An overview of the regulation of virtual assets in Bahamas

Digital asset laws and regulations in Bahamas

Regulation of virtual assets and offerings of virtual assets in Bahamas

Regulation of DASPs in Bahamas

Regulation of other crypto-related activities in Bahamas

Other relevant regulatory information

Pending litigation and judgments related to virtual assets in Bahamas (if any)

Government outlook on virtual assets and crypto-related activities in Bahamas

Advantages of setting up a DASP in Bahamas

1. Digital asset laws and regulations in Bahamas

The Bahamas established itself as a pioneer in digital asset regulation, becoming one of the first jurisdictions to introduce legislation for Digital Asset Businesses in 2020. The Digital Assets and Registered Exchanges Act, 2020 brought into force on 14 December 2020, set the foundation for regulating the issuance, sale, and trade of digital assets. The commission found some gaps in the existing legislation and to cure these defects introduced the Digital Assets and Registered Exchanges Act, 2024 (DARE Act, 2024), the previous legislation has been repealed. DARE 2024 governs the issuance, sale, and trade of digital assets both within The Bahamas and for entities operating from the jurisdiction. It also sets out the process for registering any individual or entity involved in digital asset businesses (DABs) or as digital asset service providers (DASPs). This legislation creates a clear regulatory structure, ensuring that all virtual asset offerings and related activities meet defined standards. DABs operating in The Bahamas must comply with legislation such as the Proceeds of Crime Act, 2018, the Anti-Terrorism Act, 2018, Securities Industry Act, 2024 and the Financial Transactions and Reporting Act, 2018.

In addition, DABs must adhere to the Digital Assets and Registered Exchanges (Anti-Money Laundering and Countering the Financing of Terrorism) Rules, 2022, which provide guidelines on AML/CFT compliance for digital asset businesses. Adhering to these laws is crucial for DABs to establish and maintain effective AML/CFT programmes, helping to prevent financial crimes and maintain the integrity of the digital asset sector in The Bahamas. This progressive approach reinforces The Bahamas’ position as a leading jurisdiction for digital asset regulation, ensuring that businesses can operate in a transparent and secure environment.

What is considered a digital asset in Bahamas?

The Digital Assets and Registered Exchanges Act, 2024 defines a digital asset as any value or right that can be transferred and stored electronically, typically using blockchain or similar technology. This definition covers a range of assets, from cryptocurrencies to tokenized assets, and other digital financial products.

The Act identifies several types of digital assets. One is asset tokens, which represent a claim against an issuer and are often backed by real-world assets. These tokens get their value from the underlying asset, making them more stable. Another type is digital asset derivatives, which are contracts that rely on the value of another digital asset, like options or futures, and are used for investment or trading purposes.

Digital currencies, such as government-backed digital money, are also included under the Act. These work like regular currency but are entirely digital. Non-fungible tokens (NFTs) are unique digital items, like digital art or collectibles that cannot be swapped one-for-one because each is different. stablecoins are digital assets designed to have a stable value by being tied to things like fiat currency or other assets, reducing the price swings seen with other cryptocurrencies.

In simple terms, the Act regulates all types of digital assets, ensuring they are securely managed and traded within The Bahamas. This allows for innovation while protecting users and promoting trust in the growing digital economy.

Who do such laws and regulations apply to?

This comprehensive Act applies to a broad spectrum of participants, including businesses that operate cryptocurrency exchanges, facilitate digital payments, or offer services such as digital asset custody, trading, and advisory. Whether you’re issuing digital tokens, trading on exchanges, or managing digital portfolios, compliance with these regulations is essential. The Act meticulously governs everything from initial coin offerings (ICOs) and token sales to stablecoins and digital asset derivatives, ensuring all players operate with integrity and accountability. Specifically, it targets:

1. Digital Asset Businesses: Any business that deals with digital assets, such as cryptocurrency exchanges, payment service providers, or entities offering digital asset custody, trading, or management services. These businesses must be registered and follow specific regulations, including financial requirements, reporting, and data protection.
2. Issuers of Digital Assets: This includes any entity or individual that creates, sells, or offers digital assets (like tokens or stablecoins) to the public. They must comply with rules on disclosure, registration, and ensuring the security and backing of the assets they issue.
3. Investors and Purchasers: People or organizations that buy, trade, or hold digital assets within The Bahamas are also covered by the Act. This ensures that they engage with regulated entities and have protection from fraudulent or unfair practices.
4. Token Offering Participants: Any individual or group involved in the formation, promotion, sale, or redemption of tokens must operate in accordance with the Act. This includes organizers, founders, or those participating in token sales.
5. Service Providers Related to Digital Assets: Professionals like auditors, advisors, or legal representatives who assist in managing or advising on digital assets are also impacted by the Act if their work relates to registered digital asset businesses or offerings.

Who are the relevant regulatory authorities in relation to digital assets in Bahamas?

The Securities Commission of The Bahamas is the primary authority overseeing digital assets under the Digital Assets and Registered Exchanges Act, 2024. The SCB is responsible for the registration, licensing, and regulation of digital asset businesses, ensuring compliance with anti-money laundering and counter-financing of terrorism laws. It also issues guidelines and rules for the proper conduct of these businesses, including overseeing token offerings and stablecoin issuance. Additionally, the SCB protects investors by promoting transparency and preventing fraud or market manipulation. Collaborating with bodies like the Central Bank of The Bahamas and the Bahamas’ Financial Intelligence Unit (FIU), the SCB ensures a secure and compliant digital asset landscape.

The Central Bank of The Bahamas is responsible for the supervision of supervised financial institutions such as digital assets operating in and from within The Bahamas. Therefore, SFIs that are jointly supervised entities are expected to adopt the more conservative approach where there are conflicts between the Central Bank’s guidelines and any requirements outlined by the SCB.

What are the penalties for breaches of virtual asset laws and regulations in Bahamas?

The DARE Act, 2024 outlines penalties such as fines, suspension of operations, and revocation of registrations, but it does not provide specific monetary amounts for fines directly within the text of the Act. Instead, the exact monetary value of penalties is typically determined by the Securities Commission of The Bahamas, which has the authority to impose fines based on the severity and nature of the violation.

The Commission may set these penalties through subsequent regulations or guidelines, which could outline fine ranges or minimum amounts, based on the type of breach, such as failure to comply with financial reporting requirements, engaging in insider trading, or market manipulation. These fines are usually calculated depending on factors like the financial impact of the violation or the size of the business involved.

The table below sets out the main offences for contravention of the DARE Act:

2. Regulation of virtual assets and offerings of virtual assets in Bahamas

Are virtual assets classified as ‘investments’ or other regulated financial instruments in Bahamas?

Under the Securities Industry Act, 2024 and the Digital Assets and Registered Exchanges Act, 2024, the classification of virtual assets in The Bahamas is based on their characteristics and usage, not automatically as “investments” or financial instruments. The Bahamas Test helps determine when a digital asset is decentralized enough to avoid being classified as a security. “Sufficiently decentralized” refers to the point at which a digital asset, project, or platform can operate independently without the need for ongoing intervention or control from its creators or any central authority. The key question the test asks is whether the asset would still function if its creators stopped working on it. If the answer is yes, then the asset is considered “sufficiently decentralized,” reducing the risk of fraud and indicating it’s not a security. This suggests that there is no ongoing contractual obligation to build or manage the software, and the absence of such a contract means the asset is not regulated as a security.

Additionally, the second part of the test focuses on whether the asset meets the “expectation of profit” requirement from the Howey framework, which is used to identify securities. However, applying the Howey test to digital assets, especially those issued in initial coin offerings or on decentralized platforms, can be challenging. Even if people buy tokens expecting a profit, decentralized platforms often lack a central entity managing the project, making it hard to apply traditional securities criteria. As a result, many digital assets may not be classified as securities even when they are bought with profit expectations. Differentiating between utility tokens and investment tokens might require close consideration of the facts surrounding each case. Utility tokens are used for consumption within a specific platform or service, while investment tokens are designed to generate returns. However, some digital assets serve both purposes, making their classification more complex.

However, the DARE Act 2024 generally governs virtual assets and their issuance, sale, and trade, providing exemptions for certain types of digital assets that do not fall under traditional securities laws. Virtual assets intended for utility purposes, such as those used solely within a particular platform or service, are typically not classified as securities. Section 2 of the DARE Act defines “digital assets” and sets out the criteria for distinguishing between utility tokens and securities. Meanwhile, Section 198(1) of the Securities Industry Act specifically states that certain virtual assets or classes of instruments, such as those within prescribed exemptions, may not be treated as securities.

Are stablecoins and NFTs regulated in Bahamas?

Stablecoins and NFTs are regulated in The Bahamas under the DARE Act, 2024, but their treatment depends on their nature.

Stablecoins, designed to maintain a stable value by being pegged to reserve assets like fiat currency or commodities, face strict regulation. Issuers must maintain adequate reserves, undergo regular audits, and report to the Securities Commission of The Bahamas to ensure transparency and financial stability. The SCB can also intervene, such as halting or delisting non-compliant stablecoins.

NFTs, which represent unique digital items like art or collectibles, are regulated based on their functionality. NFTs generally aren’t considered securities unless they offer investment-like features, such as profit-sharing or ownership rights. Utility-based NFTs, which merely grant access or ownership, face lighter regulation unless they cross into the realm of financial products.

Stablecoins are closely regulated to protect the financial system, while NFTs are regulated based on their use and potential investment attributes.

Are decentralised finance (DeFi) activities (e.g. lending virtual assets) regulated in Bahamas?

Yes, decentralized finance activities, such as lending virtual assets, are regulated in The Bahamas under the Digital Assets and Registered Exchanges Act, 2024. While the Act does not explicitly mention DeFi, it regulates digital asset activities broadly, encompassing those typically associated with DeFi platforms. According to Section 6, digital asset businesses include services like exchanging, managing, and transferring digital assets, which applies to DeFi platforms offering lending or borrowing services. These platforms must register with the Securities Commission of The Bahamas and comply with financial reporting requirements set out in Section 15, ensuring their solvency and transparency. Additionally, under Section 33, DeFi platforms must follow anti-money laundering and counter-financing of terrorism regulations, implementing systems to monitor and report suspicious activities. The SCB holds the authority under Section 5 to oversee these platforms, ensuring compliance, issuing fines, and safeguarding users from fraud or market manipulation. In essence, DeFi activities such as virtual asset lending are regulated by the Act to ensure a secure, transparent, and legally compliant digital asset ecosystem in The Bahamas.

Are there any restrictions on issuing or publicly offering virtual assets in Bahamas?

In The Bahamas, the issuance and public offering of virtual assets are subject to strict regulatory oversight under the DARE Act, 2024, which establishes a clear framework to ensure transparency, investor protection, and market integrity. Any entity or individual seeking to issue or publicly offer virtual assets must first navigate a detailed registration process, as mandated by Section 9 of the Act. This section requires digital asset issuers to submit an application to the Securities Commission of the Bahamas providing essential details about their operations, financial standing, and key management figures. Without this registration, it is prohibited to issue or offer virtual assets within or from The Bahamas.

Public offerings of virtual assets are further regulated under Part IV of the Act, which covers token offerings. Issuers must prepare and submit an offering memorandum, similar to what is required in traditional securities offerings. This document must include detailed disclosures about the nature of the offering, risks involved, and the rights associated with the digital assets. Only after the SCB reviews and approves the offering can it be marketed or sold to the public. This process ensures that investors have access to critical information before participating in any virtual asset offerings.

The Bahamas DARE Act places specific regulatory requirements on certain types of digital assets, such as stablecoins. Under Section 49, stablecoin issuers must ensure adequate reserve backing and undergo regular audits to maintain their peg to an underlying asset. The SCB reserves the right to halt or delist any stablecoin if these requirements are not met.

Are there any exemptions to the restrictions on issuing or publicly offering of virtual assets in Bahamas?

In The Bahamas, while the issuance and public offering of virtual assets are tightly regulated under the Bahamas DARE Act 2024, the Act does provide certain exemptions to these restrictions. These exemptions are outlined to ensure that not all digital asset activities fall under the same level of regulatory scrutiny, particularly for assets that may not pose significant risks to investors or the financial system.

According to Section 3(2) of the Act, the following activities are exempt from the restrictions on issuing or publicly offering virtual assets:

1. Security Tokens: If a digital asset qualifies as a “security” under the Securities Industry Act, it is regulated under that Act rather than the Digital Assets and Registered Exchanges Act. This applies when the asset has characteristics of traditional securities, such as equity or debt instruments.
2. Affinity or Rewards Programs: The issuance of digital assets as part of loyalty or rewards programs, where the value cannot be exchanged for fiat currency, bank credit, or other digital assets, is exempt from the regulations. These types of tokens are purely for use within specific ecosystems and do not function as investments or currency.
3. Non-Fungible Tokens (NFTs): NFTs, which are used purely for access or ownership of digital items (like art, collectibles, or game items), are exempt provided they are not used for payment or investment purposes. If the NFT is not a digital representation of another financial asset, it typically does not fall under the same regulatory requirements.
4. Online Game Tokens: Digital assets issued by or on behalf of a publisher for use within an online game or game platform are also exempt. These tokens must be used strictly within the game environment and should not be transferable or used for investment purposes.
5. Electronic Representations of Fiat Currency or Other Financial Assets: Digital representations of fiat currency, such as digital dollars issued by a central bank, or other financial assets that are not intended for payment or investment purposes are exempt from the 2024 Act.

These exemptions ensure that certain low-risk or utility-based digital assets, which are not designed to function as investments or securities, are not subject to the full regulatory burden of the 2024 Act. However, if a digital asset falls outside of these specific categories, it would need to comply with the full regulatory requirements, including registration with the Securities Commission of The Bahamas and the issuance of offering memoranda for public offerings.

3. Regulation of DASPs in Bahamas

Are DASPs operating in Bahamas subject to regulation?

Yes, Digital Asset Service Providers operating in The Bahamas are subject to regulation under the Bahamas Digital Assets and Registered Exchanges Act, 2024. This comprehensive legal framework ensures that DASPs comply with strict regulatory requirements to maintain transparency, consumer protection, and financial integrity in the digital asset space.

Any entity or individual offering services related to digital assets, such as exchanges, custody services, payment processing, or advisory services, falls under the definition of a DASP and must be registered and licensed by the Securities Commission of The Bahamas. Section 9 of the Bahamas DARE Act requires DASPs to submit detailed applications for registration, providing information about their operations, management, financial resources, and compliance structures.

Are DASPs providing virtual asset services from offshore to persons in Bahamas subject to regulation in Bahamas?

Yes, Digital Asset Service Providers providing virtual asset services from offshore to persons in The Bahamas are subject to regulation under the Bahamas DARE Act, 2024. The Act is designed to regulate not only DASPs operating within The Bahamas but also those offering services to Bahamian residents, even if the service provider is based offshore.

Section 3(1)(b) of the Bahamas DARE Act specifically states that it applies to any person or entity conducting digital asset business from outside The Bahamas, provided the services are being offered to persons residing in The Bahamas. This includes virtual asset exchanges, custody services, advisory services, and other types of digital asset-related activities. The Act is designed to ensure that Bahamian residents are protected from potential risks associated with digital asset services, regardless of where the service provider is physically located.

What are the main requirements for obtaining licensing / registration as a DASP in Bahamas?

To obtain licensing or registration as a Digital Asset Service Provider in The Bahamas under the Digital Assets and Registered Exchanges Act, 2024, applicants must meet a comprehensive set of requirements, overseen by the Securities Commission of The Bahamas. These regulations are designed to ensure transparency, consumer protection, and financial stability in the digital asset sector.

Key Requirements for Licensing/Registration:

According to Section 9, any entity seeking to provide digital asset services must first be registered as a legal entity, such as a company or firm, and submit a complete application to the SCB. This application includes detailed information about the entity’s founders, directors, senior officers, beneficial owners, and relevant persons in the business. The forms required for this process include Form 1 (company registration), Form 2 (information about the founders and key persons), and Form 3 (appointment of the chief executive officer, compliance officer, and money laundering reporting officer). The registration ensures that the SCB has a full view of the operational and management structure of the DASP.

In terms of governance, Sections 10 and 11 require the appointment of a Chief Executive Officer who is suitably qualified and experienced. The CEO must demonstrate a thorough understanding of the digital asset business, its operational risks, and governance structure. If the digital asset services are being added as an additional activity to an existing business (e.g., financial institutions), Section 11 specifies that a separate application must be filed for this additional service.

Under Section 12, the SCB conducts a “fit and proper” assessment of the applicant and its key personnel. This assessment evaluates factors such as financial solvency, the educational qualifications and experience of those involved, and the applicant’s ability to run the business competently, honestly, and fairly. If the SCB deems the applicant or any of its key figures unfit, the registration will be denied.

Financial solvency and reporting are key components of the registration process. Section 15 outlines that DASPs must have sufficient financial resources to support their operations and meet their obligations. The SCB may determine specific capital or liquidity requirements based on the DASP’s risk profile, size, and the nature of its services. DASPs must submit audited financial statements on an annual basis and maintain adequate liquid capital to cover operational risks.

The technological infrastructure of the DASP is also scrutinized under Section 12(e). The applicant must demonstrate that it has appropriate systems and controls to manage risks effectively, particularly in relation to market surveillance, cybersecurity, and fraud detection. This includes implementing robust cybersecurity measures and ensuring that client data and digital assets are properly secured. Adequate systems to prevent market abuse, detect suspicious transactions, and manage cyber risks are essential for approval.

One of the most critical areas of regulation for DASPs is Anti-Money Laundering and Counter-Financing of Terrorism compliance, governed by Section 33. Every DASP must have systems in place to monitor and report suspicious transactions, ensuring that their operations are not used for illicit activities. This includes the appointment of a Compliance Officer and a Money Laundering Reporting Officer, responsible for ensuring that the DASP complies with AML/CFT laws.

The registration process is not a one-time requirement. Under Section 13, DASPs must renew their registration annually by submitting updated financial documentation, paying the required registration fee, and completing Form 6. If a DASP fails to meet the requirements for renewal, including submitting required financial reports, the SCB may revoke its registration.

For those DASPs offering custody services, Section 18 stipulates that they must segregate customer assets from their own and maintain proper controls to ensure the safekeeping of client assets. This is essential for ensuring that customer funds are protected in the event of insolvency or business failure. The DASP must also have systems in place to promptly return assets to customers upon request.

Additionally, Section 17 requires prior approval from the SCB for certain changes in the business, such as mergers, acquisitions, or significant alterations to the scope of activities. The DASP must apply for approval at least 28 days in advance of any planned changes, ensuring that the SCB can assess the potential impact on the market and clients.

What are the main ongoing requirements for DASPs regulated in Bahamas?

Under the Digital Assets and Registered Exchanges Act, 2024, Digital Asset Service Providers in The Bahamas must adhere to several ongoing requirements designed to ensure compliance, transparency, and consumer protection. These obligations are crucial for maintaining the integrity of the digital asset industry and fostering trust between businesses and their customers.

One of the key requirements is the annual renewal of registration, which must be completed by January 31st each year. DASPs are required to submit Form 6, which includes an updated declaration and supporting documents such as a copy of their professional indemnity insurance policy. The renewal process also involves paying the appropriate fee, $15,000 for digital token exchanges and $10,000 for other digital asset businesses. Failure to renew on time can result in suspension or revocation of their registration.

Financial reporting is another critical requirement. DASPs must submit audited financial statements annually, demonstrating their financial health and solvency. These reports must show that the business maintains sufficient capital reserves to cover its operational risks, ensuring it can continue to meet its obligations. This is a key part of ensuring financial stability within the digital asset market.

Compliance with Anti-Money Laundering and Counter-Financing of Terrorism regulations is mandatory for all DASPs. This includes appointing a Compliance Officer and Money Laundering Reporting Officer who oversee adherence to these laws. They are responsible for monitoring transactions, conducting due diligence, and reporting suspicious activities to authorities. These measures are critical for preventing illegal activities within the digital asset space.

DASPs must also maintain strong cybersecurity measures to protect digital assets and customer information. Regular security audits and updates are essential to prevent data breaches, and any incidents must be reported to the Securities Commission of The Bahamas immediately. This ensures the safety and security of client assets and data.

For DASPs providing custody services, client assets must be kept separate from the company’s operational funds. This segregation protects customer funds in the event of insolvency or operational failure. The DASP must also have systems in place to promptly return client assets upon request, ensuring they are safeguarded at all times.

DASPs must maintain accurate records of all transactions, filings, and communications, making these available to the SCB when requested. In addition, any significant changes to the business, such as changes in ownership or key personnel, must be reported using Form 7, with prior approval required for major operational shifts.

If a DASP has conducted an Initial Token Offering, they are required to keep the Offering Memorandum up-to-date, reflecting any changes in the project or risk profile. Additionally, businesses must maintain adequate regulatory capital to meet their operational risks, ensuring they can continue to function effectively and meet client demands.

The SCB may conduct regular audits and inspections to ensure ongoing compliance. Non-compliance during these audits can result in penalties, including fines or suspension of operations.

4. Regulation of other crypto-related activities in Bahamas