1 INTRODUCTION

1.1 This White Paper sets out a vision and a framework to guide Bahamian digital asset policy between now and 2026. It is a complete policy update and its actions have been informed by The Bahamas' initial success in attracting significant digital asset businesses to set up in the country, and by our 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. By this we mean that we will substantially grow the sector by 2025, while ensuring that only well-run, trustworthy, and thriving digital asset businesses, which are able to maintain high standards and sustain the good reputation of The Bahamas, are allowed to operate from the country. The growth of the digital asset sector is seen as a critically important part of rebuilding an economy that has been badly damaged by Hurricane Dorian and the effects of the COVID-19 pandemic.

1.2 The use of digital assets has grown exponentially since the first cryptocurrency, Bitcoin, was launched in 2009, and more strongly since 2017. Digital assets can be said to have gone mainstream globally in 2021 with large banks, investment firms and other financial institutions beginning to invest and trade in them. By November 2021, the total market value of all crypto assets exceeded USD 3 trillion. To date, more than 12,000 crypto assets are traded on exchanges and this number continues to grow daily as new use cases are discovered. Central banks, such as the European Central Bank, the Federal Reserve, the Bank of England, and the Central Bank of China are at various stages of exploring, developing, launching, or trialling Central Bank Digital Currencies (CBDCs). Some Central Banks are exploring cryptography and blockchain technology in the development of their CBDCs. Significantly, on 9th March 2022, President Biden, issued a wide ranging executive order tasking multiple government agencies with developing policy recommendations on digital assets and crypto currencies. Specifically he directed the Secretary of the Treasury to develop and "submit a report on the future of money and payment systems, including the conditions that drive broad adoption of digital assets," This directive clearly indicates the United States intention to explore options for developing its own CBDC and acknowledged that crypto is here to stay.

1.3 Volatility in the value of crypto assets remains high, and therefore they are not suitable for all investors. While the opportunity for making money in digital assets is high when prices go up, so too is the risk of suffering losses when prices go down. These risks and the risks associated with financial crime, such as fraud, money laundering and illicit financing, necessitate proportionate and relevant policy responses. Many jurisdictions fail to strike the right balance between, on the one hand, effective risk-adjusted regulation appropriate to a novel and burgeoning industry and, on the other, supporting the growth and economic potential that innovative financial technology can bring. This policy will support both objectives in ways that will provide sustainable growth for The Bahamas' economy and increase the prosperity of its citizens.

1.4 The Government's approach to digital assets builds on examples of successes in other countries, including Gibraltar, Switzerland, Liechtenstein, and France. We have also considered current and proposed regimes in places such as the USA, the UK, the European Union, Dubai, Singapore, Japan, and Australia. We have sought to formulate a balanced policy that safely encourages innovation and fosters opportunity while adhering to best practices and rigorous standards along with meeting our international obligations.

1.5 This framework has been developed in the context of the significant growth of digital assets and international efforts to regulate the space. These include initiatives by the G20, the Bank for International Settlements (BIS), the Financial Action Task Force (FATF), the Organization for Economic Cooperation and Development (OECD) and the International Organisation of Securities Commissions (IOSCO). The Bahamas was one of the first nations to comprehensively regulate digital asset businesses and initial token offerings (ITOs) when we introduced the Digital Assets and Registered Exchanges Act, 2020 (the DARE Act) and established safeguards for the custody of digital assets in the Financial and Corporate Service Providers Act, 2020 (the FCSP Act). This framework will ensure that The Bahamas remains at the forefront of nations seeking to provide a well-regulated safe space for digital asset businesses.

1.6 The FATF clarified that virtual assets fall in scope of its global anti-money laundering standards — the 40 FATF Recommendations — in October 2018, and published an Interpretive Note and Guidance on a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers the following year. The Guidance was substantially updated in October 2021. The DARE Act and FCSP Act implement FATF requirements relating to virtual assets. We will review the latest Guidance and implement any necessary changes to our anti-money laundering and countering threat financing regime.

1.7 The Government is committed to the fight against money laundering, as well as against illicit and threat financing. We will ensure that our legal and regulatory frameworks relating to digital assets are kept up-to-date and fully aligned with sound and accepted international standards, including FATF's recommendations, and that registration, supervision, regulatory and law enforcement, together with financial intelligence regimes are effective in the fight against money laundering and illicit financing. As their primary regulator, the Securities Commission of The Bahamas (SCB) ensures that digital asset businesses understand their compliance obligations. Digital asset businesses in The Bahamas are expected to uphold thorough antimoney laundering and counter-illicit financing standards, and to continually train and evaluate their compliance and operational staff in the prevention of bribery, corruption and counter threat finance related to money laundering risks potentially involved with the use of digital assets.

1.8 The DARE Act takes a pragmatic and proportionate approach to the regulation of digital asset businesses. It delivers an expansive regime while ensuring that the highest standards are applied and maintained by those businesses. The introduction of the legal regime established by the DARE Act positions The Bahamas as an attractive destination for some of the world's largest digital asset exchanges. The first such exchange was registered as a Digital Asset Business in September 2021. The SCB is currently processing several applications for registration under the DARE Act with other interested companies either applying for registration or evaluating The Bahamas and its digital asset regime.

1.9 Globally, digital asset businesses find it challenging to open bank accounts and maintain banking relationships. While governments cannot dictate banks' commercial decisions, we will encourage banks licensed in The Bahamas to incorporate a calculated and robust risk-based approach to onboarding and monitoring digital asset businesses, as an alternative to following a pro forma derisking policy by avoiding entities operating in the digital asset space. We will also have dialogue and an appropriate approach with international correspondent banking institutions to ensure healthy relationships are maintained for our Bahamian licensed institutions so a framework to ensure they can provide transactional services to clients that deal in digital assets.

1.10 To ensure that our long-term digital asset policy is transparent, robust, and coherent, we will publish an annual update and undertake a comprehensive policy review by December 31, 2023.

2 POLICY OBJECTIVES

2.1 For The Bahamas to remain at the forefront of regulated digital asset jurisdictions, our policy framework seeks:

  • to explore new opportunities in a rapidly and continuously evolving digital asset landscape, including developments in decentralised finance (DeFi), non-fungible tokens (NFTs), stablecoins and asset-referenced tokens;
  • to improve the attractiveness of The Bahamas as a well-regulated jurisdiction where well-run digital asset businesses, of any size, can operate, grow, and prosper;
  • where necessary, to clarify and expand the scope of the current legislative framework, generally, and the DARE Act, in particular, to continue to safely regulate digital assets and digital asset businesses;
  • to encourage innovation in the Fintech space and identify emerging technologies that would help maintain the Bahamas' competitive advantage;
  • to explore linkages between the Bahamas' existing financial services toolkit (i.e. corporate and fiduciary services) to facilitate continued innovation in the international financial services sector;
  • to develop the necessary skills and expertise to fill jobs created in The Bahamian digital asset sector;
  • to work with the Central Bank of The Bahamas to ensure that polices are adjusted and clarified to enable Bahamians to access digital assets in Bahamian Dollars (B$);
  • to build capacity and expand the resources of the SCB in order to support and enhance its role as the pre-eminent digital asset regulator and to enable it to become a global centre of excellence in the pragmatic, risk-adjusted regulation of digital assets and digital asset businesses; and
  • to provide sustainable funding for our digital asset policies, initiatives, and programmes.

3 PROMOTING ECONOMIC GROWTH

3.1 Between 2008 and late-2021, the global total dollar value of digital assets grew from zero to USD 3 trillion. Until recently, much of the benefit of this new asset class and its related business sector has been concentrated in high income economies. However, more recently, developing economies, including small island economies such as The Bahamas, have leveraged their agility to seek out and exploit opportunities to compete in the innovative and largely borderless, global markets, facilitated by distributed ledger technologies. Digital assets have become a web enabled digital economy capable of creating, as well as facilitating, new business and growth opportunities beyond Bahamian shores.

3.2 The introduction of a carefully calibrated regulatory regime for digital asset businesses, and its pragmatic implementation by the SCB, has attracted leading global digital asset brands to set up operations in The Bahamas and seek registration under the DARE Act. These businesses will provide much-needed employment as well as investment in local infrastructure and social projects, resulting in a positive economic impact for the nation.

3.3 The presence of leading digital asset businesses has had a multiplier effect of attracting yet more firms to The Bahamas, initiating a powerful virtuous cycle that promises to mitigate some of the adverse economic impact of Hurricane Dorian and COVID-19 pandemic, and further promote responsible economic growth.

3.4 Central to our digital asset policy is our focus on expanding the economic benefit derived from safely developing opportunities created by the novel and innovative use of digital assets, as well as non-financial use cases for distributed ledger and blockchain technologies (the technologies that underpin most digital assets), such as Web3.

Click here to continue reading . . .

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.