The Tribune

By YOURI KEMP

Tribune Business Reporter

ykemp@tribunemedia.net

The Central Bank of The Bahamas has called for stricter due diligence on the transfer of funds in the wake of the FTX collapse. 

The call comes in the bank’s newly released Draft Digital Assets Guidelines. Due to the collapse of the FTX crypto-exchange, The Bahamas has been raked over the coals in international media, with criticisms suggesting a slack digital assets regulatory regime, with much criticism directed at the Securities Commission of The Bahamas. However, the Central Bank also has oversight of financial institutions involved in the transfer of funds between authorised agents and broker dealers that deal in digital assets.

In its newly released guidelines, the bank is asking for the risk management framework governing digital assets activity to be fully integrated into the overall risk management processes of the supervised financial institution (SFI).

It said: “Any increase in risks posed by digital assets exposure should be captured and effectively incorporated into SFIs’ Internal Capital Adequacy Assessment Process (“ICAAP”). In carrying out digital asset activities, SFIs must comply with the obligations imposed by the AML/CFT laws of The Bahamas as well as the Central Bank’s revised Guidelines on the Prevention of Money Laundering & Countering the Financing of Terrorism.”

The draft guidelines also call for SFIs to ensure customers are “adequately informed of the fundamental benefits, risks and terms of the products” they are investing in. This speaks to the heart of the FTX debacle as the cryptocurrency FTX was allowing investors to purchase was tied to other riskier investments or, worse, nothing at all as FTX just minted new coins as it went along with nothing underpinning its value.

Despite the new guidelines, SFIs are not permitted from giving traditional financial services to digital asset businesses, however the Central Bank reserves the right to impose additional requirements for SFIs to meet in order to provide these services from the issuing of digital tokens to doing business on behalf of clients investing in digital assets. SFIs are also required to notify the Central Bank prior to engaging in initial token offering (ITO).

The draft guidelines also say: “FIs are also required to notify the Central Bank prior to onboarding relationships with Digital Assets Service Providers. SFIs should communicate the details of the relationship and ensure that the entity has the proper risk management framework to mitigate any risks that could materialize from third party or outsourcing

arrangements. Any additional requirements would depend on the SFI’s existing reporting requirements, profitability, and capital adequacy. Further, it is the duty of the SFI to inform the Central Bank of any third party service provider arrangements in which the licensee may be involved.”

It added: “When onboarding new clients for digital asset custodial services, SFIs should undertake enhanced due diligence (“EDD”) to ascertain the source of funds used to acquire the digital assets and the origination of the assets. SFIs should also obtain a list of beneficiaries and signatories on the custody account. SFIs facilitating digital custody should require that the client provide any combination of their public key, private key, or wallet address, as necessary, to identify the beneficial owner of the digital asset.

“SFIs must maintain adequate accounting and other relevant records, adequate systems and controls to accurately track ownership and quantity of client digital assets; and maintain appropriate business continuity processes, procedures and controls.”

More importantly, “SFIs must not accept virtual currency tokens or other digital assets as deposit liabilities on their balance sheets.”

The Central Bank will also only allow the issuance of electronic money by SFIs that are linked to funds held on the SFI’s balance sheet as “fiat deposit liabilities or fiat funds that have been placed in the custody of SFIs for electronic money transactions”, and also these monies will also be backed by central bank fiat currency, putting the central bank at the centre of the risk of ensuring that all digital assets are backed by it as it takes full responsibility of the gaps in the Digital Assets and Registered Exchanges (DARE) Act.