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March 22, 2019

Bermuda is Emerging as a Global Hub for Digital Securities

Bermuda beach.

By Tyler Horrowitz and Veronica Dunlop

The summit was presented by the Bermuda Business Development Association and Fintech Bermuda and organized by the Blockchain Token Association (BTA). The Chairman of BTA, Jeff Pulver, is an American Internet entrepreneur known for his work as founder of Vonage and thought leadership in the VoIP industry. Since he founded the VON Coalition in 1996, he has been involved in groundbreaking global public policy work. He has also co-founded many startups, including: Free World Dialup, Vonage, VON Coalition, MoNage, Blockchain Token Association and Zula.  

Mr. Pulver believes that Bermuda is taking a “global thought leadership position” in the regulatory approach to tokenized securities. He praised the Bermuda Government for its proactive approach to new technology, which attracted innovators, entrepreneurs, attorneys and investors from 13 countries to the event at the Hamilton Princess and Beach Club. “We have people here from all over the world, some just to be part of the conversation and to be around the Government that has a public policy that is proactive and not reactive — it’s rare… refreshing and empowering,” said Mr. Pulver. Which is why he decided to help “put Bermuda on the map as a global hub for security tokens.” 

Among those attending the event was Alexi Heft. Previously, Ms. Heft worked as the blockchain tax lead at Deloitte Canada. Next month, she will be starting her new role as the global blockchain leader for indirect tax, and technology lead for Deloitte Dubai. In the past, she did security token offerings and regulatory work with Caribbean governments, but she has transitioned towards helping governments and enterprises implement blockchain within their existing infrastructure and systems. Ms. Heft reports that “having seen the adoption over the past several years, both from an enterprise and a government perspective has demonstrated… how quickly [blockchain implementation] is picking up.” She is “tracking the global government projects that are happening with blockchain. Every week, [there] are… announcements from Australia to Thailand, to Zambia — it is picking up at a rapid pace.”  

Another delegate at the Summit was Gabriel Abed, who founded Bitt Inc. He has also led the Caribbean Blockchain Alliance, which is made up of people around the region who aim to provide awareness and education of blockchain technology. He believes that “this event is important because it brings the discussions down to a more practical level of what happens after regulation, and what has to happen around regulation….” Mr. Abed said that “Bermuda seems to be a home to establish this process in the right way. Securities are coming in a digital way. Blockchain is going to be a main component of this new world, and Bermuda seems to be at the center of that, from a regulation perspective.” 

Robin Sosnow, Esq. was also in attendance on behalf of the Digital Securities Law Group, a joint venture between Sosnow & Associates PLLC and Riveles Wahab LLP. Ms. Sosnow was “inspired by the advanced and thoughtful regulation adopted in Bermuda,” and “enjoyed the structure of the conference in that it promoted open discourse among the thought leaders present.” Ms. Sosnow spoke in the International Security Token Regulatory Discussion and provided an overview of the private company capital raising framework for digital securities offerings in the United States. 

The Bermuda Legal Framework for Digital Assets Business 

Bermuda has launched several noteworthy regulatory initiatives that were explored in detail during Tuesday’s discussions with the Premier of Bermuda, the Honorable E. David Burt, and Moad Fahmi, Senior Advisor of the Bermuda Monetary Authority.  

On September 10, 2018, the Digital Assets Business Act 2018 (DABA) became operative and in effect to create a legislative framework to regulate digital asset businesses. Notably, the DABA specifies certain digital asset related activities to which it applies and imposes a licensing requirement for companies looking to conduct business “in or from within Bermuda.” In order to be under the purview of this legislation, a series of threshold questions should be addressed at the outset. In addition, companies should understand the legislation’s licensing procedures and compliance requirements.   

What is a “Digital Asset Business”? 

A Digital Asset Business, as defined in the legislation, means the business of providing any or all of the following activities to the general public: 

  • issuing, selling or redeeming virtual coins, tokens or any other form of digital asset;  
  • operating as a payment service provider business utilizing digital assets which includes the provision of services for the transfer of funds;  
  • operating an electronic exchange;  
  • providing custodial wallet services; or  
  • operating as a digital asset services vendor. 

What is the Scope of DABA? 

In order to carry on a digital asset business “in or from within Bermuda”, DABA requires a digital asset business to either be (i) incorporated or formed in Bermuda and carrying on any digital asset business activity, or (ii) incorporated or formed outside of Bermuda and carrying on any digital asset business activity in or from within Bermuda.  

Application Process: How Can an Entity Obtain a License? 

Before engaging in the activities of a digital asset business, one must apply to the Bermuda Monetary Authority (BMA) and obtain a license of either one or two classes: (i) Class F, a full license and (ii) Class M, a defined period license.  

During the application process, a company will be required to provide the following: 

  • a business plan setting out the nature and scale of the digital asset business activity which is to be carried out by the applicant;
  • particulars of the applicant’s arrangements for the management of the business;  
  • policies and procedures to be adopted by the applicant to meet the obligations of DABA and the Proceeds of Crime (Anti-Money Laundering and Anti-Terrorist Financing) Regulations 2008; and 
  • such other information and documents as the BMA may reasonably require for the purpose of determining the application.  

Licensing Criteria 

The BMA will only issue a license if a company meets the “minimum criteria.” That is to say, an applicant would need to meet the following requirements:  

  • the ‘controllers’ (managing directors, CEOs, shareholder controllers (owning or controlling more than 10%) and persons in accordance with whose instructions or directions the applicant in accustomed to acting (shadow directors)) must be ‘fit and proper’; 
  • the business must be conducted in a prudent manner (taking into account any failure to comply with the provisions of DABA, AML/ATF requirements, Codes of Practice issued by the BMA and international sanctions measures), including a requirement for the maintenance of minimum net assets of $100,000 or such other amount as the BMA may direct taking into account the nature, size and complexity of the licensed undertaking); 
  • the business must have in place appropriate insurance to cover inherent risks or such other risk mitigation measures as the BMA may approve; 
  • maintenance of adequate accounting records, control systems and policies and procedures and implementation of appropriate corporate governance policies; 
  • the business of the licensed undertaking must be effectively directed by at least two directors and under the oversight of such number of nonexecutive directors as the BMA considers appropriate given the nature, size, complexity and risk profile of the licensed undertaking; and
  • the position of the licensed undertaking within the structure of any group to which it may belong should be such that it will not obstruct the conduct of effective consolidated supervision. 

Continuing Obligations and Compliance of License Holders  

The DABA also requires license holders to maintain a head office in Bermuda from which the digital asset business must be directed and managed. The BMA shall consider the following factors in determining whether a licensee complies with this requirement: 

  • where the strategy, risk management and operational decision making of the licensed entity occurs; 
  • whether the senior executives who are responsible for, and involved in, the decision-making related to digital asset business of the licensed entity are located in Bermuda; and 
  • where meetings of the board of directors of the licensed undertaking occur. 

Additionally, licensees will be required to disseminate key information to customers, develop and implement a crisis management program, establish and maintain a surety bond, trust account, or indemnity insurance for their customers, and file annual statements to the BMA. 

The Global Financial Innovation Network 

An international group of financial regulators and related organizations launched the Global Financial Innovation Network (GFIN) in January 2019. Its three primary functions are: 

  1. To act as a network of regulators collaborating and sharing their innovations in respective markets, such as emerging technologies and business models. 
  2. To create a forum for joint policy work and discussion. 
  3. To provide an environment for firms to test cross-border solutions. 

The GFIN conducted a pilot phase of cross-border testing and The Bermuda Monetary Authority was one of 18 firms that participated in the initial trial. The pilot was as much a trial for GFIN members as it was for firms. GFIN is looking for member-firms who are flexible and agile in their participation and can provide GFIN regulators with feedback on their experience. Firms benefit from the opportunity to test and compete in the regulated space, and their tests will help inform both the future work of the network, and regulatory authorities about potential areas of regulatory convergence. 

Regulatory Haven for Global Blockchain Industry

Bermuda has been listed among the top seven most crypto-friendly countries in the world and has demonstrated its willingness and desire to work with the blockchain industry. It has the highest GDP per capita of any country and is renowned as being a tax friendly jurisdiction. Because of this, and the natural beauty of the island, Bermuda attracts many high net-worth individuals and companies. Currently, crypto remains an untaxed asset in Bermuda as it is not yet classed as legal tender. However, the government’s efforts to clarify and regulate the digital asset space to prevent criminality and provide stability for crypto businesses has drawn global attention to the small island. Presently, the largest crypto business tied to Bermuda is Binance. It invested close to $15 million into Bermuda to assist with legislation of the digital space. Clearly, Bermuda is on track to become a recognized leader in building a functioning regulatory framework for the benefit of the global blockchain industry. 

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