The Bahamas: A Complete and Compelling Choice March 2023

The Bahamas: A Complete And Compelling Choice A WealthBriefing Four Part Mini-Series On The Bahamas Financial Services Industry EDITION 1

2023

INTRODUCTION

The Bahamas Where Advanced Technology And HNW Investors Meet The Bahamas leads the world in the field of payment systems, having created the world’s first nationwide central bank digital currency, the Sand Dollar, in 2020. In implementing this digital coin of the realm, The Bahamas beat China’s ‘digital renminbi’ to the market by six months. The Government has coupled the introduction of the Sand Dollar with plans to eliminate the use of cheques in The Bahamas in favour of digital currencies.

Published by: CLEARVIEW FINANCIAL MEDIA LTD 83 Victoria Street London SW1H 0HW United Kingdom Tel: +44(0) 207 148 0188 www.clearviewpublishing.com

In association with: BAHAMAS FINANCIAL SERVICES BOARD Bahamas Financial Services Board Montague Sterling Centre East Bay Street P.O. Box N-1764 Nassau, The Bahamas Telephone: (242) 393-7001 www.bfsb-bahamas.com

© 2023 ClearView Financial Media Ltd, publisher of WealthBriefing. All rights reserved. No part of this publication may be reproduced in any form or by any means, electronic, photocopy, information retrieval system, or otherwise, without written permission from the publishers.

The jurisdiction has also been a forerunner in the world of cryptocurrency regulation. Flexible but thorough regulation applies to digital-token exchanges, payment-service providers that use digital assets, digital-asset service providers and the provision of services relating to the sale of digital assets. HNW investors who are interested in structured ‘crypto’ products find this stable environment attractive.

With the benefit of plenty of experience in this fast-paced sector, the Government plans to reform the DARE Act 2020 – The Bahamas’ ground-breaking digital-assets law – imminently to address such matters as the segregation of client’ assets, decentralised finance or DeFi, staking, yield farming, stablecoins, regulatory accounting, Web 3, non-fungible tokens (NFTs) and the advertising of digital assets. Firms registered under the DARE Act already have to follow the same anti-money-laundering rules as traditional financial institutions, in accordance with the precepts of the Financial Action Task Force and international best practice.

The Bahamas also provides a domicile for a number of global retail brokerages that make fully-automated trading a possibility, making it easy for users to submit orders automatically through mobile applications. History abounds with traders who failed to make the most of market movements because their own frailties and insecurities played them false. There are also some noble examples of traders who stuck to their set strategies, no matter how deeply they experienced the usual raging emotions of greed, fear and everything in between. The automatic trading option allows perfectly ordinary HNW investors – who lack the training and self-discipline that traders are supposed to have – to sidestep these emotions to a large degree and to trade in stocks and derivatives according to their pre-arranged policies.

This communiqué is part of a larger report on financial services in The Bahamas which will come out in stages during the course of the year.

The Bahamas: A Complete And Compelling Choice 2023

3

ADVERTISING SUPPLEMENT

Key Developments And Latest Trends In The FinTech Sector In The Bahamas *By Christel Sands-Feaste and Oscar Johnson, Partners at the Law Firm of Higgs & Johnson

From extensive legislation that facilitates the handling of digital assets to ground-breaking progress in the evolution of payment systems, The Bahamas has been making a profound mark on financial technology in recent years.

T

he collapse of FTX in early November last year and the subsequent commencement of bankruptcy proceedings in Delaware and liquidation proceedings in The Bahamas are seismic events which have shaken the financial technology sector worldwide. According to initial estimates, this is likely to be the single largest insolvency in the country’s history and has prompted questions about the future of the crypto-currency industry generally and the necessity for more regulation and oversight in the sector.

“There has been a dedicated regulatory framework in The Bahamas for digital-asset businesses since 2020” The Government of The Bahamas published a Policy White Paper on The Future of Digital Assets in The Bahamas in April last year. It outlines the Government’s vision and policy position on the regulation of the digital-asset space over the next five years, including its objectives to expand the sector, increase the attractiveness of The Bahamas for digital-asset businesses, establish The Bahamas as a leading digital-asset hub and encourage innovation in the FinTech space.

There has been a dedicated regulatory framework in The Bahamas for digital-asset businesses since 2020. This is based primarily on the Digital Assets and Registered Exchanges Act (known as the DARE Act) of that year. This Act regulates initial token offerings and digital-asset businesses in or from The Bahamas. The range of digital-asset businesses which require registration under the DARE Act include: (i) digital-token exchanges; (ii) the provision of services to such exchanges; (iii) payment-service providers that use digital assets, (iv) digital-asset service providers and (v) the provision of financial services relating to the sale or offering of digital assets. The custody of digital assets and the provision of wallet services are regulated separately under the Financial and Corporate Services Providers Act 2020 or FCSPA. Both the DARE Act and the FCSPA are administered by the Securities Commission of The Bahamas, the primary securities regulator

in The Bahamas. The responsibilities of the commission under section 5(1) DARE Act include the regulation, monitoring and supervision of digital-asset businesses and the development of rules, guidance and codes of practice in connection with the conduct of digital-asset businesses and initial token offerings.

In March last year, the commission published the Digital Assets and Registered Exchanges (Anti-Money Laundering, Countering Financing of Terrorism and Countering Financing of Proliferation) Rules 2022, which obliged firms registered under the DARE Act to follow the same anti-moneylaundering and counter-terrorist-financing rules as traditional financial institutions, in accordance with international best practices.

These obligations include: (i) the implementation of a risk-rating framework which, among other things, assesses the risk profile of the registrant and its customers; (ii) the development of internal controls and procedures for the prevention, detection and disclosure of risks associated with money laundering, the financing of terrorism and the financing of the proliferation of weapons, in accordance with the Financial Transactions Reporting Act 2018; (iii) the verification of customers’ identities; (iv) the maintenance of customer identification and transaction records; (vi) suspicious-transaction reporting; and (vi) the ongoing provision of education and training for employees.

More recently, the commission published its own policy statement in which it outlined The Bahamas’ Approach to the Regulation of Digital Assets Businesses. The SCB’s statement (PS1/2022) outlines the commission’s considerations in developing the regulatory framework for the sector, describes its regulatory philosophy, clarifies the process of registration and supervision and outlines future considerations for the regulation of the sector. The sector is evolving rapidly, so the commission intends to review and amend the DARE Act in respect of regulatory accounting, the segregation of clients’ assets, decentralised finance (de-fi), staking, yield farming, the advertising of digital assets, stablecoins, Web 3 and non-fungible tokens (NFTs).

In addition to the regulation of the digital-asset space, The Bahamas has implemented a number of measures in recent years to modernise its payments systems. The world’s first nationwide central bank

4

The Bahamas: A Complete And Compelling Choice 2023

digital currency, the Sand Dollar, was launched by the Central Bank of The Bahamas in October 2020 after a pilot programme on the Island of Exuma in 2019. This was a continuation of the Bahamian Payments Systems Initiative which began in 2003.

Institutions have committed to cease using Bahamian-dollar cheques as negotiable instruments for the acquisition of goods and services and the settlement of legal and financial obligations in The Bahamas on 31st December 2024.

“The world’s first nationwide central bank digital currency is the Sand Dollar”

The FTX débâcle will undoubtedly overshadow the financial services industry of The Bahamas for some time to come. On top of this, it remains to be seen whether the world will ever agree on the right way to regulate digital assets. Nevertheless, the regulatory and policy framework for digital assets in The Bahamas is well-established and the commission intends to strengthen that framework in response to rapid changes in this space. Moreover, the continued advancement of initiatives such as the Sand Dollar and the elimination of cheques demonstrate The Bahamas’ commitment to the general modernisation of payment systems on its territory.

The Sand Dollar is not a crypto-currency. It is issued by the Central Bank and fully backed by the country’s foreign currency reserves. Its objectives include greater efficiency among payments systems, more financial inclusion, the provision of non-discriminatory access to payment systems and a strengthening of anti-money laundering and counter-terrorist-financing defences by reducing the usage of cash.

Since the full re-opening of The Bahamian economy after the Covid 19 pandemic, the Central Bank has engaged in aggressive marketing activity to promote the use of the Sand Dollar in domestic commerce, partnering with the organisers of local cultural festivals where the only permitted form of payment is the Sand Dollar.

As a part of a project to eliminate the use of cheques, the Central Bank, the Clearing Banks’ Association and local Supervised Financial

* Christel Sands-Feaste can be reached on +1 242 502 5200 or at csands-feaste@higgsjohnson.com; Oscar Johnson can be reached on +1 242 502 5200 or at ojohnsonkc@higgsjohnson.com

The Bahamas: A Complete And Compelling Choice 2023

5

ADVERTISING SUPPLEMENT

How Systematic Trading And Investing Overrides Bad, Emotional Decision-Making * By Dr Iyandra Smith Bryan, the Chief Operating Officer at Quantfury Trading Limited

In this article we see how sophisticated trading software is saving traders in The Bahamas and elsewhere from falling victim to their own dark urges and human frailties. The results are often spectacular.

S

o many of us often find it difficult to manage our investments without emotions of panic or anxiety leading us to make unsound financial decisions. This even applies to those of us who consider ourselves knowledgeable about the markets. Think about the time when you had to decide whether to buy or sell a position, when sentiments of fear or notions of greed began to obscure your ability to make a decision in a rational and logical manner. We are all driven by irrational factors; “being human” can, unsurprisingly yet regrettably, get in the way of us making the best financial decisions for ourselves and for our lives.

THE PROBLEM: HOW CAN WE PROTECT OURSELVES FROM OUR OWN FRAILTIES? Writing in 1923 about the famous discretionary speculator Jesse Livermore, the American author Edwin Lefèvre described the fallibility of human psychology when it comes to trading or investing in financial markets.

“It is inseparable from human nature to hope and to fear. In speculation, when the market goes against you – you hope that every day will be the last day – and you lose more than you should have had you not listened to hope...And when the market goes your way you become fearful that the next day will take away your profit, and you get out – too soon. Fear keeps you from making as much money as you ought to.”

“Fear keeps you from making as much money as you ought to” Edwin so eloquently captures one of the weaknesses associated with being human: our inability to remain calm in the midst of panic. What do so many of us do when the market is collapsing? We panic, we run, we exit.

Robert Carver, a portfolio manager at one of the world’s largest hedge funds, wrote that his team was terrified during the financial crisis of 2008 and thought of liquidating all its positions in financial institutions all over the world.

He wrote in his book Systematic Trading: “After yet another crisis meeting, where we decided to take no action for now, I left the meeting room and returned to my desk. As I sat down, a colleague came over and started typing on my keyboard...He pressed return and a live estimate of today’s profitability appeared on my screen. For the first time in our firm’s history it showed a ten-digit number. We had made over a billion dollars in a single day. Our computer system had stuck to its pre-programmed set of trading rules and mechanically exploited the market moves almost to perfection, whilst terrified humans had discussed closing it down.”

Another human frailty is overconfidence. We often believe that we are smarter than we are and that we know more about the trading system than we do. Very often, however, this could not be further from the truth.

Significant personal ‘life events’ such as divorce and separation have also been shown to affect a trader’s performance. In an article entitled Limited attention, marital events and hedge funds in the Journal of Financial Economics, the authors’ research concluded that fund managers generated lower realised returns in the years before and after their divorces. Their stock-selection skills were poorer and their risk-adjusted returns deteriorated and were weaker than those of control samples. This is evidence that human frailties make discretionary trading and investing so much more arduous over an extended period of time.

THE SOLUTION: SYSTEMATIC TRADING AND INVESTING We humans are vastly superior to IT systems when we perform tasks that require fundamental analysis and critical thinking, but our emotions often hinder us from using the intelligence that we need to make sound trading decisions. The solution to this problem lies in systematic trading and investing. When we put a trading system in place, it eliminates impulsive reactions and cuts out the human behavioural biases to which so many of us are prone. It also makes it easier for us to pursue a steady and logical trading strategy.

System trading and investing also institutes an omnipotent ‘commitment mechanism,’ backed by objective data, that prohibits the interference that may result from the cognitive biases that we humans have. It draws a line in the sand, delineates the rules, causes just enough friction to disincentivise meddling, and produces sounder results.

6

The Bahamas: A Complete And Compelling Choice 2023

A modern example of a commitment mechanism is to be found in Victor Niederhoffer’s book, Education of a Speculator, where Victor, a hedge fund manager, has a large long position in silver futures. In the book, the Hunt brothers, who have been manipulating the market upwards, are about to succumb to market events that will cause the price to drop.

“I decided to set my loss limit at 50% of my winnings...The model story on this point is Odysseus...I locked myself inside a racquetball court instead of tying myself to a ship’s mast. I issued instructions to my assistant and future wife, Susan. ‘Do not listen to my entreaties if I wish to double further. If the losses reach 50% of the winnings, reduce my positions by one-half. If I beg to be released, sell everything out’...Some rumours about liquidation by the Hunts had hit the fan...I immediately placed a call to Susan: ‘Untie me, disregard everything I said before’...

My faithful companion followed my original directions.”

Susan, Victor’s partner, was the commitment mechanism. She closed the entire position and Victor went on to continue his journey. Not all of us have a Susan, so a we need a trading system to help us remain committed to the goal at hand. Systematic trading, in other words, provides traders with a transposable groundwork for trading that can help them manage risks far better.

A systematic trading approach permits a trader to be more disciplined in managing risks because he can construct an appropriate risk-management regime inside the trading strategy itself, rather than treating it as a side-note. The trader can apply or operate within a stated level of risk or permit a variation of risk within a specified range.

“Divorce and separation have been shown to affect a trader’s performance” The price of almost every derivative security is affected by swings in volatility. Statistical techniques permit traders to forecast volatility with a reasonable measure of accuracy, both in the short and medium term. This helps them to keep risks within limits. The trader, in other words, can use conscientious statistical methods to set up a sound risk-management regime.

Systematic trading also allows the trader to set and observe limits in order to control risks and exposures. When the system reaches these limits, it can cap or minimize position sizes automatically.

SYSTEMATIC INVESTING HAS PRODUCED BETTER PERFORMANCE Countless research papers have been written about the performance of systematic investing as opposed to discretionary investing; they prove that systematic investing often leads to far higher performance and is more consistent than discretionary investment. In the Journal of Alternative Investments, researchers concluded that systematic trend-following fund managers performed better and achieved higher returns than those in other categories. Similarly, researchers from the Man Group analysed the performance of systematic and discretionary managers and concluded that systematic macro-funds outperformed discretionary macro-funds.

“Systematic investing often generates far higher performance than discretionary investment” SYSTEMATIC TRADING AND INVESTING IS ACCESSIBLE For those beginning their journeys into the capital markets, it is easier than ever to trade or invest in a systematic way. A host of global retail brokerages, such as Quantfury, make it easy for users to submit orders automatically through mobile applications and make fully-automated trading a possibility. Moreover, users can download data such as historical prices, company research and news reports from various websites easily and at no cost. Systematic trading and investing allows them to make decisions about investment and trading in a methodical way and with a high degree of ease. * Dr. Iyandra Smith Bryan, SVP, Chief Operating Officer Quantfury Trading Ltd., Bahamas. Linkedin: https://www.linkedin.com/in/dr-iyandra-s-6396a3136/