Digital Assets Regulation Enacted in The Bahamas

In order to keep pace with the provision of financial technology, the Digital Assets and Registered Exchanges Act, 2020 (“the Act”) came into force on 14 December 2020 to regulate the issuance, sale and trade of digital assets in or from within The Bahamas.

Application & Supervision

The Act applies to any person who participates in the formation, promotion, maintenance, organization, sale or redemption of an initial token offering as organizer, issuer, founder, purchaser or investor. The Act also applies to any legal entity incorporated, registered, or established in The Bahamas as a company, partnership or exempted limited partnership, carrying on a digital asset business, irrespective of the physical location from which the activity is carried out.

For the purposes of the Act (i) “digital assets” are any digital representation of value distributed through a DLT (distributed ledger technology) platform where value is embedded or in which there is a contractual right of use, including a contractual token, (ii) “digital assets business” includes the business of a digital token exchange, providing services related to a digital token exchange, operating as a payment service provider utilizing digital assets, operating as a digital asset service provider, participating in and providing financial services related to an issuer’s offer or sale of a digital asset and any other activity prescribed by regulation and (iii) an “initial token offering” is an offer by an issuer for sale to the public of a digital token in exchange for fiat currency or another digital asset.

The Securities Commission of The Bahamas (the “SCB”) regulates and supervises the issuance of digital assets, digital asset businesses and their activities in The Bahamas and is required to maintain a register of digital asset businesses and initial token offerings. Included within the remit of the SCB is the development and maintenance of investor protection standards with respect to the digital asset business and initial token offers.

Registration of a Digital Asset Business

Any legal entity proposing to conduct digital asset business in or from within The Bahamas must be registered under the provisions of the Act. The application for registration must be in the prescribed form, indicate the type of digital asset business to be carried out and be accompanied by the documents and fees prescribed in the Act. The requisite fees for registering a digital asset business are as follows:

Digital Asset Business as an Additional Activity 

A person which is (i) registered under the Securities Industry Act, 2011  (the “SIA”), (ii) licensed as an investment fund administrator under the Investments Funds Act, 2020 or (iii) licensed as a financial or corporate service provider under the Financial Corporate Service Providers Act, 2020 may apply under the Act to register a digital asset business as an additional activity.

A person that is a marketplace or registered firm may conduct a digital asset business as an additional activity and must provide written notice to the SCB of a change of information pursuant to regulations 27(1)(a) and 53(1)(a) of the Securities Industry Regulations, 2012.

Digital Token Exchange

Any legal entity wishing to offer services as a digital token exchange (i.e., as a platform using distributed ledger technology for the sale, trade or exchange of digital tokens, whether for fiat currency or one or more digital tokens), must first register as a digital asset business prior to applying for registration to establish and operate a digital token exchange. The application for registration must be in the prescribed form and be accompanied by the prescribed documents and fees.

The requisite fees for registering a digital token exchange are as follows:

An applicant must also demonstrate the following to the SCB:

• it is fit and proper;
• has sufficient capacity and resources;
• has appropriate and sufficient systems and controls to perform its functions and manage its risks, including fraud and market abuse;
• has the ability to meet solvency standards and levels of capital as may be prescribed by regulations; and
• has designed a digital asset framework which addresses but is not limited to (a) technology and security; (b) governance; (c) scalability; (d) identified risk framework; and (e) data protection and storage.

A digital token exchange must ensure that the systems and controls used in its activities are adequate and appropriate for the scale and nature of its business, including systems and controls which adequately and appropriately address the following:

• the recording, storing, protecting and transmission of information;
• the effecting and monitoring of transactions;
• the operation of the arrangements made for securing the timely discharge, whether by performance, compromise or otherwise, of the rights and liabilities of the parties to transactions;
• the safeguarding and administration of assets belonging to investors; and
• in the event of disruption, business continuity and planning.

Initial Token Offerings

Registration of initial token offering

An issuer that intends to offer digital tokens in or from The Bahamas through an initial token offering must (i) be fit and proper; and (ii) apply for registration of the initial token offering no later than forty-five (45) days before the start of the offer period, which must not exceed six (6) months. The application for registration must be in the prescribed form and be accompanied by (i) a written legal opinion for the classification of the tokens, (ii) the offering memorandum relating to the offering and (iii) a filing fee of $6,000. The offering memorandum must contain the information set out in the Second Schedule of the Act and be posted on a website operated and maintained by the issuer, which is readily accessible to and downloadable by potential purchasers for the duration of the offer period and for no less than fifteen (15) days after the offer period ends.  The Act imposes ongoing disclosure requirements on the issuer in connection with the offering.

Classification of Tokens

An issuer must identify the class or classes of tokens which will be available for subscription in the offering memorandum. The written legal opinion enclosed with the registration application concerning the classification of the issuer’s tokens, must be attached to the offering memorandum. Where the Commission’s assessment is that a token is a security, an issuer must withdraw its application for registration of the token and may proceed to have the token registered under the provisions of the SIA.

Purchaser’s right of withdrawal 

A purchaser of a token offered under the provisions of the Act is entitled to withdraw his purchase by written notice to the issuer. A purchaser’s notice of withdrawal must be made no later than seventy two (72) hours after the date of the agreement to purchase the token. Where a purchaser has exercised the right of withdrawal, all funds paid by the purchaser must be paid over by the issuer to the purchaser within two (2) days of the purchaser’s request.

Regulatory oversight by SCB

The Act confers broad investigative and regulatory oversight powers upon the SCB over registrants under the Act, including the power to conduct on and off-site investigations and to request information.

Sanctions

Failure to comply with the provisions of the Act is an offence, punishable by regulatory and administrative sanctions and on summary conviction by a fine of up to $500,000 and/or up to 5 years imprisonment.

Should you require any further information on the Act, please contact a member of the Securities Practice Group.

The information contained in this article is provided for the general interest of our readers, but is not intended to constitute legal advice. Clients and the general public are encouraged to seek specific advice on matters of concern. This article can in no way serve as a substitute in such cases.
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