An overview of the regulation of digital assets in Bermuda

Digital asset laws and regulations in Bermuda

Regulation of digital assets and offerings of digital assets in Bermuda

Regulation of DABs in Bermuda

Regulation of other crypto-related activities in Bermuda

Government outlook on digital assets and crypto-related activities in Bermuda

Advantages of setting up a DAB in Bermuda

1. Digital asset laws and regulations in Bermuda

The digital asset landscape in Bermuda is governed by a comprehensive regulatory framework comprising key legislative instruments and regulatory guidelines. The Digital Asset Business Act 2018 (DABA) is the foundational legislation for overseeing digital asset businesses, while the Digital Asset Business (Prudential Standards) (Annual Return) Rules 2018 provide specific reporting requirements and financial standards. Additionally, the government has issued a Statement of Principles to outline overarching guidelines for the digital asset industry. Under the Investment Funds Act 2020, sector-specific guidance notes have been introduced to elucidate regulatory expectations and compliance standards for digital asset businesses. To facilitate the licensing process, the Assessment and Licensing Committee (ALC) Digital Asset Business Application Process was established in September 2018. Codes of practice for digital asset custody were also promulgated in May 2019, with updates made in April 2023. Bermuda’s commitment to international cooperation in regulating digital assets is reflected in the International Cooperation Policy articulated by the regulatory body. Furthermore, the Digital Asset Issuance Act 2020, enacted on 23 June 2020, provides a framework for regulating digital asset issuance activities within the jurisdiction. These laws and guidelines collectively contribute to comprehending and regulating the digital asset space in Bermuda, promoting transparency, compliance, and innovation within the sector. Additionally, various rules, including the Digital Asset Issuance Rules 2020 (DAIA) and the Digital Asset Business (Custody of Client Assets) Rules 2024, along with statements of principles and codes of practice, establish standards and best practices for entities operating in the digital asset space. The Assessment and Licensing Committee oversees the application process for digital asset businesses, ensuring compliance with prudential standards, client disclosure requirements, and cybersecurity measures outlined in respective rules. Furthermore, regulations such as the Proceeds of Crime (AML/ATF Financing) Regulations 2008 and international sanctions regulations play a crucial role in combating money laundering and ensuring global regulatory alignment. With policies for international cooperation in place, Bermuda’s regulatory framework aims to foster innovation while maintaining integrity and compliance with global standards and regulations.

What is considered a digital asset in Bermuda?

The definition of digital assets is broad and encompasses various form of digital representation. Digital Assets mean anything which has value that exists in binary format and comes with the right to use it but excludes legal tender such as Central Bank Digital Currencies (CBDCs) regardless of whether they are denominated in legal tender.

They are intended to represent ownership in assets such as debt or equity in the entity promoting them and represent any other assets or rights associated with those assets.

It also includes digital assets designed to provide access to applications, services, or products through distributed ledger technology.

Who do such laws and regulations apply to?

All those business entities engaged in Digital asset business (DAB), Digital asset services vendor (DASV) and digital asset issuance platform (DAIP) are under the ambit Bermuda digital asset laws and regulations, these include:

DAB and its associated activities include the following:

1. Issuing, selling or redeeming digital coins, tokens or any other form of digital asset;
2. operating as a payment service provider business utilizing digital assets, which include the provision of services for the transfer of funds;
3. operating as a digital asset exchange;
4. carrying on digital asset trust services;
5. providing custodial wallet services;
6. operating as a digital asset derivative exchange provider;
7. operating as a digital asset services vendor

A DASV encompasses various activities related to digital assets, including:

1. Facilitating digital asset transactions on behalf of others under a formal agreement as part of its business operations;
2. holding power of attorney over digital assets belonging to another individual or entity, thereby possessing authority to manage or act on behalf of those assets;
3. operating as a market maker for digital assets, facilitating liquidity by buying and selling assets to maintain market stability;
4. serving as a digital asset benchmark administrator, responsible for establishing and maintaining benchmarks or reference points used to assess the performance or value of digital asset.

A DAIP in relation to a digital asset issuance, includes a website or an electronic database or other software platform for the purpose of selling digital assets or providing information to the public with regards to a digital asset issuance or on boarding, processing or otherwise soliciting digital asset acquirers.

Who are the relevant regulatory authorities in relation to digital assets in Bermuda?

The Bermuda Monetary authority (BMA) oversees the supervision and regulation of entities involved in DAB activities and Digital Asset Issuance activities.

What are the penalties for breaches of digital asset laws and regulations in Bermuda?

2. Regulation of digital assets and offerings of digital assets in Bermuda

Are digital assets classified as ‘investments’ or other regulated financial instruments in Bermuda?

Any digital asset which is intended to represent assets such as debt or equity in the promoter or is otherwise intended to represent any assets or rights associated with such assets are incorporated in the definition of digital asset.

However, the regulatory framework for digital assets is characterized by a principle of proportionality in evaluating different types of digital assets within the digital asset issuance or business activities. Notably, there are no specific laws, regulations, or restrictions governing the participation of individuals or entities resident or situated in Bermuda in the purchase, holding, or sale of digital assets, unless these assets represent a security in a Bermuda company. In such cases, the Exchange Control Act (ECA) and related regulations may apply to regulate these transactions.

If a DAB is issuing securities, they need prior approval from BMA and put additional policies in place to get the approval of BMA as per the requirements for a business issuing securities by the BMA.

Are stablecoins and NFTs regulated in Bermuda?

Stabecoins generally refer to those digital assets which are tethered 1:1 to international currency like US dollar or some other asset which makes stable compared to other digital assets like utility tokens. In Bermuda, stablecoins are regulated and are covered under the definition of digital assets. In May 2024, the BMA issued a Guidance note to provide clarity for the digital assets industry on the standards the Authority expectswhen considering whether persons Licensed under the DABA and carrying on business as Single Currency Pegged Stablecoins Issuers (SCPSIs) are conductiong their business in prudent manner.

NFTs exist in binary format and comes with the right to use it and includes a digital representation of value and therefore possesses the characteristics of digital assets as defined under DABA. NFTs are regulated in the Bermuda.

Are decentralised finance (DeFi) activities (e.g. lending digital assets) regulated in Bermuda?

Decentralized finance (DeFi) applications themselves are not DABs, but individuals or entities involved in creating, owning, operating, or maintaining control over DeFi arrangements may fall under the FATF definition of a digital asset service vendor if they provide or actively facilitate digital asset services. The provision of lending digital assets would be covered by the laws and regulation of Bermuda.

The determination of whether an activity falls under the regulations should be made on a case-by-case basis, emphasizing the practical implications and functions of the business activity.

Are there any restrictions on issuing or publicly offering digital assets in Bermuda?

In Bermuda, any offering of digital assets are regulated by DAIA, subject to section 11 of DAIA a person shall not conduct a digital asset issuance in or from within the Bermuda unless it is an authorised undertaking. Every authorised undertaking conducting a digital asset issuance in Bermuda is required to appoint a local representative who meets specific criteria outlined by the regulatory authority. This representative must be appointed from the start of the offering until 120 days after its conclusion. The local representative must be approved by the BMA to act on behalf of the authorised undertaking and must maintain a physical office in Bermuda.

An undertaking cannot offer digital assets to the public through a digital asset issuance without meeting certain requirements, including:

1. Publishing an issuance document in electronic form before the offer.
2. Filing a copy of the issuance document with the BMA, signed by or on behalf of all directors, either before or shortly after its publication.

However, there are exceptions to the requirement of filing an issuance document with the BMA, such as if the digital assets are listed on an appointed stock exchange or an accredited digital asset exchange. Additionally, exemptions may apply if the offering is made solely to non-residents of Bermuda or if the documents have been accepted by relevant authorities or exchanges.

An undertaking conducting a digital asset issuance in or from within the Bermuda Offerings are broadly classified in two categories; public offering i.e. to the public at large and private offerings where maximum number of acquirers is 150 or institutional acquirers who have a reserve of $5,000,000 and above.

Entities seeking to publicly offer digital assets in the Bermuda are required to be authorised by the BMA under the DAIA.

Are there any exemptions to the restrictions on issuing or publicly offering of digital assets in Bermuda?

Yes, there are exemptions available for issuers seeking to issue or publicly offer digital assets in Bermuda. These exemptions are outlined in section 16(2) of the DAIA and include provisions for filing an exemption form with the BMA before proceeding with the digital asset issuance.

Specifically, exemptions apply in the following scenarios:

1. Digital Asset Issuance through an Accredited Digital Asset Business: If an issuer offers digital assets to the public through an accredited digital asset business, only certain rules (5 and 7 to 10) are applicable. However, if the issuer holds digital asset acquirers’ assets under custody but not through the accredited digital business, additional rules (14 to 18) apply.
2. Local Issuers: Local issuers who qualify as such are not required to appoint a local representative as mandated by section 27 of the DAIA. Furthermore, certain rules (11, 12, 13, 15, and 16) are not applicable to these issuers.

Additionally, the BMA has the authority to exempt or modify rules under the DAIA based on determinations made or applications received from authorised undertakings. However, any exemptions or modifications granted are subject to conditions imposed by the BMA, and the authority may revoke or vary them if deemed necessary, ensuring compliance with regulatory standards and considering the nature, scale, and complexity of the authorised undertaking.

3. Regulation of DABs in Bermuda

Are DABs operating in Bermuda subject to regulation?

Yes, the DABs must comply with the laws and regulation in Bermuda regulating their code of conduct and anti-money laundering (AML) anti-terrorism financing (AFT) regulations. DABs must also adhere to Bermuda’s international cooperation agreements with international organisation ensuring best practices for businesses involved in digital assets.

Are DABs providing digital asset services from offshore to persons in Bermuda subject to regulation in Bermuda?

Any entity involved in digital asset services either within the jurisdiction or from outside the jurisdiction to the public of Bermuda are required to be licensed under the regulation of DABA or DAIA according to the services provided by them.

What are the main requirements for obtaining licensing / registration as a DABs in Bermuda?

In Bermuda, issuers planning to issue digital assets with the primary purpose of raising capital for a venture or project must obtain authorization from BMA under DAIA. Conversely, issuers intending to issue digital assets with characteristics of a business, such as continuous issuance with the aim of generating profit, are required to obtain a DAB license from the BMA. Entities engaged in digital asset business activities within or from Bermuda are required to acquire a license from the Bermuda Monetary Authority (BMA). The available licenses are categorized into three classes:

1. Class F (full license)
2. Class M (modified license under the ‘sandbox regime’)
3. Class T (test license)

According to the DABA, entities applying for Class M and Class F licenses must meet a minimum net asset requirement of $100,000. The associated application fee for Class M and Class F licenses is $2,266. For Class T licenses, the net asset requirement is also $100,000, with an application fee of $1000.

Bermuda digital asset legislations sets out detailed requirements for entities seeking license in Bermuda. Below are the general requirements for submitting a comprehensive Digital Asset Business application, the application must include the following documents:

1. A cover letter providing an executive summary of the application and explaining how the minimum licensing criteria specified in the Schedule to the DABA are satisfied. If required documentation is missing, a written explanation for the omission(s) is necessary;
2. copies of the Memorandum of Association, Certificate of Incorporation, or Registration Permit (if available);
3. business plan including various details such as ownership structure, board of directors and management information, business purpose for licensing in Bermuda, business strategy, risk assessment, description of business activities and products, financial projections, staffing requirements, risk management procedures, compliance measures, and other relevant information;
4. copy of Anti-Money Laundering and Anti-Terrorism Financing policies and procedures as required by Regulation 16 of The Proceeds of Crime (Anti-Money Laundering and Anti-Terrorist Financing) Regulations 2008;
5. information about corporate shareholders and ultimate beneficial owners, including financial statements, regulatory filings, background information, personal declaration forms, bank references, and net worth statements;
6. description of the applicant’s proposed cybersecurity programme, including policies and procedures related to private key storage;
7. description of arrangements to allow the BMA access to monitor digital asset transaction records with online or automated real-time read-only access, and provision of wallet public addresses;
8. unconditional acceptance letters from the approved auditor and senior representative;
9. curriculum vitae of the applicant’s senior representative;
10. Address of the applicant’s head office;
11. declaration from an officer of the applicant confirming awareness of and intention to abide by the Code of Practice required pursuant to the DABA.

For applicants seeking to continue an overseas operation from a foreign jurisdiction into Bermuda, the following additional requirements must be provided:

1. A Certificate of Good Standing from the relevant regulatory authority in the foreign jurisdiction;
2. contact information for the regulatory authority in the relevant foreign jurisdiction, including contact person name/title, organization name/address, email address, and telephone contact details;
3. copies of the most recent statutory financial statements and/or any other relevant financial information demonstrating compliance with the capital, solvency, and liquidity requirements of the foreign jurisdiction.

For Class M applications, which involve modified licensing requirements, the following additional information is required:

1. Inclusion of the roadmap to deploy services and delivery mechanisms on a broader scale once the modified class license has expired in the business plan;
2. details of any current or past participation of the applicant in a regulatory sandbox in another jurisdiction/country;
3. description of the proposed product, service, or distribution channel to be offered under the Class M license, including how the sandbox eligibility criteria outlined in the Digital Asset Business Regulatory Sandbox Guidance Note are met, differentiation from existing market offerings, benefits, foreseen risks, and any licenses, patents, or copyrights related to the proposed product/service;
4. nature of testing during the proof-of-concept stage, including start and end dates of the Class M license, requested modifications to legal and regulatory requirements, test plan, controls and scenarios, involved clients and counterparties, critical success factors, monitoring plan for breaches, and a contingency plan for unsuccessful testing or premature exit from the sandbox, with client protections in place.

Applications must be received by the Bermuda Monetary Authority (BMA) no later than 5:00 p.m. on the relevant Thursday to be considered by the Application Licensing Committee (ALC) four weeks later. Applications should be emailed to innovate@bma.bm, with a hard copy submitted to the BMA’s FinTech Department. All documents must be provided in English.

What are the main ongoing requirements for DABs regulated in Bermuda?

Digital asset businesses operating and licensed by the BMA subject to conditions in the license are required to file the following documents annually within four months after the end of its financial year:

4. Regulation of other crypto-related activities in Bermuda