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DARE to Regulate: The Bahamas Blockchain Regulation Initiatives

DARE to Regulate: The Bahamas Blockchain Regulation Initiatives

Back in April 2019, the Securities Commission of The Bahamas (the “Commission”) has issued the Digital Assets and Registered Exchanges Bill (the “Bill”) for public consultation, which was scheduled to conclude on May 28, 2019. To find out how progressive are the Bahamas blockchain regulation initiatives and how do they compare to already existing DLT-specific legal acts in the world, we have analysed the Bill for you. Read about our findings below!

Purpose and Material Scope of the Bill

DARE is designed to regulate persons engaged in the digital token business, which includes:

1) digital token exchanges (centralised and decentralised fiat-to-crypto exchanges & crypto-to-crypto exchanges);

2) sponsorship of initial token offers (a licensed person who ensures that issuers are compliant with DARE, submits information to the Commission, carries out due diligence on potential issuers, etc.);

3) wallet services (provision of digital wallet services by the use of a software program that uses private and public keys and enables users to send, receive and monitor their digital assets);

4) custody of digital asset services (arrangement to hold customer’s access keys, smart contracts or other forms of digital assets); and

5) any other activity which the Commission may prescribe by rules.

The Bill, however, will not regulate security tokens as defined by the securities legislation. This is the same approach as was taken by Liechtenstein in its latest legislation initiatives, as Legal Nodes has reported previously. 

Digital Tokens Legal Classification

The Bill classifies digital tokens into 4 groups, as commonly done by the financial regulators.

Virtual currency tokens (a.k.a. payment tokens like BTC, ETH) are digital representations of value which can be digitally traded and function as a medium of exchange, a unit of account or a store of value (which means that such tokens have to have one or more economic characteristics that are usually associated with money), that do not have legal tender status to carry any security or guarantee in any jurisdiction.

Asset tokens are digital assets that represent an asset and are embedded with underlying assets, derive their value by reference to an underlying asset, are secured by an underlying asset, or are backed by assets held as collateral for the primary purpose of encouraging price stability (meaning, stablecoins). Those, however, do not include security tokens, as they fall out of the scope of DARE's regulation. 

Utility tokens are rights of access or a discount represented in binary format to an application, utility or service, which do not have characteristics of security tokens.

Initial Token Offerings & Compulsory Legal Opinions

If you thought that we've had enough "O's" with ICOs, STOs, DWOs, and IVFAOs – take a seat, because now there will also be Initial Token Offerings (ITOs) in the Bahamas.

Under the DARE, digital token issuers will have to publish an offering memorandum and have a duty to provide full and accurate disclosure of all information which would allow potential purchasers to make an informed decision.

What is interesting, the draft proposes to impose on issuers an obligation to themselves identify the class or classes of tokens. An issuer shall obtain a written legal opinion issued by an appropriately qualified Bahamian domestic law firm concerning the classification of its tokens and submit the same to the sponsor along with its application for registration.

Registration of ITOs shall be made through the sponsors, who are designed to perform functions similar to VFA Agents in Malta.

Digital Asset Business Registration

Businesses, that are seeking to carry out digital asset business in or from the Bahamas would need to be incorporated in the Bahamas and be registered with the Commission.

Registration for an application shall be accompanied by certain documents, that might be specific for certain types of activities. For example, exchanges would need to provide copies of the rules of the exchange including rules for admission to listing of digital assets.

In addition to that, DARE is set to impose professional conduct, capital, insurance and other usual for blockchain businesses requirements. Naturally, applicable in the Bahamas AML/CFT rules would also apply.

Dare for a Breach?

A person, who has committed an offence may be subject to a fine of $500,000 or imprisonment up to five years & up to 10 years for misrepresentations. 

DARE would also set a wide range of administrative sanctions for a breach or a failure to comply with its provisions.

Conclusion

As the Commission has reported, DARE is not intended to be the only act to provide guidelines for blockchain-enabled companies, as a comprehensive policy position paper will be released next. 

In general, the Bill provides for a progressive, up-to-date DLT regulation. As a general rule, the institutionalization of legal relations under the industry-specific legal acts always makes for a better legal climate and adds to jurisdiction's credibility. 

We will continue to monitor the regulatory situation in the Bahamas as well as other parts of the world and notify you of the most interesting updates. 

Disclaimer: the information in this article is provided for informational purposes only. You should not construe any such information as legal, tax, investment, trading, financial, or other advice.

Some of the regulatory provisions that have not entered into legal force are referenced above and are subject to change.

Nik Kliapets, Legal Counsel at Legal Nodes

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