Fintech Update

Fintech Update

About Tim MoltonTim Molton

Tim Molton has a broad practice as an Associate in the Dispute Resolution Team. He advises commercial clients and high net worth individuals on a wide range of matters, having particular experience in the fields of contentious trusts, fraud and asset-tracing, cross-border enforcement, insolvency, financial regulation and employment law matters.

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2021 has seen a global resurgence in the issuance, trade and practical use of digital assets. Projects leveraging the use of distributed ledger technology (DLT) have increased exponentially this year, as more and more businesses recognise the advantages offered by the use of (predominantly) decentralised, fast, secure and immutable blockchains as a means of transacting with assets of value.

Bermuda, as an innovation-friendly jurisdiction and a regulatory sandbox, has continued to focus on emerging technologies and to encourage businesses (from start-ups to established global enterprises) to take advantage of its unique legislative framework and to foster the development and use of digital assets.

Bermuda’s Digital Assets Framework

Bermuda’s digital assets regime is primarily governed by two statutes (together referred to as the “Digital Assets Framework”):

  1. Digital Asset Business Act 2018 (“DABA”): This governs businesses dealing with digital assets (including payment service businesses, custodians and electronic exchanges) and covers the issuing, selling and redeeming of virtual coins, tokens or other digital assets to businesses; and
  2. Digital Asset Issuance Act (“DAIA”) (as amended): This legislation was enacted to replace the previous Initial Coin Offering (“ICO”) regime and to facilitate the regulation of digital asset issuance by the Bermuda Monetary Authority (“BMA”) (rather than the Ministry of Finance). In December 2020, the Digital Asset Issuance Rules 2020 also became operative and set out the explicit requirements as to how a digital asset issuance must be conducted.

Under the Digital Assets Framework, a “digital asset business” is defined as a business that provides any or all of the following digital asset business activities to the general public:

  1. issuing, selling or redeeming virtual coins, tokens or any other form of digital asset;
  2. operating as a payment service provider business utilising digital assets which includes the provision of services for the transfer of funds;
  3. operating as an electronic exchange;
  4. providing custodial wallet services; or
  5. operating as a digital asset services vendor. Each of the above definitions have been incorporated into DAIA which governs ICOs.

The BMA is able to issue three types of license to digital assets businesses, namely:

  1. Class T (Test Licence): for those seeking to test their proof of concept. This licence is issued for a defined period and is intended for pilot or beta testing purposes, allowing the licence-holder to develop a minimum viable product within the initial period and without the need to establish a physical presence in Bermuda;
  2. Class M (Modified) Licence: a restricted license for a specified period of time, often referred to as a “sandbox license”, issued to facilitate innovation and testing of new products and services in Bermuda; or
  3. Class F (Full Licence): for companies seeking to provide any or all of the digital assets business activities. Certain minimum licencing criteria must be met for the BMA to issue a licence under DABA.

The ability of Bermuda’s legislature to adapt to evolving technologies and to regulate appropriately (so as to protect consumers without stifling innovation) has attracted a multitude of businesses to the island. This year, a further seven companies have been licensed under the Digital Assets Framework (including four companies receiving Class F (Full) licenses and the first Class T (Test) licence.

MJM has continued in 2021 to provide advice on the Digital Assets Framework to local and international businesses alike, including international payments service providers and global crypto exchanges.

For more detailed information regarding Bermuda’s Digital Assets Framework, read MJM’s Fintech Comparative Guide: Bermuda here or contact Tim Molton / Jeremy Leese for further advice.