The Bahamas enters the next phase of crypto market regulation

Introduction

In 2020, The Bahamas introduced the Digital Assets and Registered Exchanges Act (DARE 2020), one of the world’s first bespoke regulatory regimes for digital assets.

Since the regime entered into force, the Securities Commission of The Bahamas (SCB) has continually assessed the rapid development of digital asset products and services, and on 25 April 2023, a  new Bill was issued for public consultation. On 30 July 2024, the Parliament of The Bahamas passed into law the Digital Assets and Registered Exchanges Act, 2024 (DARE 2024), strengthening the previous regime and expanding the scope of the regulated activities to meet the demands of a rapidly evolving digital asset ecosystem.

This article provides an overview of the changes and significant additions introduced in DARE 2024, their expected impact and the opportunities they provide for the digital asset sector.

Within scope of DARE 2024

Digital asset custody

Digital asset custody services were not within the scope of DARE 2020. Instead, this activity required authorisation under the Financial and Corporate Services Providers Act (FCSPA). DARE 2024 brings digital asset custodians within its remit, categorising them as digital asset businesses (DABs). As a result, digital asset custodians are no longer required to operate under two separate regimes when providing custody as a service and alongside any of the other relevant digital asset services.

DARE 2024 requires that DABs providing custody services segregate customer assets, have agreements and disclosures on duties, responsibilities and risks, establish policies for handling malfunctions, attacks and other service disruptions, conduct annual independent audits of systems, processes and controls, and provide clients with asset statements regularly and on request.

Stablecoins

While DARE 2020 broadly covered digital asset issuance in response to the initial coin offering (ICO) craze in 2017, under DARE 2024, stablecoin issuers are to be considered DABs and subject to specific requirements. These include being fully backed by a reserve of assets, which can be made up by a broad and flexible set of assets, and may include any asset approved by the SCB. In addition, stablecoin issuers must submit a whitepaper setting out all factors used to calculate the value of the reserve assets, details on the stabilisation mechanism, and investment and redemption policies. Redemption of stablecoins shall be subject to the issuer’s terms and conditions, as approved by the SCB.

Digital asset staking

DARE 2024 defines staking as “the process of locking up digital assets for a certain period of time in return for a reward or for interest”. Service providers that stake digital assets belonging to third parties or operate or manage staking pools are considered DABs and are within the scope of the new Act.

Many crypto companies offer users access to earn programs, often referred to as staking programs. In these programs, users are given the option to transfer custody of their digital assets to a centralised service provider that then promises to generate a return on those assets. Much of the time, users do not have visibility over what exactly is done with their assets or how this yield is generated.

DARE 2024 is the first piece of legislation to define and regulate digital asset staking services. It puts in place much-needed consumer protection measures and provides a key opportunity for digital asset staking businesses looking for regulatory clarity.

DABs providing staking services are required to provide the SCB with a summary of their terms of agreement with clients, details of the staking protocol, including an explanation of the consensus mechanism of the relevant distributed ledger technology (DLT) network (if applicable), details on the rewards or interest to be earned, penalties which may be imposed on clients and more. DABs providing staking services must also provide the same information to clients before onboarding them and make clear certain disclosures.

Digital asset derivatives

Although termed “digital asset exchange,” the definition of this activity is broad and captures a wide range of services including platforms that facilitate the “issuance, distribution, sale or trading” of digital asset derivatives. DARE 2024 defines a digital asset derivative as a contract (including contracts for difference) or instrument, whose value, delivery, or payment obligations, are derived from, referenced to, or based on a digital asset underlying interest and classifies digital asset derivative exchanges as DABs.

This provides many major crypto businesses offering digital asset derivative services with additional regulatory certainty. In many jurisdictions, the regulation of such services remains unclear, including in the EU, where the Markets in Crypto-assets Regulation (MiCA) and ESMA’s draft Guidelines on the qualification of crypto-assets as financial instruments do not clarify whether such businesses will be regulated under MiCA or MiFID II.

Approach to decentralised finance (DeFi)

DARE 2024 contains no explicit reference to decentralised finance (DeFi). When detailing the activities that constitute a DAB, the Regulation states that “the development and dissemination of software does not in and of itself constitute a digital asset activity.” Consequently, developers of truly decentralised financial (tDeFi) products and services are not within scope of the Regulation.

However, certain DeFi activities conducted by way of business are likely within scope of DARE 2024. The Act states that both digital asset staking services and the provision of DLT network node services are regulated digital asset activities. This notably makes native, on-chain staking services on blockchain or DLT networks a regulated activity subject to certain requirements.

While many activities related to a DLT network or DeFi protocol simply communicate user transactions to the network and are not done on a commercial basis, some activities conducted by way of business may be considered either staking or node services and would likely fall within the regime.

Similarly, if a service provider runs a validator in which user funds are staked in exchange for fees, it is likely subject to regulation under DARE 2024. However, individuals running validators and staking their own assets are unlikely to be in scope.

Other notable changes

Mining pools are banned in The Bahamas, however, persons are permitted to mine digital assets if they use their own funds to do so, or where mining activities are ancillary to other regulated activities.

DARE 2024 bans the issuance of privacy tokens, but the exchange or trading of privacy tokens is not prohibited as long as the DAB can do so in compliance with its regulatory obligations. Additionally, providing anonymity-enhancing services is now considered a regulated activity.

Non-fungible tokens (NFTs) explicitly fall outside the scope of DARE 2024 unless they are used for payments, investment purposes or represent another financial asset.

Conclusion

The passage of DARE 2024 marks a significant step in The Bahamas’ evolving approach to digital asset regulation. By broadening the scope to include digital asset staking, derivatives, and stablecoins, the legislation addresses emerging trends and offers much-needed clarity and consumer protection in a rapidly advancing sector.

As the digital asset sector continues to mature, DARE 2024 positions The Bahamas as a pragmatic, forward-thinking jurisdiction balancing innovation with oversight and poised to capitalise on the opportunities within this dynamic ecosystem.