Bahamas and Cryptocurrency
Bahamas Cryptocurrency Laws
Regulation of Digital Currencies: Cryptocurrency, Bitcoins, Blockchain Technology
In 2019, the Securities Commission of The Bahamas (“SCB”) released the draft Digital Assets and Registered Exchanges Bill, 2019 (“DARE Bill, 2019”).[1] The DARE Bill provides for the regulation of the issuance and sale of digital tokens, and for the regulation of the conduct of those issuing digital tokens and those providing intermediary services related to the issuance of digital tokens.
Digital Assets and Registered Exchanges Bill (DARE)
The DARE Bill defines a “digital asset” as “a digital representation of value distributed through a DLT Platform where value is embedded or in which there is a contractual right of use and includes without limitation digital tokens.” The bill further defines a “digital asset business” to include the provision of services related to –
- digital token exchanges;
- sponsorship of initial token offers;
- wallet services;
- custody of digital asset services; and
- any other activity which the Commission may prescribe by rules;
The draft legislation would regulate the issuance or sale of digital tokens in or from within The Bahamas and how sellers and intermediary service providers conduct themselves. The proposed regulations provide a framework not only for token issuances but also for the registration and regulation of crypto exchanges and define certain types of “crypto” businesses (such as custodians and wallet services), thereby paving the way for their regulation. The legislation’s requirements for crypto exchanges are applicable to not only fiat-to-crypto exchanges but also crypto-to-crypto exchanges as well as both centralized and decentralized exchanges.
Digital Token Spac
The Bill proposes a legislative structure with standards for entry into and participation in the digital token space. Its requirements stipulate who may participate, the level of capital required, the rules for reporting and seeking the Commission’s approval, and the penalties for failure to comply.
Additionally, the proposed legislation requires that participants adhere to established anti-money laundering (AML) and counter-financing of terrorism (CFT) laws, ensure data protection measures related to the personal information of clients, and implement measures to prevent data breaches that would jeopardize clients’ crypto assets.
In November of 2018, the Central Bank of the Bahamas issued a Discussion Paper, entitled Proposed Approaches to Regulation of Crypto Assets in The Bahamas. The paper describes the proposed regulatory posture on crypto assets and related instruments for supervised financial institutions (SFIs) under the remit of the Central Bank of The Bahamas. This includes the application of the Exchange Control (EC) regime.
The Central Bank will impose constraints on the range of crypto instruments in which SFIs may transact–either directly on the balance sheet or from an associative point of view. The Bank will also prohibit direct convertibility between Bahamian dollar (B$) currency or officially sanctioned B$ crypto instruments and foreign currency-denominated crypto assets or non-resident sponsored instruments.
For payment tokens, the Central Bank advises that the regulatory treatment of the crypto-asset would be captured by the provisions of the Payment Systems Act, 2012 (PSA). The PSA defines a payment instrument as “any instrument, whether tangible or intangible, that enables a person to obtain money, goods or services or to otherwise execute payment transactions.” The Act does not confine itself to the currency denomination of the instrument, even though its regulations (the PIOR), specifically address Bahamian dollar (B$) instruments.
The discussion paper notes several key challenges raised by SSBs including the following:
- Tax evasion—When conducted on a peer-to-peer basis, cross-border transactions using crypto assets tend to be anonymous. This creates opportunities for individuals to evade tax.
- Unstable valuation caused by fluctuating demand–The absence of central issuers with mandates to guarantee stability, combined with the constant influx of new crypto-assets into the marketplace leaves them susceptible to large valuation changes, including a collapse to zero value.
- Fraud—The sale of these assets via initial coin offerings (ICOs) is mostly unregulated, leaving consumers susceptible to fraud. Consumer protection advisories have been issued by a number of authorities, warning customers that by investing in crypto assets they are vulnerable to theft, hacking, phishing, and investment fraud.
- Scalability—Maintaining decentralized, “trustless” systems has led to volatile, unpredictable transactions costs. Therefore, payment tokens do not always prove cost-effective for low-value transactions. There is also uncertainty about the length of time that it takes to confirm transactions. When coupled with price volatility, these attributes diminish their usefulness as reliable stores of value or mediums of exchange.
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Money laundering and/or terrorist financing––Decentralised systems are especially vulnerable because of anonymity risks. In many instances, there is no name or other customer identification attached to the crypto asset; no trusted central server or service provider, or issuing authority; no central oversight body; and no available anti-money laundering (AML) software to monitor and identify suspicious transaction patterns. The inherent pseudonymity of virtual currencies, combined with their global reach, make them ideal vehicles to conceal the identity of the originators of fund transfers, and the destination of end-users. Because they permit transfers where senders and recipients may not be adequately identified, crypto-assets can be and have been, used to facilitate money laundering and terrorist financing. The Financial Action Task Force (FATF) has already provided some guidance on managing the risks of virtual currencies when they function as payment products and services.
Initial Coin Offerings
The Central Bank’s Discussion Paper sets out its views with respect to ICOs. SFIs may act as sponsors or promoters of ICOs, as long as they create no on balance sheet obligations, or fall within the range of prohibited payment tokens. They may only act as agents in these offerings to facilitate sales on a best-efforts basis. In such cases, the prior consent (or non-objection) of the Central Bank must be obtained. In reviewing proposed sponsorship of ICOs, the Central Bank will determine whether the offering would meet the definition, and satisfy the requirement of a sanctioned instrument under the PSA, or be subject to any regulatory oversight criteria that the SCB may establish. If the instrument falls outside the scope of either regulated framework, the Central Bank may still object to the ICO on the basis that it poses an unmanageable risk to the SFI or The Bahamas.
An ICO will be considered sponsored by a central bank SFI where any of the following criteria is met:
- The offering creates a direct claim on or obligation of the SFI;
- The SFI underwrites or guarantees the offering;
- The SFI sells or markets the offering; or
- The marketing of the offering either implies an association with or carries the endorsement of, the SFI.
An ICO will be considered sponsored by a central bank SFI where any of the following criteria is met:
- The offering creates a direct claim on or obligation of the SFI;
- The SFI underwrites or guarantees the offering;
- The SFI sells or markets the offering; or
- The marketing of the offering either implies an association with or carries the endorsement of, the SFI.
Exchange Control Considerations
The Central Bank’s Discussion Paper sets out its views with respect to exchange controls. The Exchange Control (EC) Regulations govern investments into and out of foreign assets and the convertibility of Bahamian currency to facilitate residents’ movement into, and out of, foreign assets.
Unless they are denominated in Bahamian dollars and sponsored by resident entities, the Central Bank views crypto assets as foreign assets for EC purposes. Residents are entitled to invest in these as they would any foreign assets. In this case, the investments may only be funded with foreign exchange purchased through the investment currency market (ICM). The use of credit cards to purchase crypto assets does not negate the fact that there is an intervening settlement in foreign currency, and hence a sale of foreign currency.
Subject to the range of domestic (Bahamian dollar) instruments permitted by the SCB, residents will be allowed to invest in local crypto assets. However, for EC purposes, direct investments in such assets by non-residents will remain prohibited, aside from general accommodations that already apply for “like” portfolio instruments under Exchange Controls. Current accommodations apply to cross-listed regional securities on BISX or similar regulated exchanges, and temporary residents on work permits. That said, non-fiat-based payment tokens are impermissible Bahamian dollar crypto instruments.
The Central Bank of the Bahamas issued Responses to Comments.
P.S. Insights on Cryptocurrency Legal Issues
Most jurisdictions and authorities have yet to enact laws governing cryptocurrencies, meaning that, for most countries, the legality of crypto mining remains unclear.
Under the Financial Crimes Enforcement Network (FinCEN), crypto miners are considered money transmitters, so they may be subject to the laws that govern that activity. In Israel, for instance, crypto mining is treated as a business and is subject to corporate income tax. In India and elsewhere, regulatory uncertainty persists, although Canada and the United States are relatively friendly to crypto mining.
However, apart from jurisdictions that have specifically banned cryptocurrency-related activities, very few countries prohibit crypto mining.
Our Freeman Law Cryptocurrency Law Resource page provides a summary of the legal status of cryptocurrency for each country across the globe with statutory or regulatory provisions governing cryptocurrency. The globe below provides links to country-by-country summaries:
Is cryptocurrency legal in The Bahamas?
Do you have questions about cryptocurrency, digital currencies, or blockchain technology?
Freeman Law can help with digital currencies, tax planning, and tax compliance. Contact us now to schedule a consultation, or call (214) 984-3410 to discuss your cryptocurrency and blockchain technology concerns.
[1] The SCB is a statutory body established in 1995 pursuant to the Securities Board Act, 1995. That Act has since been repealed and replaced by new legislation. The SCB’s mandate is now defined in the Securities Industry Act, 2011 (SIA, 2011). The Commission is responsible for the administration of the SIA, 2011 and the Investment Funds Act, 2003 (the IFA), which provides for the supervision and regulation of the activities of investment funds, securities, and capital markets. The Commission, having been appointed Inspector of Financial and Corporate Services effective 1 January 2008, is also responsible for administering the Financial and Corporate Service Providers Act, 2000.
