By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The International Monetary Fund (IMF) last night urged The Bahamas to undertake “deeper efforts” to regulate digital assets firms by providing more resources to inspect their operations.

The Fund, in issuing its statement on the annual Article IV consultation with this nation, warned that “vigilance will be of the essence” in supervising the fast-evolving industry as The Bahamas continues to manage the fall-out from last November’s implosion of the FTX crypto currency exchange.

In particular, it called on The Bahamas to ensure that planned reforms to the Digital Assets and Registered Exchanges Act, the key law in its regulatory regime, are aligned with international standards set by the likes of the Financial Stability Board and Basel Committee.

“Deeper efforts are recommended to analyse, monitor and mitigate financial stability risks stemming from crypto assets,” the IMF urged. “The regulatory framework for crypto assets has been updated and the authorities have legislated an amendment to the Digital Assets and Registered Exchanges (DARE) Act to strengthen the regulation and supervision of crypto assets.

“Critically, this should be accompanied by the provision of more resources for on-site inspections to help identify and rectify operational deficiencies and reduce reputational risks.

“Further amendments to the legislation to fully align The Bahamas’ framework for crypto assets with global standards like the Financial Stability Board’s high-level recommendations on crypto assets and the Basel Committee standards on the prudential treatment of crypto exposures are advised. Vigilance in this nascent but rapidly-evolving area of regulatory oversight will be of the essence.”

The Bahamas likely does not need to be warned twice following FTX’s collapse, which has sparked liquidation and winding-up legal proceedings in both this nation and Delaware amid efforts to untangle assets that have been “hopelessly commingled”.

The IMF, though, found no threat to The Bahamas’ foreign currency reserves that are critical to supporting the one:one exchange rate peg with the US dollar. “Protection of the exchange rate peg requires sustained preservation of international reserves,” it said. 

“The recovery in tourism, external public sector borrowing and the presence of long-standing capital flow management measures have supported international reserve accumulation even as domestic short-term interest rates remain well below those in the US.

“However, capital flows can be sensitive to interest rate differentials, especially during periods of uncertainty or volatility. Liquidity management operations, as well as allowing interest rates to rise as needed by market conditions, could be useful for mitigating these risks, reduce banks’ carrying cost of reserves and, in turn, narrow the spreads between deposit rates and rates on loans to private borrowers.”

Elsewhere, the IMF prodded The Bahamas to remedy all concerns identified in its 2019 Financial Sector Assessment Programme (FSAP). “The progress made by the authorities in implementing the 2019 FSAP recommendations are welcome, but some areas remain to be addressed,” it added. 

“A separate Resolution Unit within the Central Bank has been established but will require adequate staffing to become fully operational. Plans are underway to establish The Bahamas Financial Stability Council (BFSC) to improve inter-agency co-ordination and information exchange among financial stability regulators.

“Efforts should be furthered to increase the coverage of deposit insurance for domestic banks by increasing premiums levied on banks for all deposit liabilities, while improving the Deposit Insurance Corporation’s governance and operational structure. The collection of loan-level data by supervisors would assist in identifying systemic risks and, if needed, in designing macro-prudential policies.”

Calling on The Bahamas to persist with the introduction of the Central Bank Digital Currency (CBDC), the IMF added: “Usage of the Sand Dollar, the central bank’s digital currency, remains limited. Despite the large diffusion of electronic wallets, the Sand Dollar still represents a small, albeit growing, percentage of money in circulation.

“The Central Bank is continuing its outreach efforts to the public and has formalised the governance framework surrounding the Sand Dollar. The bank’s multi-pronged approach to increasing Sand Dollar adoption has the potential to increase financial inclusion and increase the resilience of the payment system.

“Continued efforts to identify and manage cyber security risks and improve the security infrastructure will also bolster confidence in the Sand Dollar, and strengthen prospects for a larger circulation.”