The Central Bank of The Bahamas (CBOB) has released a discussion paper outlining the regulatory framework it proposes as it prepares for the introduction of crypto assets to the financial services industry.
The CBOB outlined the key challenges raised by standards-setting bodies (SSB) like the International Monetary Fund (IMF) — of payments-focused crypto assets, including tax evasion since cross-border transactions using crypto assets tend to be anonymous;
unstable valuation caused by fluctuating demand; fraud, as the sale of such assets via initial coin offerings (ICO) is mostly unregulated; scalability, given unpredictable and volatile transactions costs; and money laundering and/or terrorist financing.
“In addition to AML/CFT considerations, SSBs have focused on investor protection standards, advocating that regulations should treat crypto products and services similarly when they serve like purposes as products provided through the regulated financial sector,” the CBOB’s discussion paper said.
“However, fragmented regulatory approaches at the international level could make it difficult to manage emerging risks in the fintech arena.”
While the Payments Instrument (Oversight) Regulations, 2017 (PIOR) already addresses many of the concerns articulated by SSBs – such as reserve requirements, liquidity and consumer protection – the CBOB is proposing amendments to the “to close any gaps concerning domestic payment services in foreign currency instruments”.
“The regulations also stress the fitness and propriety of individuals who provide electronic money services, safety and soundness of operations, and anti-competitive practices — especially when operations become systemically important,” the discussion paper stated.
“Thus, any business contemplating operations in, or from within The Bahamas would have to demonstrate safe and sound business practices; show that they have systems in place to measure, monitor, and adequately control market and other risks; and ensure that they have in place auditable policies, practices and procedures to prevent the use of their services for criminal purposes.
“The PIOR are also explicit about AML and related safeguards that apply to payment services.”
As for the local approach, the CBOB said additional adaptations will be made in consultation with the Securities Commission of The Bahamas (SCB) regarding its supervised financial institutions (SFIs) and the evolution of regulatory standards for the securities industry generally.
“That said, when the instrument’s purpose is to confer digital access rights as a utility token, there may be no obvious connection to the Central Bank’s remit, other than the application of the exchange control regulations,” the discussion paper noted.
“This would also be the case for asset-backed/security tokens, where the determined jurisdiction of the SCB may also apply.”
CBOB also explained that it has also chosen to support international regulatory convention which refers to the various types of token as ‘crypto assets’ – which are Central Bank-issued fiat currencies, rather than ‘cryptocurrencies’ – which are private sponsored innovations that rely on cryptographic or distributed ledger technology.
The introduction of crypto assets is a part of the CBOB move to further modernize the financial services sector, specifically as it relates to financial technology (fintech).
CBOB said the regulatory framework must evolve to enhance the sector’s competitiveness without compromising its integrity.
“Crypto assets and the associated technological platforms (such as distributed ledger technology), may offer fast, accurate and secure record-keeping,” the bank said.
“They may also allow for increased payment efficiency (in-country and cross-border), with lower transaction times and costs. Because transactions can be made on a peer-to-peer basis without financial intermediaries, these technological advances can readily be used by unbanked populations. This has the potential to increase financial inclusion worldwide.”