The rapid emergence of digital assets and cryptocurrencies has presented many challenges for regulators in the global financial sector. Recognising the need for a robust regulatory framework to bring legal clarity to this dynamic, evolving space, The Bahamas has taken a progressive approach to the regulation of digital assets. This article explores the rationale behind The Bahamas’ decision to regulate digital assets, the development of the Digital Assets and Registered Exchanges (DARE) Act, 2020, and the key provisions shaping the regulatory landscape that influenced the new DARE Bill, 2023, which we anticipate will become law this year.
The Path Toward Regulation
The Securities Commission of The Bahamas, (the Commission), the statutory regulator for the nation's capital markets, began developing legislation for digital assets in 2018 after monitoring the industry's rapid growth over several years. The Commission took a thoughtful, deliberate approach to determining what threats, if any, the space represented. The Commission was faced with several considerations including the lack of legal definition and a globally agreed taxonomy for digital assets, as well as what its overarching approach to digital assets in or from within the jurisdiction would be.
First and foremost, The Bahamas had to determine whether it wanted to: (1) allow digital asset businesses to operate within the jurisdiction without a specific regulatory framework; (2) develop a specific regulatory framework to ensure that all digital assets and digital asset activities fall within the perimeters of the regulator’s scope; or (3) prohibit digital asset business activities altogether. From a policy perspective, the Government of The Bahamas determined that it did not want to prohibit digital asset activities, so the Commission then set out to ensure that, in the context of a virtually non-existent domestic market for digital assets, any digital asset businesses operating within the jurisdiction would only do so within an appropriate regulatory framework and with proper regulatory oversight.
The Commission also fielded significant interest from international and domestic digital asset businesses and related industry stakeholders who thought digital asset businesses could thrive in The Bahamas’ financial services ecosystem. Consistent with the Commission’s mandate to protect investors, facilitate clear and efficient markets, and reduce systemic risk, we opted not to rely on pre-existing frameworks as these did not clearly define or scope digital asset businesses and activities. Instead, the Commission sought to develop a bespoke regime that provided legal clarity and definitions for the oversight of digital asset operators and related business activities.
Benchmarking International Best Practices
Crucial to the development of The Bahamas’ regulatory framework was extensive research and evaluation of international regulatory policies, and engagement with policymakers, industry participants, and stakeholders. The DARE Act, 2020 framework was originally benchmarked against legislation from 13 jurisdictions. Careful consideration was given to best practices for activities-based approaches to registration, risk-based regimes for the supervision of digital asset business and related activities, as well as ensuring The Bahamas’ commitment to the global fight against money laundering, terrorism, and proliferation financing.
As a result of this comprehensive development process, the Commission established two important principles for providing the appropriate levels of oversight. First, we determined the legislation would take an activities-based approach to registration. DARE aims to regulate the stated or intended activity of prospective registrants. Secondly, our goal was to develop a risk-based supervisory approach. Consequently, DARE assesses potential risks based on the nature, scope, and complexity of each individual digital asset business. Activities-based registration and risk-based supervision are fundamental to providing the appropriate levels of oversight, safeguarding market integrity, and protecting investors in this evolving digital asset space.
The DARE Act, 2020
The DARE Act, 2020, was enacted in The Bahamas in December 2020 as a robust, bespoke regulatory framework that was specifically designed to protect investors and consumers, align with international anti-money laundering, counter-terrorism and proliferation financing provisions (AML/CFT/CPF), and mitigate associated risks. From its inception, the Commission has intended for DARE to remain sufficiently flexible to adapt to the ever-changing digital asset landscape. This entails ongoing legislative reviews and appropriate updates to the legislation from time to time. In 2022, the Act underwent amendments and the DARE (AML/CFT/CPF) Rules were introduced. The DARE framework aligns with the Financial Action Task Force (FATF) Recommendations, and the legislation has received international recognition for its investor protection and globally compliant standards.
The Digital Assets And Registered Exchanges Bill, 2023
Significant developments in the digital assets space have continued since the DARE Act, 2020, was enacted. By the time the ‘Crypto Winter’ hit in 2022, the Commission had already begun to see new risks that were not apparent in previous years or even relevant to prior months. Consequently, the Commission identified aspects of DARE that required further consideration. In April 2022, we began consolidating our ongoing review of DARE for the purposes of addressing any legislative gaps, ambiguities, and procedural concerns within the legislation. Our work updating DARE coincided with the International Organization of Securities Commissions’ (IOSCO) development of crypto and digital asset markets recommendations for regulators, to which The Bahamas has significantly contributed.
To help address these revisions, the Commission engaged the international law firm Hogan Lovells to draft the amendments to DARE and benchmark the proposed DARE Bill, 2023 regime against legislation from jurisdictions such as Hong Kong, the European Union, and New York, USA.
Expanding Digital Asset Business Activities
The DARE Bill, 2023, expands the scope of digital asset activities captured under international standards and best practices. Notably, the Bill encompasses a comprehensive range of digital asset activities and appropriate protection mechanisms for the registration and ongoing supervision of operators. The Bill represents an even greater focus on consumer and investor protection by strengthening the existing safeguards afforded to digital asset participants. Such protections include increased disclosure and reporting requirements for digital asset businesses; expanded activities-based registration obligations for potential registrants; and enhanced, ongoing supervision of operators. Notably, the framework addresses the safekeeping and accessibility of digital assets, requiring operators to have adequate systems and controls in place.
Operating Digital Asset Exchanges
Operators of digital asset exchanges must align their systems and controls with the scale and nature of their businesses. If an entity establishes and operates a digital asset exchange that also provides custody of digital assets or custodial wallet services, it must comply with all requirements applicable to digital asset businesses. Exchanges must segregate customer assets from their own, providing enhanced protection for clients. The Commission has the authority to prescribe additional rules for digital asset exchanges as necessary.
Custody Of Digital Assets Or Custodial Wallet Services
The DARE Bill, 2023, introduces a single comprehensive framework for custody of digital assets or custodial wallet services, prioritising the protection of client interests. The framework establishes clear procedures for the ongoing safety and accessibility of digital assets, along with transparent client disclosures and several requirements specifically concerning the segregation of client assets from the assets belonging to the operator or other non-client assets.
The DARE Bill, 2023, introduces a first-of-its-kind, dedicated disclosure regime for staking activities that promotes transparency and accountability within the digital asset ecosystem. Authorised registrants must disclose essential information to clients, including details of staking protocols, lockup periods, potential rewards or interest earned, penalties, and participant selection criteria.
The Bill includes a new stablecoin regime which requires stablecoins to be backed by reserve assets. Stablecoin issuers must disclose these assets for evaluation by the Commission. Under the Bill, the issuance of algorithmic stablecoins is expressly prohibited in The Bahamas.
Guardrails And Other Provisions
The Bill brings a significant set of guardrails to DARE that provide more clarity and legal definitions to its bespoke regime. For example, the categorisation of Non-Fungible Tokens (NFTs) under the DARE Bill, 2023, now depends on the distinction between financial or consumer assets, resulting in financial NFTs falling within the scope of regulation, whereas consumer NFTs, particularly in the realm of gaming, do not.
Moreover, the Commission has taken proactive measures to address liquidity events through mandatory reporting requirements, while also granting flexibility to introduce additional safeguards for investor protection. Furthermore, the Bill introduces specific standards to address conflicts of interest and regulate connected third-party relationships. Notably, the Bill also prohibits the issuance of privacy tokens under the legislative framework, although digital asset businesses are not prohibited from conducting business with privacy tokens.
The DARE Bill, 2023, builds on the foundation of the DARE Act, 2020, with an even stronger, comprehensive regulatory framework for digital assets and digital asset businesses. This pioneering legislation establishes a new precedent for current, proactive, and internationally compliant standards and best practices. With refined definitions and exclusions, and expanded provisions and requirements, the new Bill demonstrates the commitment by The Bahamas to investor protection while maintaining a regulatory environment that is designed for innovation, development, and responsible growth in the digital asset industry.
Christina R. Rolle
Ms. Christina R. Rolle is Executive Director of the Securities Commission of The Bahamas, having been appointed 26 January 2015. Ms. Rolle holds an MBA from Kellogg School of Management, Northwestern University, and is an alumna of Harvard Business School. She has more than 25 years of experience in the financial services industry. Prior to her appointment as Executive Director, Ms. Rolle has acted as Director and Deputy CEO for a prominent international private bank and held various senior managerial positions with local and other international institutions including Head of Trust and Fiduciary, Head of Risk, Compliance and Corporate Governance and Manager of Banking Services. Ms. Rolle was a member of the FATCA advisory group for the Government of The Bahamas and has served on the Board of Directors of The Bahamas Financial Services Board (2009-2012) and the Society of Trust and Estate Practitioners (STEP), Bahamas branch (2003-2005). Ms. Rolle currently serves as Vice Chair of the Inter-American Regional Committee (IARC) of the International Organization of Securities Commissions (IOSCO) and is also a member of IOSCO’s Board of Directors. During her tenure at the Securities Commission, Ms. Rolle has directly overseen the development and enactment of several pieces of legislation which are administered by the Commission: the Investment Funds Act, 2019 which provides for the licensing and regulation of investment funds, fund administrators as well as fund managers; the Financial and Corporate Service Providers Act, 2020 which regulates various non-bank financial and corporate service activities; the Digital Assets and Registered Exchanges Act, 2020 (DARE) which provides for the registration and distribution of digital tokens as well as the registration and regulation of digital token exchanges and other digital asset businesses; and the Carbon Trading Act, 2022 which provides for secondary market trading of carbon offset credits. In April 2020, Ms. Rolle was appointed to The Bahamas’s Economic Recovery Committee to make recommendations to the Cabinet on the long-term economic recovery of The Bahamas economy in response to COVID-19.