The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Securities Commission last night unveiled its long-awaited overhaul of The Bahamas’ digital assets regulatory regime although there was no mention of, or reference to, the recent FTX implosion.

The regulator, in outlining the major reforms contained in the Digital Assets and Registered Exchanges (DARE) Bill’s 2023 version, listed the operation of digital assets exchanges as one area that will be strengthened, and referred to “lessons learned” from last year’s so-called ‘crypto winter’, but studiously avoided any link to the collapsed crypto exchange that attracted worldwide notoriety.

Nevertheless, given the fast-paced evolution of the digital assets industry, the Securities Commission has constantly acknowledged that the DARE Act 2020 - the centrepiece of its regulatory regime - must be upgraded. It is hoping that Parliament will pass the Bill into law by the end of the 2023 second quarter, which is just two months away at end-June.

“In light of lessons learned during the so called ‘crypto winter’ of 2022, the Commission identified aspects of the DARE Act that require further consideration,” it told industry stakeholders.

“In April 2022, the Commission began consolidating its ongoing review of DARE for the purposes of addressing any legislative gaps, ambiguities and procedural concerns within the legislation.” The international law firm, Hogan Lovells, was hired to draft the new Bill, and the Securities Commission promised: “The DARE Bill 2023 will establish new regulatory frameworks to ensure the Bahamian legislative regime is current, proactive and compliant with international standards and best practices.

“The DARE Bill 2023 encompasses a comprehensive range of digital asset activities and establishes appropriate protection mechanisms for the registration and ongoing supervision of operators that align with prevailing international standards.

“The new DARE Bill represents an even greater focus on consumer and investor protection, robust risk management as well as market development and innovation. Furthermore, the DARE Bill 2023 explicitly addresses staking services in the context of international standards, making it among the first legislation of its kind.”

The Securities Commission described this as “a first-of-its-kind, dedicated disclosure regime that captures the activity of the staking of digital assets belonging to clients or the operation or management of a staking pool as a business.

“Under the DARE Bill 2023, authorised registrants must disclose certain information (where applicable), including a summary of the terms of the client agreement, details regarding the staking protocol, details of how the digital assets are staked (including how and for how long assets are locked up), details of rewards or interest to be earned, details of any penalties which may be imposed, and details of how staking participants are chosen to validate transactions,” it added.

When it came to the operation of digital exchanges, which will likely attract significant scrutiny following the FTX implosion, the Securities Commission said: “Operators of a digital asset exchange must ensure the systems and controls used in its activities are adequate and appropriate for the scale and nature of its business.

“A legal entity intending to establish and operate a digital asset exchange that also provides custody of digital assets or custodial wallet services on behalf of third parties must comply with all requirements under the DARE Bill 2023 applicable to digital asset businesses providing custody of digital assets or custodial wallet services.

“This includes exchanges that provide digital wallet services as an ancillary service to the exchange, which stores private cryptographic keys and enables users to send, receive and monitor their digital assets. Under the DARE Bill 2023 the Commission is empowered to prescribe additional rules for digital asset exchanges.”

The revised legislation is designed to capture a wider range of digital asset activities, including “derivative services, providing distributed ledger technology (DLT) network node services and providing staking services. The Bill provides the ability for the Commission to prescribe additional activities as digital asset businesses as necessary”.

“The DARE Bill 2023 will provide for a single framework for persons providing custody of digital assets or custodial wallet services to be registered as digital asset businesses - the relevant provisions applicable to persons providing custody of digital assets originally in the scope of the Financial and Corporate Service Providers Act are brought under the scope of the DARE Act,” the Securities Commission said.

“The new DARE Act will provide a robust approach to protecting client interests and custody or wallet service providers’ ability to return client assets -for example by requiring such digital asset businesses to maintain procedures to ensure continued safekeeping and accessibility of digital assets, and make the required client disclosures.”

Stablecoins will be regulated for the first time, with the issuance of algorithmic stablecoins prohibited. “The amendments provide a clear definition for stablecoins, provide for the registration of existing stablecoins, specify acceptable forms of reserve assets and establish new requirements for custody and management, segregation, reporting and redemption of reserve assets,” the regulator added.

As for the issuance of digital assets, the Securities Commission added: “The DARE Act requires that issuers of digital assets in or from within The Bahamas must comply with several obligations aimed at protecting investors, primarily as related to initial token offerings.

“These include fit and proper requirements for the issuer, the requirement to prepare an offering memorandum unless an exemption applies, continuing disclosure obligations and purchasers’ rights to rescission or damages and withdrawal.

“Under the DARE Bill 2023, a voluntary registration regime will be established for persons who issue digital assets from outside of The Bahamas to persons outside of The Bahamas or otherwise not in the scope of the issuer requirements under the DARE Bill 2023. The Commission will keep a register of initial token offerings containing specified information.”

Christina Rolle, the Securities Commission’s executive director, said in a statement: ““I am pleased to present for consultation the Digital Asset and Registered Exchanges Bill 2023, which will modernise and strengthen requirements for conducting digital asset businesses in The Bahamas, and for the protection of consumers, investors and the markets.

“We invite the public to respond to this consultation process as we seek to develop and expand the legislative framework. Once passed, DARE 2023 will be among the most advanced pieces of digital asset legislation in the world and will align with The Bahamas’ commitment to facilitating development and innovation in a well-regulated environment.”