sense legislation around it and encourage it to bloom?”
DARE has now been in effect for more than a year. There are presently three registrants, with the Securities Commission of The Bahamas (the “Commission”) reporting many applications in the pipeline. Since its introduction, the Commission has hosted three public webinars, the most recent one highlighting the issuance of AML/KYC rules discussed later in this article.
DARE applies to digital asset businesses (including but not limited to exchanges) (“DABS”) with a nexus to The Bahamas and initial token offerings/issuers with a nexus to The Bahamas. The nexus for registration of a DAB is incorporating a legal entity in The Bahamas to conduct digital asset business or offering digital asset business services to Bahamian residents from anywhere in the world. I expect this nexus for registration approach to be subject to additional guidance or further amendment as it has and will continue to raise some important cross-border questions.
Clients frequently ask whether there are prescribed minimum physical presence requirements. The short answer is not at the moment. The Commission has stated that they are not inclined to be overly prescriptive and will pragmatically approach substantive physical presence rules. Prospective registrants should expect to demonstrate how their proposed operations display substantive ties to the jurisdiction allowing regulatory oversight.
While there are presently no formulated minimum regulatory capital rules for DABs, DABs should adequately demonstrate to the Commission how their business’s size, scope and complexity align with the minimum regulatory capital maintained in the jurisdiction.
On March 30th 2022, the Commission issued draft Digital Assets and Registered Exchanges (Anti-Money Laundering and Countering the Financing of Terrorism) Rules, 2022. Consultation on the rules will conclude at the end of April. The rules are a progression and clarification of the manner in which the Financial Transactions Act, 2018 applies to DABs. The Bahamas had already adopted a definition of “virtual currency” to align with FATF’s recommendations and the so-called “travel rule”, already part of our law under the Financial Transactions (Wire Transfer) Regulations, is intended to apply to DABs.
OECD’s Consultation on Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard (“CRS”)
Outside of The Bahamas but impacting Digital Asset Businesses in The Bahamas is the Organization for Economic Co-operation and Development’s (OECD) recently issued Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard (CARF). This is the culmination of the OECD’s and EU’s work on this matter. By way of background, in 2020 the OECD issued a paper analyzing the differing taxation models for crypto assets. That paper noted the OECD’s intention to expand the Common Reporting Standard to adequately capture the tax evasion risks associated with crypto-assets. The subject of tax transparency and digital assets vis a vis CRS was also subject to review by the Committee on Fiscal Affairs of the EU which had approved a work plan to make recommendations by the end of 2021.
As we have been living with CRS for some years now, we understand the basic premise that the obligation to report under CRS applies to all Bahamas Financial Institutions that are Reporting Financial Institutions with respect to their Reportable Accounts. A Reportable Account is an account held by one or more Reportable Persons or by a Passive NFE with one or more Controlling Persons that is a Reportable Person.
CRS’s definition of Financial Assets is inclusive, but the OECD recognized that it was not broad enough to cover certain crypto assets. If the proposals in CARF are adopted in their present form, the OECD will amend CRS to include a definition of “Relevant Crypto-Asset”, which will put the obligation to report on “Crypto-Asset Service Providers” in respect of “Relevant Transactions” of “Crypto-Asset Users” who are “Reportable Users”. The terminology is different, but the general concepts are the same.
Although the scope of this article does not permit a full summary, much will be written about whether CARF hits or misses the mark.
Government of The Bahamas’ Digital Asset Policy
Just days ago, on April 20th 2022, the Government of The Bahamas released its white paper entitled “The Future of Digital Assets” (the “White Paper”), outlining its digital assets policy intentions. The Prime Minister of The Bahamas, the Hon. Phillip Davis, QC, remarked in the course of his parliamentary contribution laying the white paper before Parliament that the Government has “a vision to transform The Bahamas into the leading digital asset hub in the Caribbean and a global leader in the progressive regulation of businesses in this profoundly innovative space.”
The White Paper highlights several key policy objectives which bear mentioning. First, the Government wishes to explore opportunities in DeFi, NFTs, stable coins, and asset referenced tokens. Although NFTs are excluded from DARE scope, these may well be brought within scope if DARE is updated as the policy envisions. Stable coins, encouraging price stability, are arguably contemplated in the definition of “asset token”, but if the stable coin is not collateralized, the stable coin may not captured. DeFi is an interesting one in the context of DARE, as the definition of digital asset exchange is not delineated by custody and arguably broad enough to include custodial and non-custodial exchanges. However, there are many issues that DARE does not address and will have to address if it intends to create a regulatory bucket for DeFi. New regulatory guidance and/or DARE revisions might focus on the on-ramps and points where there is evident centralization to the protocol (e.g. fiat to crypto exchanges and stable coins).
Another significant policy initiative is probably of more interest to Bahamians (and certain permanent residents) who are subject to exchange controls. The Bahamas is one of only a few remaining jurisdictions that still have restrictions on inflows and outflows of foreign currency. The Central Bank of The Bahamas (“Central Bank”) believes that this is an important feature of supporting the 1:1 peg of Bahamian Dollars to US Dollars. The Central Bank has delegated most exchange control approvals to financial institutions. However, the traditional banking institutions do not provide access points and on-ramps to digital assets. In previous policy statements, they advised that there were no prohibitions on acquiring digital assets. Still, purchases had to be funded in the manner that all foreign securities purchases are funded by accessing the Investment Currency Market (“ICM”) administered by the Central Bank.
In addition to proposing additional clarification and guidance from the Central Bank on exchange controls relating to the acquisition of digital assets, the White Paper offers a proposed solution by allowing Bahamians to access digital assets in B$ through Sand Dollars. Although it is not clear from the White Paper how the Government will achieve this, if the practical mechanics work, this will be a monumental step forward for access to digital assets by Bahamians.
The White Paper is a comprehensive and progressive policy, acknowledging the importance of sound regulation, compliance with international AML/KYC standards, domestic education and regulatory capacity building. Other key highlights of the White Paper are:
- In domestic skills and education, the Government proposes to encourage regulatory agencies and the private sector to collaborate with the University of The Bahamas to develop a series of relevant blockchain and digital asset courses.
- The Government’s recognizes that its policies should be iterative and adaptive to the fast pace of technological progress by the proposed establishment of a Digital Advisory Panel (DAP), tasked with making recommendations. DAP will assist the Government in keeping abreast of new innovations and changes in the industry.
- Accompanying the announcement of the White Paper was the introduction of the Climate Change and Carbon Markets Initiatives Bill. The White Paper acknowledges that there are increasingly more digital assets linked to carbon credits. This is another indication of The Bahamas’ general approach to innovative and sound policy frameworks, honed from years of adaptivity and creativity as a financial centre.
Although intention and implementation don’t often align, The Bahamas is establishing a framework that endeavours to ensure accountability to the policies espoused in the White Paper. A whole jurisdiction approach has always been a key to our success as a financial centre for more than 70 years; an entire nation approach, focusing on capacity, business efficiency, education, skill and embracing emerging technology will be the key to success in the next 70.
April 21st, 2022
A PDF copy of this legal update can be downloaded here, An Update on Regulatory Developments in The Bahamas Impacting Digital Asset Businesses.
DISCLAIMER: The views in this article are the perspectives of the author and not the views of Graham Thompson. This article is for general information purposes and is not intended to constitute legal advice and should not be relied upon as legal advice in any specific case.
 On March 9, 2022, the White House in the United States issued an Executive Order on Ensuring the Responsible Development of Digital Assets. https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/
 Non-fungible tokens and Security Tokens are excluded from the application of DARE.
 Recommendation 16 of the FATF Revised Recommendations
 Taxing Virtual Currencies: An Overview Of Tax Treatments And Emerging Tax Policy Issues,
OECD, Paris. www.oecd.org/tax/tax-policy/taxing-virtual-currencies-an-overview-of-tax-treatments-and-emergingtax-policy issues.htm
 The Bahamas adopted and implemented CRS in local legislation through the Automatic Exchange of Financial Account Information Act, 2016 (as amended).
 A term linked to, among others, the definition of an Investment Entity.
 Two types of Crypto-Assets are excluded from reporting, Closed Loop Crypto-Assets intended to be redeemed against goods or services, and Central Bank Digital Currencies. CBDCs are “cash” which are covered by the current scope of CRS. The OECD has observed in its questions for public consultation that NFTs would generally be covered by CARF if they are representative of value and tradeable or transferable.
 “An individual r entity that, as a business, provides a service effectuating Exchange Transactions for and on behalf of customers, including by acting as counterparty, or as an intermediary, to such Exchange Transactions or by making available a trading platform.
 It generally covers Exchange Transactions (see footnote above), payment transactions involving the transfer of Relevant Crypto-Assets for goods and services and other transfers of Relevant Crypto- Assets.
 The Bahamas introduced the world’s first Central Bank Digital Currency in 2020 called Sand Dollar, becoming a global leader in the space.