About Jeremy Leese
Jeremy’s practice focuses on corporate finance, mergers and acquisitions, corporate reorganisations and restructurings, banking and international real estate finance, structured finance, as well as regulatory and legislative compliance.
Jeremy Leese’s full profile on mjm.bm.
The Digital Asset Business Act 2018 (the “DAB Act”) became operative on 10th September 2018, creating a legislative framework for digital asset business and services to operate within a regulated environment in or from within Bermuda.
Digital assets are defined as anything that exists in binary format and comes with the right to use it and includes a digital representation of value that:
(a) is used as a medium of exchange, unit of account, or store of value and is not legal tender, whether or not denominated in legal tender;
(b) is intended to represent assets such as debt or equity in the promoter;
(c) is otherwise intended to represent any assets or rights associated with such assets; or
(d) is intended to provide access to an application or service or product by means of distributed ledger technology;
but does not include:
(e) a transaction in which a person grants value as part of an affinity or rewards program, which value cannot be taken from or exchanged with the person for legal tender, bank credit or any digital asset; or
(f) a digital representation of value issued by or on behalf of the publisher and used within an online game, game platform, or family of games sold by the same publisher or offered on the same game platform.
Whilst digital asset business is defined as the business of providing any or all of the following digital asset business activities to the general public:
(a) issuing, selling or redeeming virtual coins, tokens or any other form of digital asset;
(b) operating as a payment service provider business utilising digital assets which includes the provision of services for the transfer of funds;
(c) operating as an electronic exchange;
(d) providing custodial wallet services; or
(e) operating as a digital asset services vendor.
Along with the published statement of principles and codes of practice, the DAB Act will establish a licensing and supervisory regime for entities engaged in digital asset business. To conduct digital asset business in or from within Bermuda, a person must be licensed under the DAB Act, by means of the grant of either an indefinite (Class F) or fixed term (Class M) licence, and be directed and managed from Bermuda.
Criteria are set out with regard to licensing, including a fit and proper person test, the carrying on of the business in a prudent manner and corporate governance requirements.
Applications for licences have to be submitted together with a business plan, management arrangements, policies and procedures which will be in place to cover all of the ongoing requirements of DAB Act, including details of AML/ATF policies (further details of which can be provided by us upon request).
Any undertaking that is licensed in Bermuda for the purpose of conducting digital assets business (“licensed undertaking”) is required to maintain a head office in Bermuda from where it will be directed and managed. When deciding if the head office requirement has been met, the Bermuda Monetary Authority (the “BMA”) shall consider factors including where the presence of senior executives are, where meetings of the board of directors are held and where operational decisions are being made.
In accordance with the DAB Act, a licensed undertaking must ensure that any assets belonging to its clients are held separately from its own assets. Licensed undertakings may allow clients funds to comingle in a separate account from its own; however, accounts must be administered to accurately allocate each holding to each respective client.
A licensed undertaking must also demonstrate a comprehensive cybersecurity program that is commensurate to the nature, scale and complexity of its business and will be required to have a written cyber security policy which is reviewed at least annually. An external audit of its cybersecurity program must also be conducted on an annual basis.
Licensed undertakings will be regulated financial institutions for the purposes of Bermuda’s anti-money laundering and anti-terrorist financing legislation and must adhere to such legislation. The BMA has recently issued sector specific guidance on AML/ATF applicable to digital asset businesses, which requires the licensed undertaking to apply a risk-based approach to obtaining adequate due diligence on, and verifying the identity of, its clients, and to conduct ongoing monitoring and report any suspicious activity. We would be happy to provide advice on the applicability of these requirements to the specifics of your business.
Enforcement powers are granted to the BMA under the DAB Act to impose civil penalties of up to $10,000,000, issue prohibition orders, public censures and injunctions. In addition, the BMA has the ability to demand production of any information or documents they may require and can restrict and revoke licences where there is any non-compliance with the legislative and regulatory requirements.
The BMA has published the following pursuant to the DAB Act, on which we can offer further details:
- Code of Practice: providing guidance on the duties, requirements, procedures, standards and sound principles to be observed by digital asset businesses including with respect to proportionality, corporate governance, board oversight and the responsibilities of the chief and senior executives, the risk management framework and internal systems and controls.
- Statement of Principles: relating to the BMA’s interpretation of the minimum criteria for licensing and its approach to supervision.
- Cybersecurity Rules: requiring the filing of an annual cybersecurity report written by the senior executive appointed by the licensed undertaking to oversee and implement its cybersecurity programme and an independent audit of such programme confirming that it is suitably designed and operating effectively to meet the requirements of the Cybersecurity Rules.
- Application Process: information concerning the process for application for a license under DAB Act.
The DAB Act provides clear evidence of the avowed intent of the Bermuda Government to provide regulatory certainty and a reliable legal framework with a view to creating an environment within which companies focused on blockchain, virtual currencies and other digital assets will thrive, whilst also implementing the highest standards of corporate governance, transparency and consumer and market protections.