Bermuda Crypto regulations

In recent years, Bermuda has emerged as a leading jurisdiction for the regulation of cryptocurrencies and digital assets. With a forward-thinking approach and a robust regulatory framework, Bermuda has positioned itself as a hub for innovation and investment in the rapidly evolving crypto space. In this article, we explore the regulatory landscape governing cryptocurrencies in Bermuda and its implications for businesses and investors.

Bermuda’s Regulatory Framework

At the heart of Bermuda’s crypto regulatory framework is the Digital Asset Business Act 2018 (DABA). Enacted in response to the growing prominence of cryptocurrencies, DABA provides a comprehensive regulatory framework for the issuance, sale, and trading of digital assets within or from Bermuda. Under DABA, businesses engaged in digital asset activities, such as issuing or trading cryptocurrencies, are required to obtain a license from the Bermuda Monetary Authority (BMA).

DABA sets out clear guidelines and standards for digital asset businesses, covering areas such as licensing requirements, anti-money laundering (AML) and counter-terrorism financing (CTF) measures, cybersecurity, and investor protection. By establishing a regulatory framework tailored to the unique characteristics of digital assets, Bermuda aims to foster innovation while safeguarding against potential risks.

Licensing and Compliance

One of the key features of Bermuda’s crypto regulations is the licensing regime imposed on digital asset businesses. To operate legally within or from Bermuda, businesses involved in digital asset activities must obtain a license from the BMA. The licensing process involves stringent due diligence checks and compliance assessments to ensure that licensees meet the necessary standards of integrity, competence, and financial soundness.

Digital asset businesses are also required to comply with AML and CTF regulations, as mandated by DABA. This includes implementing robust AML/CFT policies and procedures, conducting customer due diligence, and reporting suspicious transactions to the relevant authorities. By adhering to these regulations, Bermuda aims to mitigate the risk of financial crime and maintain the integrity of its financial system.

Investor Protection and Market Integrity

In addition to licensing and compliance requirements, Bermuda’s regulatory framework prioritizes investor protection and market integrity. Digital asset businesses are required to adhere to strict standards of transparency, disclosure, and investor education to ensure that investors are adequately informed and protected.

Furthermore, Bermuda’s regulatory authorities actively monitor the crypto market to detect and deter fraudulent activities, market manipulation, and other forms of misconduct. By promoting fair and orderly markets, Bermuda seeks to instill confidence in investors and stakeholders and foster sustainable growth in the crypto ecosystem.

Looking Ahead

As the crypto industry continues to evolve, Bermuda remains committed to maintaining a conducive regulatory environment that balances innovation with investor protection and market integrity. The government and regulatory authorities continue to engage with industry stakeholders to stay abreast of developments in the crypto space and adapt regulations accordingly.

In conclusion, Bermuda’s crypto regulations represent a progressive and pragmatic approach to regulating digital assets. By providing clarity, certainty, and oversight, Bermuda aims to attract reputable businesses and investors to its shores while mitigating risks and safeguarding against potential abuses. As the crypto industry matures, Bermuda stands poised to remain a global leader in crypto regulation and innovation.

Bermuda has implemented a comprehensive regulatory framework governing cryptocurrencies, marking one of the earliest legal and regulatory systems worldwide tailored specifically for digital assets. As a prominent offshore financial center, Bermuda has embraced a business-friendly approach to regulating digital assets and associated enterprises.

In 2018, Bermuda introduced legislation aimed at overseeing initial coin offerings (ICOs) and digital asset businesses: the Digital Asset Business Act and the Companies and Limited Liability Company (Initial Coin Offering) Amendment Act 2018 (ICO Act). These laws were supplemented by additional regulations such as the Digital Asset Business (Cybersecurity) Rules 2018, the Digital Asset Business (Client Disclosure) Rules 2018, and the Digital Asset Business (Prudential Standards) (Annual Return) Rules 2018.

These legislative measures establish standards governing ICOs and digital asset businesses. Under Bermuda’s regulatory framework, ICOs are classified as restricted business activities requiring approval from the Bermuda Monetary Authority.

Unlike some jurisdictions, Bermuda law does not mandate a physical presence for conducting a token sale. Generally, it only necessitates corporate registration in Bermuda. However, Bermuda law also imposes an economic substance requirement, which entails additional compliance standards.

Digital asset businesses must adhere to anti-money laundering (AML) and anti-terrorist financing (ATF) legislation, with licensed entities obligated to adopt and adhere to comprehensive AML policies.

The 2018 legislation regulates “digital asset businesses” in Bermuda, mandating businesses—incorporated or formed within or outside Bermuda—that engage in digital asset business within or from Bermuda to obtain a license from the Bermuda Monetary Authority. Digital assets are defined as binary format entities granting the right to use them, including digital representations of value serving as mediums of exchange, units of account, or stores of value. However, exemptions exist for specific transactions, such as those within affinity or rewards programs, or digital representations of value used in online games.

In accordance with section 4D of the Bermuda Monetary Authority Act 1969 (the Act), the Bermuda Monetary Authority (referred to as the Authority or BMA) may delegate its functions and powers to an officer, servant, or a committee constituted by the board from among the Authority’s personnel. The authority to make decisions regarding licensing applications under the Act is further delegated to the sector-specific ALC.

The ALC structure was established in 2007 by the board of directors of the Authority specifically to assess applications for licensing from financial services businesses intending to operate within or from Bermuda. The sector-specific ALC responsible for digital assets comprises a chairperson, typically the Senior Advisor, FinTech, or Managing Director overseeing Digital Asset Businesses (DABs). It includes a diverse panel of experts drawn from various departments within the Authority, including FinTech, Supervision, Actuarial, Policy Development, and Anti-Money Laundering/Anti-Terrorist Financing.

Typically, the Committee meets weekly on Thursday mornings at 9:00 a.m. to review the presented applications and collectively decide whether to approve, defer, or reject the licensing requests. Following the meeting, applicants are promptly notified of the ALC’s decision, and the Authority subsequently issues a formal letter confirming the outcome.

To apply for licensure under the Digital Asset Business Act 2018 (DABA), a thorough and detailed application must be submitted following the guidelines outlined below:

Completed applications must reach the Authority no later than 5:00 p.m. on the respective Thursday of the week. This ensures consideration by the Assessment and Licensing Committee (ALC) four weeks later on a Thursday. Failure to meet this deadline may lead to delays in the review process by the ALC.

Applications should be emailed to [email protected]. Hard copies are not required. If applicants encounter difficulties in attaching documents within the application forms or if the total document size exceeds the email limit, please contact the FinTech Department at the provided email address for instructions on submitting via the Authority’s secure drive.

All documents submitted as part of the DAB application must be in English.

Applicants must use the appropriate application form corresponding to the desired class of license. Access the latest version of the relevant application form via the BMA website using the provided links for:

• T (test license)
• M (modified license)
• F (full license)

The Authority understands that certain documents required for a comprehensive DAB application may not be available at the time of submission or may not be applicable based on the proposed business plan. In such cases, a written explanation for any omissions must be provided.

Applications lacking the necessary documents may be deferred or deemed insufficient for review.

This Statement of Principles (the Principles) is issued in accordance with section 5 of the Digital Asset Business Act 2018 (the Act), which mandates the Bermuda Monetary Authority (referred to as the Authority or BMA) to publish Principles governing its actions or proposed actions concerning:

• Interpreting the minimum criteria outlined in Schedule 1 of the Act and the grounds for license revocation as specified in section 24.
• Exercising its authority to grant, revoke, or restrict licenses.
• Utilizing its authority to obtain information, reports, and documents.
• Exercising other enforcement powers.

These Principles are intended for broad application and aim to accommodate the diversity of Digital Asset Business (DAB) service providers eligible for licensing under the Act, while also considering potential institutional and market changes. Therefore, it is expected that these Principles will require periodic revision and further development over time. In the event of any material changes to the Principles, the Authority will release an updated version. Additionally, it is recommended to review these Principles alongside any Guidance Notes issued under section 5(2) of the Proceeds of Crime (Anti-Money Laundering and Anti-Terrorist Financing Supervision and Enforcement) Act 2008 (SEA Act 2008), pursuant to section 49M of the Proceeds of Crime Act 1997 (POCA 1997), and section 12O of the Anti-Terrorism (Financial and Other Measures) Act 2004 (ATFA 2004).

Furthermore, this document should be considered alongside the Statement of Principles on the Use of Enforcement Powers (SPUEP). The SPUEP outlines the principles guiding the Authority’s use of formal powers to ensure compliance or penalize non-compliance with statutory or regulatory requirements. In situations where discrepancies arise between the SPUEP, the Statement of Principles on the Use of Enforcement Powers under the Proceeds of Crime (Anti-Money Laundering and Anti-Terrorist Financing Supervision and Enforcement) Act 2008 (AML Principles), and the Principles outlined herein, the content of the SPUEP shall take precedence.

The Principles, in conjunction with the SPUEP, play a crucial role in the Authority’s decision-making process regarding the licensing of a Digital Asset Business (DAB) company, as well as in determining whether to revoke or restrict a license. These Principles, combined with the Authority’s interpretation of the minimum licensing criteria outlined in Schedule 1 and the grounds for revocation detailed in section 24 of the Act, form the primary standards considered by the Authority during its supervision of DABs.

The supervisory functions regarding DABs involve monitoring ongoing compliance with these standards and ensuring adherence to the obligations mandated by the Act, the DAB’s internal policies and procedures, and external regulatory obligations such as the Proceeds of Crime Act 1997, the Proceeds of Crime (Anti-Money Laundering and Anti-Terrorist Financing Supervision and Enforcement) Act 2008, and relevant regulations.

In instances where concerns arise regarding the role of a senior representative or the company itself, the Authority will assess appropriate measures to address the issue. Initially, the Authority may seek remedial action through persuasion and encouragement. However, if such efforts prove ineffective, stronger measures may be considered to ensure compliance. If the Authority deems it necessary in the public interest, it may utilize its powers under the Act, including imposing restrictions on a license or ultimately revoking it.

The Principles incorporate references to various policy and guidance documents issued by the Authority, which are typically accessible on its website: www.bma.bm. Section III of the Principles delves into the interpretation of each licensing criterion outlined in Schedule 1 of the Act, while Section IV outlines considerations relevant to the Authority’s discretion in granting a license. Section V addresses the principles guiding the Authority’s power to obtain information, reports, and documents.

On the other hand, the SPUEP outlines interpretations of the grounds for initiating enforcement actions, with assessments made on a case-by-case basis, taking into account the broader context. This assessment includes consideration of whether alternative measures may be more appropriate, considering factors such as the regulated financial institution’s circumstances, the conduct under review, and broader contextual elements.

Regarding enforcement processes, the Authority may exercise its powers to restrict or revoke a license. These powers may also be utilized in a supervisory context, such as imposing additional reporting requirements or in cases where an institution ceases operations or conducts limited scope business. Additionally, these powers may be employed to safeguard public interests, particularly in response to external threats unrelated to the DAB’s conduct, as outlined in section 8 of the Act.

Before granting a license to a Digital Asset Business (DAB), the Authority must ensure that all criteria outlined in Schedule 1 of the Act are either being met or are capable of being fulfilled by the applicant. Once licensed, DABs remain under the continuous supervision and regulation of the Authority, which includes ongoing compliance with licensing criteria. DABs are obligated to provide information about their operations at intervals determined by the Authority, as per the Act and related regulations, rules, guidance notes, or codes. Should a DAB fail to meet any criterion, the Authority holds the power to take action in accordance with the provisions outlined in the Act, as well as detailed in the Principles, the AML Principles, and the SPUEP.

The Act establishes the framework outlining the minimum criteria that licensed DABs must adhere to. These criteria are applied and interpreted within the specific circumstances of individual DABs, considering developments within the sector. In addition to reviewing periodic, annual, and other reports submitted by DABs, the Authority’s supervision involves conducting thorough prudential discussions with the senior management of DABs as needed. The frequency of these discussions is determined based on factors such as the nature, scale, complexity, and risk profile of the DAB and its business activities. These discussions may occur either in person or virtually, either at the Authority’s offices or the premises of the DAB.

Furthermore, compliance visits are regularly conducted, either physically or virtually, to the premises of DABs to enhance the Authority’s understanding of their management structures, operations, policies, and controls. These visits assist the Authority in ensuring that each DAB continues to conduct its business prudently and in line with all relevant criteria.

Upon becoming aware of breaches or potential breaches, DABs are expected to promptly alert the Authority so that necessary remedial actions can be swiftly agreed upon. Similarly, DABs must inform the Authority of any proposed significant changes to their business operations. This enables the Authority to assess whether these changes affect the DAB’s ability to meet the minimum criteria.

In order to issue a license under the Act, the Authority must ensure that all the minimum licensing criteria outlined in Schedule 1 are satisfied. This satisfaction hinges upon the applicant and any other pertinent parties providing all requested information to the Authority regarding the application. Even when the Authority is confident that the criteria are being or can be met, it reserves the right to withhold a license. This discretion may be exercised if there are doubts regarding the ongoing fulfillment of the criteria or if significant threats to the public interest or the interests of clients or potential clients are perceived.

Furthermore, the Authority assesses whether it will receive adequate information from the DAB and associated parties to effectively monitor compliance with the criteria and identify potential risks to the DAB’s clients.