We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
20 February 2020
Government attitude and definition
Money transmission laws and AML requirements
Promotion and testing
Ownership and licensing requirements
Border restrictions and declaration
Estate planning and testamentary succession
The current government was elected in 2017, having undertaken to create new economic pillars in Bermuda, identify new opportunities for economic diversification and seek local and overseas investment to develop new local industry and thereby create jobs in Bermuda. Since its election, the government has enthusiastically embraced the fintech sector and the potential that it offers and has repeatedly expressed its intention for Bermuda to be a significant centre for this industry.
In furtherance of this goal, the government has implemented a comprehensive regulatory regime aimed at providing legal certainty to industry participants and ensuring that business in the sector conducted in or from Bermuda is done in a properly regulated matter, in accordance with the highest international standards. This regulatory regime is described in more detail below but, in summary:
In addition, the government:
Although digital asset offerings and businesses are regulated in the manner described in this article, no Bermudian legislation or legal provisions officially or legally recognise any cryptocurrency or other digital asset or confer on them equivalent status with any fiat currency. Further, neither the government nor the Bermuda Monetary Authority (BMA) – the jurisdiction's financial regulator and the issuer of its national currency – have backed any cryptocurrency, and the Bermuda dollar remains the territory's legal tender.
While both the government and the BMA are on record as being keen to embrace the potential offered by fintech, both recognise that the industry presents tremendous risk, requiring prudent regulation. Bermuda has, accordingly, led the way in introducing a regulatory framework for digital asset business and coin and token offerings.
DABA came into force in September 2018. Since then, the BMA has promulgated rules, regulations, codes of practice, statements of principles and guidance in order to supplement DABA, with the result that it operates in a similar manner to the regulatory frameworks in place for other financial services regulated by the BMA.
In summary, DABA:
At the time of writing, the BMA was engaged in a consultation exercise with a view to amending certain provisions of DABA to give greater clarity to certain sections and make other changes that are intended to facilitate more effective administration of its provisions.
DABA applies to any entity incorporated or formed in Bermuda and carrying on digital asset business (irrespective of the location from which the activity is carried out) and to any entity incorporated or formed outside Bermuda and carrying on digital asset business in or from within Bermuda. The legislation defines 'digital asset' widely enough to capture:
For the purposes of DABA, a 'digital asset business' includes:
This category is intended to capture any other business which provides specific digital asset-related services to the public, such as operating as a custodian of digital assets.
In addition to the above categories, DABA includes an option for the minister of finance, after consultation with the BMA, to be able to add new categories or amend, suspend or delete any of the categories listed above by order.
DABA specifically provides that the following activities do not constitute digital asset business:
DABA requires persons carrying on digital asset business to obtain a licence before doing so, unless that person is subject to an exemption order issued by the minister of finance. At the time of writing, the minister had not issued or proposed any exemption orders.
Two classes of licence are available for applicants:
The intention behind this tiered licensing regime is to allow start-ups which engage in digital asset business to do so in a properly supervised regulatory environment and engage in proof of concept and develop a track record before obtaining a full licence. The restrictions to which a licensee will be subject will depend on its business model (and the risks associated therewith), but will almost invariably include an obligation to disclose to prospective customers the fact that it holds a Class M licence and certain limitations on the volume of business which it is permitted to conduct, along with other restrictions as the BMA may deem necessary on a case-by-case basis.
A prospective licensee may not necessarily receive the licence for which it applies: an applicant for a Class F licence may receive a Class M licence if the BMA decides that a Class M licence would be more appropriate in the circumstances. A licence will further specify the category (or categories) of digital asset business in which the licensee is permitted to engage.
Carrying on digital asset business without a licence is a criminal offence punishable by a fine of up to US$250,000, up to five years' imprisonment or both.
Criteria to be met by licensees
Under DABA, the BMA cannot issue a licence unless it is satisfied that the applicant fulfils certain minimum criteria addressing the fitness and propriety of directors and officers, ensuring that business is conducted in a prudent manner, the business's management has the required integrity and skill and standards of corporate governance are observed by the (prospective) licensee. This is consistent with the position under other regulatory laws applicable to other sectors and is intended to ensure that the BMA maintains high standards for the conduct of regulated business. The BMA has also published a code of practice detailing requirements as to, among other things, governance, risk management and internal controls applicable to licensees. However, the BMA recognises that licensees have varying risk profiles arising from the nature, scale and complexity of the business, so assesses a licensee's compliance with this code in a proportionate manner relative to the business's nature, scale and complexity.
DABA requires licensees to notify the BMA on changes in directors or officers, and the BMA has powers to, among other things, object to and prevent new or increased ownership of shareholder controllers and remove controllers, directors and officers who are no longer fit and proper to carry on their role.
Continuing obligations of licence holders
Persons holding a licence issued under DABA are subject to several ongoing obligations.
Client disclosure rules
The BMA has used powers conferred to it under DABA to promulgate the Digital Asset Business (Client Disclosure) Rules 2018 in order to mitigate the high degree of risk for consumers owing to the highly speculative and volatile nature of digital assets. These rules require licensees, before entering into any business relationship with a customer, to disclose to that customer:
The rules also oblige licensees to confirm certain information regarding transactions with clients at the conclusion of each such transaction.
Alongside the client disclosure rules described above, the BMA has promulgated the Digital Asset Business (Cybersecurity) Rules 2018 (Cybersecurity Rules). Under the Cybersecurity Rules, licensees must file an annual cybersecurity report prepared by their chief information security officer assessing:
The cybersecurity programme itself must include the following audit functions:
Licensees must engage a qualified independent party to audit their systems and provide a written opinion to the BMA that the cybersecurity programme and controls are suitably designed and operate effectively to meet the requirements of the Cybersecurity Rules and applicable codes of practice.
Custody and protection of consumer assets
Licensees which hold client assets must have in place and maintain a surety bond, trust account or indemnity insurance for the benefit of their customers. Any such trust account must be maintained with a 'qualified custodian', defined in DABA as a licensed Bermuda bank or trust company or any other person recognised by the BMA for this purpose. In addition, licensees must maintain books of account and other records sufficient to ensure that customer assets are kept segregated from those of the licensee and can be identified at any time. All customer funds must be held in a dedicated separate account and clearly identified as such.
DABA imposes an obligation on licensees to appoint a senior representative. Senior representatives must be:
Senior representatives have a duty to report certain significant matters to the BMA, including:
DABA requires licensees to maintain a head office in Bermuda and direct and manage their digital asset business from Bermuda. The relevant section lists a number of factors that the BMA will consider in determining whether a licensee satisfies this requirement, together with a number of additional factors to which the BMA may (but need not) have regard.
Annual prudential return
Licensees must file with the BMA an annual prudential return, with the BMA being granted the power to require more frequent filings or additions to a filing if required in the interest of consumer protection. The annual prudential return should be accompanied by a copy of the licensee's audited financial statements and business plan for the following year, and include information relating to, among other things:
BMA's supervision and enforcement powers
DABA grants the BMA wide-ranging powers of supervision and enforcement, such as the power to:
For example, the BMA may:
In more extreme cases, the BMA may revoke a licence altogether and, if it so elects, subsequently petition the court for the entity whose licence it has revoked to be wound up.
If a licensee fails to comply with a condition, restriction or direction imposed by the BMA or with certain requirements of DABA, the BMA can impose fines of up to US$10 million. Alternatively, it may:
The BMA will use these enforcement powers in a manner consistent with the Statement of Principles and Guidance on the Exercise of Enforcement Powers published in September 2018, which contains general guidance applicable to all regulated sectors on the BMA's approach to the use of its enforcement powers and the factors that it will consider in assessing whether to exercise those powers.
As noted above, DABA does not apply to any ICO intended to finance the issuer's or promoter's own business. Instead, the Companies Act 1981 and the Limited Liability Company Act 2016 (collectively, the company legislation) were amended in 2018 to include a regulatory framework for ICOs.
The company legislation defines an ICO as an offer by a company or a limited liability company to the public to purchase or otherwise acquire digital assets and designates any ICO as a 'restricted business activity', requiring consent from the minister of finance before any ICO may be made to the public. Private sales and offers of further coins or tokens to existing holders of coins or tokens of the same class are exempted, as are issuances where the offer is made to a limited number of persons (the actual limit depends on what type of company or limited liability company the issuer is, and is 35 in most cases). Regulations published under the company legislation set out key information required to be included with the application for consent, including:
In addition to obtaining consent from the minister of finance, a prospective ICO issuer will also have to publish, in electronic form, an offering document and file this with the Bermuda Registrar of Companies. The offering document must contain:
If an ICO issuer offers digital assets to the public over a period and any of the particulars in its offering document cease to be accurate in a material respect, the issuer must publish supplementary particulars disclosing the material changes and file these with the registrar.
The promoter must provide an electronic platform to facilitate communication with prospective investors. The legislation also grants investors a cooling-off period during which they can withdraw an application to purchase the digital assets offered.
Any person who makes or authorises the making of a false statement in an ICO offering document is guilty of an offence punishable with a fine of up to US$250,000, up to five years' imprisonment or both, unless the person proves that the statement was immaterial or that they had reasonable grounds to believe that it was true at the time that it was made. Officers of the issuer and promoters of the ICO will also incur civil liability to any person who suffers loss as a result of false statements in the offering document, subject to certain defences.
The issuance, sale and redemption of cryptocurrencies are regulated under DABA if carried on as a business and ICOs are regulated under the company legislation (in each case in the manner described above).
There are no income, capital gains, withholding or other taxes imposed in Bermuda on digital assets or on any transactions involving them (see "Border restrictions and declaration" for a discussion on the potential application of Bermuda's foreign currency purchase tax). Further, exempted companies or limited liability companies carrying on digital asset business, including ICO issuers, may apply for, and are likely to receive, an undertaking from the minister of finance to the effect that – in the event that Bermuda enacts any legislation imposing tax computed on profits or income or computed on any capital asset, gain or appreciation – the imposition of any such tax will not apply to such company or any of its operations.
Operating a payment service business which uses cryptocurrency or other digital assets (including the provision of services for the transfer of funds) or operating a digital exchange constitutes a 'regulated activity' for the purposes of DABA (see above).
Bermuda has a long-established and well-earned reputation as an international financial centre and a crucial aspect of this is its robust AML/ATF regime. The jurisdiction made further enhancements to this regime ahead of its fourth-round mutual evaluation by the Financial Action Task Force in 2018.
DABA amended certain provisions of Bermuda's existing AML/ATF laws and regulations in order to ensure that the AML/ ATF regime applies expressly to the carrying on of digital asset business, with the BMA subsequently issuing new AML/ATF guidance notes relating specifically to the conduct of digital asset business.
In short, digital asset businesses must establish policies and procedures to prevent money laundering and terrorist financing. These policies and procedures must cover:
As noted at the beginning of this article, the government is enthusiastic about the potential offered by fintech for the territory's economy and has launched, or is in the process of developing, numerous initiatives aimed at promoting investment by fintech businesses in Bermuda.
The government has appointed a specialist fintech team with a remit to promote the sector in Bermuda and bring more fintech business to the island. Among its initial success stories is that of Omega One, an agency brokerage for cryptocurrencies, which has opened an office in Bermuda (and received the first licence granted under DABA). Omega One has committed to hiring at least 20 Bermudians over the next three years and donating 10% of a planned token sale to philanthropic causes (with 10% of the amount donated going to sports and community clubs in Bermuda).
A further government initiative is a tailored immigration policy for fintech businesses, which allows companies which operate in the fintech space and are new to Bermuda to receive immediate approval of up to five work permits for non-Bermudian staff within the first six months of obtaining their business permit. In order to benefit from this, a business must present a plan for the hiring, training and development of Bermudians in entry-level or trainee positions. However, businesses cannot apply for work permits under this policy in respect of any job categories which are:
The government has also entered into a series of MOUs with various digital asset businesses, which provide as follows:
Under current Bermuda law, and under the ICO Act and DABA, no licensing requirements are imposed on any person merely by virtue of that person holding any form of digital asset, unless that person does so in the course of its business and on behalf of another, in which case that person will likely be regarded as a digital asset services vendor and thus subject to regulation under DABA. The BMA is consulting on proposals to require Bermuda trust companies which hold digital assets as trust property to obtain a licence to do so under DABA.
An investment fund incorporated or formed in Bermuda which proposes to deal in digital assets as part of its investment strategy or programme may fall within the ambit of the Investment Funds Act 2006. This requires open-ended funds to apply to the BMA for authorisation prior to commencing business and subjects such funds to ongoing supervision by the BMA. It does not apply to closed-ended funds, such as private equity funds.
Mining is specifically exempted from the scope of DABA. It therefore remains an unregulated activity. Although mining is not prohibited by any Bermuda law and is not subject to regulation under DABA, Bermuda's high energy costs are expected to operate as a practical deterrent to the establishment of any mining operations in Bermuda.
Bermuda imposes a foreign currency purchase tax of 1% whenever a Bermuda resident purchases a foreign currency from a Bermuda-based bank. This tax will not apply to most (if not all) purchases of cryptocurrency or other digital assets, on the grounds that these are purchased almost exclusively from digital exchanges, whereas the foreign currency purchase tax applies only to purchases from banks in Bermuda. This renders immaterial the question of whether foreign currency in this context would include a cryptocurrency (to date, the BMA has not expressed a view in this regard).
There are no other border restrictions on cryptocurrencies or other digital assets; the only obligation to make a customs declaration in respect of any form of money arises in respect of cash or negotiable instruments in excess of US$10,000.
Digital asset businesses and their senior representatives are subject to certain reporting obligations under DABA, as described above. DABA imposes no reporting requirements in respect of individual digital asset payments, irrespective of their value, although licensees must include anonymised details on transaction volume, value and geographical spread in their annual returns.
No particular regime under Bermuda law deals specifically with the treatment of cryptocurrencies or other digital assets on the death of an individual holding them. This means that, in principle, digital assets will be treated in the same way as any other asset and may be bequeathed to beneficiaries in a will. If a person dies intestate, their digital assets will be dealt with under the Succession Act 1974.
The main potential difficulty that may arise is practical and by no means unique to Bermuda – namely, anyone inheriting any kind of digital asset can, on the face of it, access that digital asset only if they have or can obtain the private key to the wallet in which it is stored. Although most exchanges have policies in place to transfer digital assets to next of kin, these policies, and the transfer requirements, vary between exchanges.
For further information on this topic please contact Mary V Ward at Carey Olsen Bermuda by telephone (+1 441 542 4500) or email (firstname.lastname@example.org). The Carey Olsen Bermuda website can be accessed at www.careyolsen.com.
An earlier version of this article was published in Global Legal Insights.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.