The DARE Issue with Christina Rolle

Speaking at Consensus in late April, the Prime Minister of The Bahamas, Philip Davis, announced the island country’s new set of regulations for cryptocurrency — the DARE Bill.

While in the West an entire industry grapples with the government’s inability to offer appropriate policies and a simultaneous, punitive enforcement of laws not designed with the digital age in mind, The Bahamas have offered the DARE Bill for public consideration.

The Digital Assets and Registered Exchanges (DARE) Bill is an ambitious attempt to rectify public confusion, regulatory pertinence, and future of the crypto industry in The Bahamas, which previously attracted both illicit and legit crypto companies.

I spoke to Executive Director of the Securities Commission of The Bahamas, Christina Rolle, about the challenges of creating the DARE Bill and the potential of clear guidelines to change the narrative of crypto as suspicious, half-legal internet money.

ALICE TIERMES: The DARE bill will be an innovative legislation, and such are difficult to create de novo. What were the hallmark bills that led to creation of the DARE bill?

CHRISTINA ROLLE: The DARE Act, 2020 is an innovative piece of legislation and robust by any objective measure. Notably, The Bahamas was one of the few countries in the world that had digital assets regulation by end of 2020, although there were already some industry standards and best practices surfacing, like the Financial Action Task Force (FATF) Recommendations with respect to AML/CFT/CPF, and other jurisdictions had elements of a regulatory regime in place.

To create the DARE Act, 2020, the Commission conducted extensive benchmarking of 13 jurisdictions, carefully considering and where applicable, implementing various regulatory approaches, international standards, and best practices. In tandem, the Commission consulted with other regulators, policymakers, industry participants, and stakeholders.

After our deliberations, the Commission determined to create a legal taxonomy which gives appropriate scope to address digital assets and digital asset business by giving it its own bespoke framework. “Digital asset” was given its own definition under DARE. Under DARE, the Commission has clear authority to regulate and oversee digital assets and digital asset business activity. This authority is not “inferred” from previous legislation, and the question of whether digital assets are securities or commodities does not exclude them from proper regulation in The Bahamas.

It was always the intent when we passed DARE to continually evolve our regulatory regime to stay current with the rapidly changing space. We consolidated our ongoing review of the developments in the space, our legislation and assessment of emerging risks and technologies in April of last year. For the DARE Bill 2023, we benchmarked the DARE Act, 2020 with comparable frameworks from jurisdictions such as the European Union, Hong Kong and New York, USA, along with updated guidance from the Financial Stability Board and the FATF.

AT: The DARE bill covers limitations on mining within the country. Why is it and how
adjustable are you prepared for this legislation to be, in order to maintain relevance within the fast-developing market?

CR: There are certain restrictions on proof of work mining. Mining as a part of a digital asset business or where mining is ancillary to other digital asset business activities, is not prohibited. There are proof-of-stake mining operations which are legitimate and, to be clear, will not be banned.

The current infrastructure of The Bahamas makes legitimate proof of work mining here unfeasible. We did not want to expose The Bahamas to the risk that a firm outside of The Bahamas is licensed to conduct proof of work mining, as the firm may operate the company for the purpose of committing fraud or scams. In these circumstances, the ability of the regulator to oversee the activity is limited.

We are adaptable to the changing market, but we do not anticipate this type of mining being a viable business activity in The Bahamas in the near future.

We always intended for DARE to be flexible. For example, we chose not to develop regulations as the space is still developing rapidly, which allows for pragmatic regulatory responses as new risks surface. From the outset, we took the approach that we would need to supplement the legislation with rules and guidelines for robust risk-based regulation as the industry grew.

AT: How do you ensure the veracity and relevancy of the information about the
rapidly changing digital asset industry that is presented to the legislators?

CR: The Commission has a unit dedicated to policy and research, which is consistently monitoring developments in the space and benchmarking. Out of this unit, the Commission also established its FinTech Hub. We are also always increasing our capacity. We have continuous education and training for technical staff. Virtually everyone who deals with digital assets has done a training course in crypto or digital assets.

Through the board membership of the Executive Director, The Bahamas is also a part of the securities standards setting body, the International Organization of Securities Commissions (IOSCO) Fintech Task Force (FTF) steering committee (developing principles with respect to digital asset regulation globally), and is a part of that work which ensures we are on top of what’s happening from a global principles and regulatory standpoint.

The Commission is also a part of the Global Financial Innovation Network (“GFIN”), which is an organisation whose purpose is to talk about regulatory solutions and principles and to support financial innovation and protect investors and consumers on a global scale.

We appreciate the space is rapidly changing. For example, in the initial process of drafting the DARE Act 2020 we started benchmarking from 2018 but had to make further changes before presenting the final Bill to Parliament in 2020 because so much had changed. As we are a small jurisdiction, we are quite nimble in that we can more efficiently make changes to legislation. We always said that the DARE legislation will need to be frequently updated to keep pace with the space and our amendments since 2020 to now is further proof of that.

Executive Director of the Securities Commission of The Bahamas, Christina Rolle. Source: SCB.GOV.BS

AT: There are circulating rumors that Coinbase, a currently US-based cryptocurrency exchange, is planning to move offshore in case the US government does not provide enough regulatory clarity. Will the DARE bill provide a sufficient regulatory framework for companies like Coinbase to consider moving their operations to The Bahamas, while maintaining provision of services to international customers?

CR: The DARE Act framework allows for exchanges to be registered with the Commission and also provide services to international customers and to operate with legal and regulatory certainty. DARE is one of the best regulatory frameworks for digital asset exchanges in terms of investor and consumer protection. DARE requires that exchanges ensure the systems and controls used in its activities are adequate and appropriate for the scale and nature of its business. The DARE Bill being proposed further strengthens the regulatory framework around exchanges by introducing additional requirements.

All digital assets businesses including digital asset exchanges may be interested to know that The Bahamas has also attained a “Compliant” rating on the Financial Action Task Force (the FATF) Recommendation 15, for the technical compliance of its Virtual Asset Service Providers AML/CFT/CPF supervisory framework. This was critical to The Bahamas achieving a perfect 40 out of 40 rating with the FATF Recommendations, only six countries globally have achieved this milestone (as at 26th April 2023). Attaining the “Compliant” rating required an assessment of the DARE Act, which continues to be validated at the highest levels globally for its commitment to international best practices and regulatory standards.

AT: Do you think that the other countries of the Commonwealth might follow suit and create a modern regulatory framework for the industry?

CR: We certainly see more jurisdictions globally, not only in the Commonwealth, embracing digital asset regulation, and as leaders in regulating the new asset class we see key elements of our approach and our investor and consumer protection provisions echoed and as various jurisdictions move to implement digital asset legislation. This will help to push global standards setters toward developing common baseline standards to facilitate innovation and protect investors, consumers and the financial markets, which is an ultimate goal. In fact, IOSCO recently announced they will propose their first set of recommendations for regulation of crypto assets and the Commission contributed to that work through it role on IOSCO’s Fintech Task Force.

For digital assets to survive and attract institutional business going forward, it has to be regulated. As the EU with MiCA, the UK and other G20 jurisdictions continue to develop regulations it will become more aligned around the world and other jurisdictions will have to fall in line. When you have other jurisdictions without regulations or regulations that are not up to the standard of global standard setting bodies it will be bad for the industry generally. We intend to be a leader as global standards on digital assets regulations are being set.

We had good reason to implement a digital asset regulatory framework. Jurisdictions like The Bahamas that are financial centres faced the dilemma of the possibility of external players coming into our markets without being licensed to operate. The choice would be either to pass legislation barring certain activities or to regulate these entities. There are significant risks for having companies operating in the digital asset space setting up in your jurisdiction and conducting business unregulated. We thought it best to put in a framework where they could operate under regulatory guardrails designed to protect consumers and investors. Along with the way, we saw the way the world was going in terms of regulatory principles to govern the space. The Bahamas passing DARE was proactive and an essential step on the path to taking a global leadership role in digital assets regulation.

The Bahamas as a leading jurisdiction in the financial services sector possesses the human capital to facilitate and execute digital asset related services such as asset management and wallet services, together with other businesses in the digital asset space that naturally serve the marketplace.

AT: What kind of feedback are you anticipating from the public regarding the DARE bill?

CR: Feedback from industry participants, consumers and customers who will be impacted by new products or services, other stakeholders ranging from regulators to policymakers, and the public is integral to the development of the Commission’s policies and essential for legislation it proposes to improve the financial services regulatory landscape in The Bahamas.

We hope to get feedback on if the proposed Bill appropriately addresses consumer and investor-related risks, if it provides a practical framework for legitimate businesses to operate and innovate under, if it properly empowers the Commission to take action, if there are attendant risks to the financial system or other systems not adequately addressed, if there are activities that should be brought under scope which are not, are there jurisdictional reputation issues to be addressed, and so on. Our aim is to make the legislation better for industry, licensees, investors and consumers.

Prime Minister of The Bahamas, Philip Davis, speaking at Consensus 2023.
Source: Coindesk

AT: After DARE, what is the next step for the Bahamas in terms of financial freedom and inclusion of public needs?

CR: The Commission sees a significant opportunity to increase knowledge and understanding of the digital assets in The Bahamas, which has be potential to impact entrepreneurs, the work force, investors, developers, and ultimately financial inclusion and financial freedom. This can help consumers avoid being the victim of the crypto frauds and scams still plaguing the industry.

Similarly, we also can help to improve the public’s understanding about investing and financial management generally, and opportunities available to raise capital and invest in the Bahamas’ capital markets.

Our work to provide leading regulation and oversight for digital assets is far from over, and the Commission also recognizes the benefits to financial freedom generally as the nation is able to diversify its economic model and stay relevant as a leading international financial centre. Financial services is a significant pillar of the Bahamian economy and underpins the middle class.

We also plan in conjunction with the University of The Bahamas to establish digital asset courses to help educate Bahamians about the space which we hope can further encourage their involvement in building their skills like coding etc.

AT: The Bahamian SEC has financial literacy initiatives. Who are they for and what do you hope to achieve with them?

CR: The Securities Commission of The Bahamas has a statutory mandate related to investor education and promoting public understanding of the capital markets, its participants and the risks and benefits associated with investing. We recognize the important role that investor education and financial literacy play in not only increasing financial and investor resilience but in helping to grow our local economy. The Commission aims to expose Bahamians and persons living in the Bahamas to key financial concepts and topics including, but not limited to investing, risk, diversification, compound interest and frauds and scams prevention. We believe this effort can help Bahamians, make informed choices about their finances and see investing as a path to building wealth.

We also seek to increase awareness about the role of the Securities Commission in the domestic capital and financial markets and in protecting investors and consumers.

Although the pieces of legislation we administer include risk mitigation and investor protection measures for all investors, our financial literacy and investor education programs are geared mainly toward retail investors who may have limited knowledge of the capital markets and investing concepts.

AT: In what ways do you hope the cryptocurrency industry will better the lives of your

CR: Currently, we do not have much domestic digital asset activity in The Bahamas. We hope that with having a regulatory framework in The Bahamas and through our education efforts, more Bahamians will be able to participate in the space as entrepreneur service providers and developers, or be able to gain employment in the area. We have seen Bahamians getting into the space as service providers with registered Bahamian-owned digital asset businesses providing digital asset services like custody and exchanges, etc. already and we foresee more of this activity down the road.

Companies choosing to register in The Bahamas provide employment opportunities for Bahamian financial services professionals. This is more of a focus for the Government of The Bahamas due to its political and economic impacts. In this regard, the Government has published a White Paper: The Future of Digital Assets in The Bahamas last year which outlines their objectives. However, the Commission has a charge to develop and safeguard the markets, specifically for digital assets space under the DARE Act, but also for the capital markets more broadly under the Securities Industry Act.

AT: What is your advice for other lawmakers when it comes to tackling Decentralized
Finance (DeFi)?

CR: Law makers globally should approach the development of DeFi regulations holistically, carefully and deliberately. Generally, we are of the belief that regulation of digital assets should be principled based, proportionate to the risk and not be so onerous as to drive the space underground, which would lead to other issues which are less manageable and pose even greater risks like financial crimes, fraud and potential future systemic risks. That said, the Commission is looking at DeFi to identify areas where regulatory clarity may be prudent but importantly that it doesn’t stifle innovation and growth.

Positive regulation can make DeFi more inclusive and mainstream with AML/KYC and other requirements ultimately making participants more secure. This is the natural progression of the space.

The Commission is collaborating with the Digital Advisory Panel chaired by our Attorney General on how to regulate Decentralised Autonomous Organisations (DAO’s) structures so they can operate with predictability and legal certainty. We are currently reviewing and will probably create rules on how they operate and some governance related issues.

The island country, with its fascinating history of the Republic of Pirates, is not shy of embracing change. The Bahamas aim to collaborate with and accept emerging financial and technological innovations as part of their norm moving forward.

Despite current infrastructure setbacks to mining operations, The Bahamas offering thorough regulations for careful consideration puts the country at a clear advantage for development and endurance. What’s more, with financial literacy initiatives, these benefits are likely to be felt by individual citizens, and not just well-funded companies and government agents.

The DARE Bill, which may come into effect by the end of Q2 2023, may serve as an example countries which are stubbornly busy with attempts to solve issues already solved by cryptocurrency and blockchain technology over a decade ago. 

Alice Pylypenko

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Alice is an editor, journalist, and essayist. Educated in psychology and dedicated to decentralization efforts, Alice continues to disclose the capabilities of Bitcoin to cultivate liberty, equality, and solidarity while shedding light on misinformation, power overreach, financial scandal, and the reasons behind them.