Pioneering the fintech landscape, Bermuda is now celebrated as one of the leaders in the global market and stands as a beacon of innovation for businesses. In partnership with the Bermuda Monetary Authority (BMA), the financial services regulator of Bermuda, the government has constructed a legal and regulatory framework that ensures business transparency, investor protection, and customer security. Bermuda prides itself on one of the largest (re)insurance markets worldwide, renowned for crafting risk solutions and alternative-risk structures. The BMA developed a dynamic, risk-based regulatory regime that caters to the needs of digital asset businesses while remaining open to the quick adoption of distributed ledger and other technologies.
Bermuda’s legislation evolution is distinguished by several key laws:
The Digital Asset Business Act 2018 (DABA) sets the blueprint for licensing and supervising digital asset businesses in Bermuda. It features codes of practice, principles, rules for client disclosure, cybersecurity, accounting, and sector-specific guidelines to prevent money laundering and terrorist financing, specifically tailored for the digital asset business sector.
The Digital Asset Issuance Act 2020 governs the behavior of digital asset issuances parallel to initial public offerings of shares.
The Banks and Deposit Companies Act 1999 underwent amendments, paving the way for a unique banking license category that fosters the establishment of banking institutions serving the fintech sector.
The Insurance Act 1978 received amendments, forming a unique regulatory sandbox license class to be issued by the BMA for innovative insurers, insurance managers, and intermediaries. It also enables the creation of an innovative insurance company category that companies can register as or transition into from the sandbox.
The DABA has been further enhanced several times since its enactment to keep pace with the rapid advancements intrinsic to the fintech sector. One of the primary advancements is the regulation of the digital assets derivative market, such as options, futures, contracts for differences, and swaps with digital assets as the underlying. The licensing regime has also been expanded to include digital assets derivative exchanges, digital asset benchmark administrators, and trustee companies that oversee and administer digital assets.
Fintech businesses, investors, and financiers will find a rich ecosystem in Bermuda, which boasts an advanced legal system, an abundance of intellectual capital, regulatory sandboxes, an innovation hub, and a sizable customer base.
Digital Asset Issuance Act (DAI Act)
Introduced in 2020, the DAI Act is a foundation for Bermuda's digital asset regulation. It stipulates a statutory framework for sanctioning digital asset issuances and elaborates on the requirements that digital asset issuers must meet. The DAI Act governs anyone planning a public offer for acquiring digital assets from or within Bermuda. The broad definition of 'digital assets' under the DAI Act and the Digital Asset Business Act (DABA) encompasses digital coins, cryptocurrencies, and even security, utility, and equity token offerings.
How to Launch a Digital Asset Offer in Bermuda
Issuers planning a public offer of digital assets are expected to conform to certain provisions under the DAI Act. The key requirements include:
Establishing a company, limited liability company, or partnership.
Procuring the minister of finance's approval since the public offer is considered a 'restricted business activity.'
Upon fulfilling these requirements, an issuer needs to apply for BMA authorization. The application must provide a detailed business plan, issuance documents, and other relevant documents, along with the necessary application fee.
Offer Document
The offer document—usually an extended version of the White Paper—forms the core of a public offer for digital assets. It provides a comprehensive view of the offering, covering the promoter's details, financial projections, project description, potential risks, custodial arrangements, and privacy measures, among others.
However, certain offers are exempted from the requirement of filing and publishing an offer document. These include offers made to less than 150 persons, 'qualified acquirers,' or those typically acquiring, disposing, or holding digital assets as part of their usual business activities. 'Qualified acquirers' refer to individuals or entities with substantial personal income, net worth, or total assets as specified under the DAI Act.
The Digital Asset Business Act (DABA)
Bermuda's digital asset business landscape is governed by DABA, which defines and regulates a wide spectrum of digital asset business activities. Whether it's issuing, selling, or redeeming digital assets, providing custodial wallet services, or operating as a digital asset exchange, all such businesses must be licensed under the BMA.
Navigating the DABA Licensing Labyrinth
The BMA provides three classes of licenses under DABA: Class F (full), Class M (modified), and Class T (test). Applications for each class require a business plan, information about beneficial owners, directors, and officers, proposed staffing, financial projections, and evidence of controls and risk management.
Class T licenses are typically for start-ups wanting to beta test a minimum viable product. The Class M license acts as a 'regulatory sandbox,' allowing businesses to establish proof of concept before transitioning to a full Class F license. Each license has different requirements, catering to different stages of a business's development.
The BMA applies minimum licensing criteria across all these classes, with some possible waivers or modifications for Class T or Class M licenses. These criteria include 'fit and proper' controllers, conducting business prudently, having sufficient insurance and risk mitigation measures, maintaining adequate accounting records, and implementing effective corporate governance measures.
Cybersecurity
DABA necessitates establishing an extensive cybersecurity program and policy by licensed entities. These are expected to align with the business's size and complexity and must be periodically audited externally. In general, both the DAI Act and DABA contain detailed cybersecurity requirements, with the BMA issuing Cybersecurity Rules that require licensed undertakings to maintain a comprehensive cybersecurity program and conduct an annual external audit.
Compensation Models
DABA-certified firms can set their own customer charges based on their individual business models. However, they must comply with the Client Disclosure Rules (2018) that mandate the communication of all potential risks associated with their services and products to their customers. They must also share any additional information the BMA considers necessary for customer protection. Key details like the license class, voting rights, insurance coverage, and a detailed schedule of fees and charges should be disclosed at the time of agreement initiation with a DABA-licensed entity.
Regulatory Sandboxes
The DABA includes provisions for regulatory sandboxes through Class T and Class M licenses, thus fostering innovation and new product testing in the digital assets realm. Similarly, the BMA has established two innovation tracks:
An insurance regulatory sandbox catering to firms seeking licensure as insurance entities or insurance intermediaries. This provides a controlled environment for firms to test new technologies and offer innovative products and services to a limited number of policyholders for a set duration. Upon successful completion of sandbox testing, companies may transition to an existing class of license.
The 'Innovation Hub' promotes interaction between innovators and the BMA, offering guidance on regulatory standards related to innovative insurance solutions. It is also seen as a platform for idea exchange and is used by companies at an early stage before applying for entry into the insurance regulatory sandbox.
Regulator's Jurisdiction
The BMA is the sole financial services regulator in Bermuda. However, if digital asset issuers provide services or products using blockchain technology in other countries, regulators may also have jurisdiction, depending on the extent to which such products or services are regulated.
Outsourcing Regulated Functions
Under DABA, certain regulated functions like asset management, custodial services, cybersecurity, compliance, and internal audit can be outsourced. While no specific jurisdictions are preferred for outsourcing, companies should ideally outsource to an entity regulated by a jurisdiction with standards equivalent to those in Bermuda.
Accreditation of Exchanges and the Gatekeeper Liability
The DAI Act allows a licensed exchange under DABA to apply to become an "accredited digital asset exchange." These accredited exchanges can authorize digital asset issuances without the issuer having to file the issuance documents with the BMA.
Enforcement Actions and Penalties
The BMA can impose civil penalties of up to USD 10 million and issue prohibition orders, public censures, and injunctions under its enforcement powers granted by the DABA. It can also demand information production and restrict or revoke licenses if a licensed entity complies with DABA rules and regulations.
Privacy Regulations and Compliance
Under Bermuda's Personal Information and Protection Act 2016 (PIPA), digital asset businesses must have detailed measures and policies to protect personal information. Fintech businesses should also have a designated privacy officer and an accessible consent mechanism. The organization transferring personal information to an overseas third party shall remain responsible for PIPA compliance.
The Auditing Landscape
Auditing firms have a pivotal role to play. They are acutely aware of the need for audited financial statements under the Digital Asset Business Act (DABA), particularly for Class M or F license holders. Interestingly, some Bermuda-licensed digital asset companies are engaging overseas audit firms for external audits, a practice accepted by the Bermuda Monetary Authority (BMA).
Banking Institutions & Fintech
Bermuda's government, via the Banks and Deposit Companies Amendment Act 2018, has effectively removed a roadblock for banks and lending institutions to serve the Fintech sector. This change was necessitated by the initial reluctance of incumbent banks to provide banking services to the sector. However, attitudes have changed, and local banks are now servicing Fintech businesses. This trend extends to some US banks known for their Fintech focus.
The Intersection of Unregulated and Regulated Offerings
The broad ambit of the Digital Asset Issuance Act (DAI Act) and DABA mean that most companies looking to conduct public digital asset offerings or blockchain-based business activities will fall within their purview. Those operating solely for their own business or subsidiary or falling within specific exemptions will not be subject to the DAI Act or DABA.
Anti-Money Laundering and Anti-Terrorist Financing (AML/ATF) Requirements
Companies operating under the DAI Act must also adhere to the AML/ATF regulations. This includes participant identification, record-keeping, and establishing an internal audit system for compliance purposes.
Companies licensed under DABA are considered "regulated financial institutions" for AML/ATF purposes and must comply with all applicable Bermuda legislation along with other "regulated financial institutions." Unregulated businesses outside DABA's scope are not required to comply with Bermuda's AML/ATF requirements.
Crypto-lending
Bermuda's government introduced the restricted banking license to allow applicants from outside the jurisdiction to provide banking services to digital asset businesses in Bermuda without needing a retail presence. Amid regulatory uncertainty, digital assets brokers and platforms offering crypto-lending or yield-generating products are looking to capitalize on the legal certainty offered under DABA.
Payment Processors
Payment processors in Bermuda do not have a legal obligation to use existing payment rails. However, if they deal with digital assets, they may require a DABA license. If a payment processor provides money services to the general public in Bermuda (excluding Banks Act licensed entities), it must obtain a BMA license under the Money Service Business Act 2016, unless exempted. There are no additional regulations for cross-border payments and remittances other than those under DABA and the Money Services Business Act 2016.
Fund Administrators
Fund administrators' services in Bermuda range from maintaining accounts, processing transactions, calculating net asset values, and distributing dividends to complying with Anti-Money Laundering (AML) and Anti-Terrorism Financing (ATF) requirements.
While the terms of the agreement between a fund and its administrator largely stem from contractual negotiations, the BMA has issued a Code of Conduct to guide fund administrators on acceptable business standards. This Code aims to foster the growth of the Fintech ecosystem while ensuring the maintenance of ethical guidelines and sound principles.
Trading Platforms: The New-Age Marketplaces
Bermuda's Fintech landscape comprises various trading platforms, including digital assets and derivative exchanges, regulated under the Digital Asset Business Act (DABA). Whether these platforms function as centralized or decentralized marketplaces, they necessitate a DABA license for operations.
Additionally, the role of a 'digital asset benchmark administrator' warrants a DABA license. These administrators manage a digital asset benchmark, which is any published rate, index, or figure, determined by the value of underlying assets used to calculate the amount payable under a digital asset.
In the realm of security trading, the Bermuda Stock Exchange (BSX) holds a significant place, offering listing services for both debt and equity securities. The BSX has also begun listing digital asset Exchange-Traded Funds (ETFs), indicating a promising future for other Fintech entities.
Cryptocurrency Exchanges
The advent of cryptocurrency exchanges has spurred the government to implement licensing regimes under DABA. These cryptocurrency exchanges, classified as "digital asset exchanges," must obtain a Bermuda license.
Meanwhile, the BMA has not set specific listing standards for digital assets and derivatives exchanges, allowing them to set their own based on industry norms, subject to BMA approval. However, the issuers of securities listed on the BSX must comply with the applicable BSX Listing Regulations.
High-Frequency and Algorithmic Trading
High-frequency and algorithmic trading falls within the purview of the DABA licensing regime or the Investment Business Act 2003 (IBA), where applicable.
In this context, 'market makers' or entities trading in digital assets as part of their business are also regulated under DABA. Nevertheless, an entity trading exclusively in a principal capacity might not come under the definition of a 'market maker' and thus requires a careful examination of its arrangements.
The regulatory framework does not distinguish between funds and dealers involved in these activities. While investment funds generally don't come under DABA, they are regulated under the Investment Funds Act 2006. Conversely, a dealer may require licenses under both DABA and IBA.
Programmers and Programming
Despite being the architects of trading algorithms and electronic trading tools, programmers and developers are not currently subject to regulations unless they offer these services directly to the public as part of a business. Financial Research Platforms
Financial research platforms enjoy a certain degree of freedom in Bermuda, with no specific requirements for registration. Nonetheless, this freedom is accompanied by a duty of care. The Bermuda Monetary Authority (BMA) vigilantly scrutinizes any activities that could amount to market manipulation.
Blockchain
Bermuda blockchain regulation is integrated into the broader fintech regulatory landscape, as discussed in earlier sections. Particular attention must be paid to:
Blockchain asset classification, where the approach is rooted in the broader regulatory landscape.
Blockchain asset issuers, falling under the regulation of the Digital Asset Issuance Act (DAI Act) and DAI Rules.
Blockchain asset trading platforms, requiring a DABA license if they meet the definition of a digital assets exchange or digital assets derivative exchange. Interestingly, DABA-licensed businesses are allowed to use third-party software and trading platforms, subject to compliance with the BMA’s outsourcing rules.
Emerging Tech Phenomena
The regulatory landscape is flexible enough to accommodate emerging phenomena in the digital asset sphere. These include:
Non-fungible tokens (NFTs): As they fall under the wide definition of "digital assets" under DABA, the regulation depends on the type of public services provided. If they align with one of the categories defined under DABA, such as issuing, selling, or redeeming digital assets, they will be regulated accordingly.
Decentralized Finance (DeFi) platforms: Depending on the type of public services provided, they may be classified and regulated under DABA as a digital assets exchange, derivative exchange provider, or a digital asset services vendor.
Virtual Currencies: Like NFTs and DeFi platforms, virtual currencies are included in the definition of "digital assets" under the DAI Act and DABA and are regulated accordingly.
Open Banking
Bermuda's approach to open banking is refreshingly liberal, with no specific restrictions in place. However, open banking activities carried out in or from within Bermuda are subject to the licensing requirements of the Banks Act.
In summary, Bermuda’s regulatory landscape is an intricate network, ingeniously designed to cater to various fintech subsectors while maintaining market integrity and promoting innovation. This careful blend of freedom and responsibility enables Bermuda to be at the forefront of the ever-evolving fintech industry.
Navigating Bermuda's dynamic fintech regulatory landscape can be complex, but you don't have to do it alone. At Prokopiev Law Group, we're ready to provide expert guidance tailored to your unique needs. Our global partnerships expand our capabilities, enabling us to offer specific services for web3 projects across various jurisdictions. Reach out to us today, and let's ensure your journey in the fintech world is smooth, compliant, and successful. Together, we can turn regulatory challenges into opportunities for innovation and growth. Connect with Prokopiev Law Group, where global expertise meets local insight.
DISCLAIMER: The information provided is not legal, tax, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. Some parts of the text may be AI-generated. The information provided is for general educational purposes only and is not investment advice. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information. A professional should review any action based on the information discussed. The author is not liable for any loss from acting on the information discussed.
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