Category Archives: Bermuda

Banking, Bermuda, Blockchain, Cryptocurrency, Digital Transformation, Fintech, Internet of Things, Technology

The final pieces of Bermuda’s puzzle: crypto banks and digital transformation

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(C) CryptoVest

Bermuda’s Banks and Deposit Companies Act was amended in August 2018.

While the amendment legislation is less than three pages long, the amendments should be far-reaching. Its provisions permit the creation and/or licensing of a new category of Bermuda bank to be regulated by the Island’s primary regulator, the Bermuda Monetary Authority (BMA). The new bank’s target customers should be either:

(a) digital asset (token) issuers approved by its Minister of Finance pursuant to the Island’s recent legislative amendments to its companies legislation (commonly referred to as Bermuda’s new “ICO legislation”); or

(b) companies which have been issued a digital asset business license under a new regime created by the Digital Asset Business Act and therefore regulated by the BMA.

Already an established and well known offshore financial center and having recently branded itself as being “Fintech-friendly”, the purpose behind the banking amendments is the creation of crypto banking in Bermuda, allowing Fintech clients to deal with crypto; buying and selling cryptocurrencies, whether using fiat (i.e. real money) or other forms of crypto.

The Crypto Banking Sector

Several onshore financial institutions have embraced the use of distributed ledger technology in order to clear and settle cross border – but fiat – payments using that particular technology (blockchain). But the development of crypto banking has been scarce. On a worldwide basis, there are very few banks, let alone jurisdictions, which are genuinely crypto friendly.

The existing banking situation in Bermuda is no different. In October 2018, Bermuda’s Premier Burt stated that the Island was heading into the Fintech banking sector whether the existing Bermuda local banks “liked it or not”. The ambition was made very clear that this was just the beginning of a long-term project when he stated: “We understand the future we are trying to build.”

Crypto banking requires banks to venture into a nascent, volatile and perhaps, from a security standpoint, risky new territory. Cryptocurrencies have an uncertain edge to them, and banks are, by their very nature, cautious.

Bermuda’s “Fintech-friendly” position

Looking back to early July 2018, while the new “Fintech-friendly” banking legislation was being debated and then approved by the Island’s legislature, the Premier announced that “Bermuda must be nimble or we will be left behind”.

The ICO legislation quickly came into force later that same month, allowing Bermuda vehicles to offer and issue tokens to the public (similar to a company issuing shares in an initial public offering). In addition to a filing requirement with the Registrar of Companies in Bermuda, an offering document related to the offering must be vetted and approved by the Bermuda Minister of Finance prior to the commencement of the offering, but there is otherwise no ongoing regulation.

The Digital Asset Business Act came into effect in September 2018 to allow digital asset platforms, exchanges, digital wallet providers and vendors to operate in Bermuda under the supervision of the BMA. As regulated entities, there is a physical presence requirement, and therefore the Government’s hope is that these businesses will inevitably lead to new jobs being created.

The new crypto banking legislation has only recently been introduced in Bermuda, so it is not surprising that no new crypto banks have yet been approved and licensed. Very few institutions have the resources to create a new Bermuda based bank which meet all of the banking and AML/KYC requirements imposed by the BMA. The same applies to any new applicants wishing to obtain a license under the Digital Asset Business Act. The standards imposed by the Bermuda authorities in order to be regulated are very high.

Bermuda’s Crypto friendly reality

A few statements have been made recently regarding the possibility of a new bank being set up in Bermuda to start accepting crypto and blockchain companies as clients.

From a general Fintech perspective, there is no doubt that the introduction of a crypto banking sector is one of “the final pieces of the puzzle” as described by Bermuda’s Premier last year.

Bermuda has certainly begun the process and it has moved rapidly. The Island’s Government passed three pieces of legislation in 2018 (not including the ‘Insurtech’ changes to its Insurance Act), all dedicated to building a new digital platform its future; a remarkable effort for any jurisdiction.

Resolving the crypto banking sector is a lofty and well overdue worldwide issue, bearing in mind the inevitability of digital assets and cryptocurrencies becoming the norm. Switzerland is a jurisdiction which has also recognized this and is developing a new crypto banking sector (having already a well-established “Crypto Valley” in Zug).

Bermuda appears to have laid a promising foundation for new entities to do business in or from within the Island, creating jobs and digitally educating its young people. The recently formed Bermuda Fintech Business Unit is a good example of where the Island should be heading, not just from a Fintech perspective, but from the perspective of digital transformation in its entirety.

The developed world is now in the midst of a Fourth Industrial Revolution (4iR), one which is changing the way we work and live: disruptive technology and trends such as robotics, artificial intelligence, the Internet of Things (IoT), 3D printing, automation, chatbots, augmented and virtual reality, etc. Most significantly, connectivity – the 4iR is connecting our physical world with an increasingly digital one.

Of course, the inevitability of a new banking sector – what may still loosely be described as “Fintech banks” – is no different.

But when one says “Fintech banks” that shouldn’t be a category of bank which merely accepts crypto payments. “Fintech” is a far broader term. Such banks are ones which have or are embracing technologies such as chatbots, artificial intelligence, IoT, all which ultimately have one thing in common – providing a far better, more efficient customer experience than they are able to provide now. The existing banks in Bermuda are already using or investigating the use of Fintech.

If the Island wants to truly evolve and embrace a digital future, the future of job creation and its youth is not crypto, it is digital transformation and riding the wave of digital disruption. The requirement is to think outside of the box, away from just crypto, and focus on what is happening on a worldwide basis. From a financial perspective, that is a Fintech world which comprises so much more than one tends to think: digital asset issuers, digital asset exchanges, financial institutions utilizing digital platforms and new technologies.

While Bermuda must be nimble moving forward, it must ensure it takes its time to build its digital future. The creation of a crypto banking sector will hinge on the establishment of a broader Fintech sector with clients for those crypto banks to service; ensuring that all of the pieces of the puzzle which the Island is trying to put into place is done so carefully and correctly is going to be essential for the future of its proposed digital transformation.

Chris Garrod, February 2019

Bermuda, Blockchain, Cryptocurrency, Digital Transformation, Fintech

Bermuda and Digital Assets: A busy 2019?

In 2018, the Bermuda Government had a very busy year passing Fintech legislation, paving the way and laying the groundwork for future jobs and digital growth. Essentially, the Island was undergoing the process of digital transformation in the financial sector.

But benefitting from the fruits of all this effort will take time. So what can we expect from Bermuda in 2019?

The Island’s current digital position?

When anticipating potential job growth, that growth was largely driven by the two main pieces of legislation which were introduced last year: the new ICO Regulations and the Digital Asset Business Act 2018 (“DABA”). They are completely different from each other and it can be easy to confuse the two.

Amendments to existing legislation to permit ICO’s and the ICO Regulations (“ICO Regulations”)

The ICO legislation was passed in July 2018 to allow Bermuda companies, whether local or exempted, to issue “digital assets” (e.g. digital tokens or coins) to the public. The requirements are fairly simple: incorporate or establish a company, fill out an ICO application form, draft an offering document setting out details of the offering for the public, and file those documents with the Bermuda Ministry of Finance and Registrar of Companies for review and approval. If approved, the Minister of Finance will grant his or her consent for the ICO to be conducted as a ‘restricted business activity’ and the ICO can then commence.

There are no requirements for vehicles which fall within the ICO Regulations to have any physical presence on the Island, or to hire Bermudians. ICO issuers are not subject to the same level of regulation by the Bermuda Monetary Authority as licensed insurance companies or investment businesses are subject to.

Some ICO vehicles may very well wish to establish a physical presence on the Island for various reasons, though for the most part, the majority will simply conduct their offerings outside of Bermuda using their Bermuda exempted vehicle.

Only one company — in October 2018 — has received an ICO approval to date. The slower than hoped-for take up of this product is down to the current poor market conditions and some inefficiencies and time lag in the approval process. To the extent market conditions improve and Bermuda can do its part to improve the efficiency of the approval process and speed to market, it should hopefully see increasing demand for this product.

The DABA

As soon as someone mentions the words “Bermuda”, “Blockchain” and “Fintech” one gets the immediate feedback: “Where are the jobs?”

The DABA requires digital asset businesses to have a physical presence and they are subject to regulation by the Bermuda Monetary Authority. Jobs will certainly be created on the Island as a result of the DABA. For instance, staffing projections must be outlined in any proposal made to the Authority for a licence. A licence cannot be issued unless staff and certain senior representatives are employed on Island.

Yes, of course, it will take time — I’d estimate roughly 5 years before any form of “economic pillar” is close to being built. By the end of 2019, I’d be very surprised if more than 2 or 3 of these vehicles were licenced and formed as fully fledged DABA licenced companies.

As Bermuda’s Minister Caines recently acknowledged: “As much as everybody wants this to happen overnight, it’s not going to happen overnight.” Some potential clients are at the preliminary stages of their due diligence on Bermuda and a few have started with the step of forming a holding company with plans to incorporate subsidiary operating companies in the future to apply for a licence under the DABA.

But to date, no company has received a DABA licence.

E-Identification

One thing which may be rolled out in 2019 as part of Bermuda’s continuing digital transformation movement is the introduction of Blockchain-based electronic identification technology (“E-ID”). The E-ID system was announced by Bermuda’s Premier Burt in October 2018 and is hoped to be introduced in the first quarter of 2019. E-ID’s are an extremely effective use of Blockchain technology with the most sophisticated already being implemented in jurisdictions like Estonia.

If Bermuda was able to follow the Estonian model it could eventually include innovations such as internet-voting (also used in other European nations such as Denmark). That would be quite a movement forward. Focus on cyber-security will be key in implementing such a system.

Other Predictions

One easy prediction: nothing will be totally clear. Potential Fintech customers often don’t know what they want. Some are not sure which jurisdiction they want to use. Some don’t know if they will even get to the stage of issuing tokens to the public, or becoming a digital asset exchange or platform. Others are looking at issuing tokens which clearly will not meet Bermuda’s high AML/KYC standards.

No matter what, the new Bermuda “economic pillar” depends on take up by quality clients of formations both under the ICO Regulations and under the DABA.

Although ICO issuers may not create jobs for Bermudians, they will bring investment into Bermuda’s economy, and the Island will need to cement that reputation in order for it to be seen as a jurisdiction proven to be ICO capable and business friendly, with high standards in place.

On the DABA front, the actual tech and other jobs should be created and provide opportunities over time for Bermudians to be educated and trained in the field of digital transformation. DABA applicants need to be of a very high standard, serious and experienced, as the regulatory environment for those vehicles is a strict one. The Authority recently released a Code of Practice which sets out those stringent standards.

The creation of new companies and jobs will indeed not happen overnight.

But the interest is there. As Minister Caines declared, there is a “buzz around Bermuda.”

If carried out successfully, there will be a favourable impact on Bermuda’s economy and perhaps a new pillar to Bermuda’s economy will be formed as a result. But patience is key.

Bermuda, Blockchain, Cryptocurrency, Digital Transformation, Fintech

Bermuda and Digital Assets – A busy 2018

The beginning

Looking at it from a Fintech perspective, 2018 was both a formative and busy year for Bermuda.

It primarily started back in January, 2018. The Premier and his Minister, Wayne Caines, along with representatives from the Bermuda Business Development Agency attended the annual World Economic Forum AGM in Davos, Switzerland. Two Blockchain working groups already had been formed in November, 2017 to encourage a distributed ledger technology industry to be created on the Island. But while at Davos, it became clear that the notion of Bermuda becoming a true “Blockchain hub” had spread based on the interest targeted towards the Island from the attendees.

So very quickly, in February, meetings were convened.

The Premier’s mandate to the attendees of those meetings was to ensure Blockchain legislation was drafted which would put Bermuda on the map in the growing worldwide Fintech space. OECD advisors and Blockchain experts were imported from Davos, and private industry experts, regulators, the Bermuda Government and various service providers all worked together as one collaborative group. Discussions were held, presentations given and whiteboards utilised to their fullest extent. How did other jurisdictions treat token or coin offerings? What were the distinctions between utility tokens, equity tokens, security tokens and digital tokens? What challenges did Bermuda face? How could we make Bermuda a better place for companies to conduct their token offerings instead of competing jurisdictions such as Malta, Gibraltar, Switzerland, Singapore, etc.?

The legislation

At great speed, in approximately a month or so, the Companies and Limited Company (Initial Coin Offering) Amendment Act 2018 was created as a draft, which was soon followed by the Companies (Initial Coin Offering Regulations) 2018, which contained all of the requirements to be a Bermuda ICO or token issuer. Bermuda stood out because unlike other jurisdictions, ICO or token offerings required to be vetted by an independent Fintech Advisory Committee and a new Fintech Business Unit which formed part of the Registrar of Companies.

Conferences were attended, panels given, press releases issued. And of course the legislation and regulations were passed and became effective, eventually in July 2018.

While that was occurring the Digital Asset Business Act 2018 (“DABA”) was drafted, along with its minimum criteria for licencing, for regulated vehicles wanting to do more than just issue digital assets or tokens: electronic exchanges, platforms, digital wallet providers and vendors. Companies would be required to have a presence in Bermuda and be subject to regulation by the Bermuda Monetary Authority. The legislation not surprisingly reflected many parts of the provisions of the Insurance Act 1978: well known, tried and tested.

MOUs were signed based on the new DABA. Because of the physical presence requirement, it was natural to for the Bermuda Government to promise that jobs would be created as a result of it. The legislation was passed in September 2018.

The Insurance Act was also amended to introduce the notion of innovative insurers and intermediaries to form on the Island. A “sandbox” approach was created to promote Insurtech vehicles to test their technology, such as automation, artificial intelligence, big data or cloud computing, in a less regulated basis but more controlled environment, under the close supervision of the Bermuda Monetary Authority.

And finally, the Banks and Deposit Companies Amendment Act 2018 was passed in the late summer of 2018 to encourage banking or financial institutions to form on the Island in order to service companies carrying on token offerings or digital asset business.

In summary in 2018, the Bermuda Government passed legislation to:

· encourage token issuers to form on the Island to conduct public coin or token offerings;

· allow licensed digital asset exchanges and other digital asset vehicles to set up on the Island with a physical presence;

· attract new Insurtech vehicles to come to the Island to test their technology; and

· permit new Fintech-friendly banks to eventually set up with a presence on the Island.

It has been a very busy time for Bermuda and there is absolutely no doubt that its Government has been successful at promising its goal for the Island to become a Fintech and Blockchain hub.

A long term project

It is a formative project.

The Bermuda Government has started a process which is going to take time. Mistakes are going to be made along the way, but there is no jurisdiction which is attempting to grow in the digital transformation arena which you can point to and say they are perfect.

It is going to take time and effort. Jobs are not going to be created immediately. The seeds of digital growth and education have just been planted.

You cannot just criticise the Fintech push and the embracing of digital assets or cryptocurrency on the basis that so may ICO’s fail or many might be “scams”. The legislation which has been introduced over the last year reflect more of a digital revolution, the acceptance of Blockchain and of innovation. Cryptocurrency and digital assets are already here and more are coming: whether you like it or not.

The Fintech door has now been opened, and Bermuda has established itself as being very much welcome to let new, cutting edge digital business in. So at the very least, perhaps be cautious, yes, but let it in.

Bermuda, Blockchain, Cryptocurrency, Fintech, Technology

Bermuda’s FinTech Triangle: Blockchain, ICOs and Virtual Currencies

On November 22nd 2017, Bermuda’s Premier, the Hon. E. David Burt, JP, MP held a press conference regarding the potential impact of blockchain on Bermuda’s economy.  In summary, he said that the Island was going to look at blockchain opportunities as a new aspect of its overall economic plan, seeking to attract initial coin offering (ICO) and cryptocurrency businesses to Bermuda through the introduction of a sensible and credible regulatory framework.

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Bermuda’s blockchain approach

From a financial standpoint, the starting point was this: broadly, two different categories of blockchain vehicles would be recognised:

(1) Issuers who were conducting ICOs for crowdfunding purposes would be regulated by amendments to Bermuda’s existing Companies Act and Limited Liabilities Companies Act legislation (the ICO Act).

(2) Issuers of virtual currencies and those operating digital asset exchanges, as well as anyone providing services related to digital assets (e.g. those operating digital asset exchanges, e-wallets and similar structures), would be regulated via a brand new piece of legislation, the Digital Asset Business Act 2018, and by Bermuda’s primary regulator, the Bermuda Monetary Authority (BMA).

The ICO legislation

The ICO Act was drafted primarily by the legal department of the Government’s business development unit, in consultation with other Government stakeholders, the BMA, the Bermuda Business Development Agency, external consultants and various private sector representatives, including law firms and technology-based companies. This collective approach is the Bermuda standard: new laws, rules and regulations which will have an impact on the Island’s economy are created through collaboration between the public and private sectors to ensure the best possible result is achieved.

The new ICO Act regulates offerings of “digital assets”, which are meant to capture all of the various categories of digital coins and tokens (whether they be utility tokens, security tokens, equity tokens or otherwise) which are being issued as ICOs and via token sales.  It excludes rewards programs and gaming platform-related tokens.

Under the new ICO Act, an ICO will be treated as a restricted business activity that will require the consent of the Minister of Finance prior to an offering being made to the public. A FinTech Advisory Committee will be appointed to assist the Minister with initial reviews of applications and to ensure that they meet certain minimum criteria set out in the offering document issued to the public in connection with the ICO. In most cases, this offering document will consist of the issuer’s white paper.

A company (or LLC) wishing to launch an ICO can set up within the typical timeframe of 24 to 48 hours using Bermuda’s usual incorporation procedures. However, it will not be able to commence its ICO offering without first obtaining the Minister’s consent (which means that the applicant should file a copy of its draft white paper with the Ministry of Finance prior to the ICO). The minimum criteria for the offering document include details about:

  • the founders
  • the implementation of the ICO
  • the proposed target market
  • the amount of money to be raised
  • the digital assets rights
  • the technology which will be used.

Most of the criteria are industry standard, but the aim is to ensure they are imposed on issuers via statute and regulations.

The issuer will also be required to collect, verify and maintain customer identity information from an AML/ATF perspective.

The provisions of the ICO Act are largely similar to the provisions of Bermuda law which relate to initial public offerings, including requirements to file the ICO offering document with the Registrar of Companies (Registrar) and to file updates of the offering document with the Registrar on an ongoing basis. The ICO Act requires issuers to include a general risk statement (e.g. what happens if the project fails and what is the impact on proposed investors) and imposes penalties for untrue statements.

Bermuda works hard in all its industry sectors to attract the best business to the Island and it has always gone for quality over quantity. In seeking to attract ICO issuers, it is committed to the same approach.  Those issuers who do not make the cut will have to choose another jurisdiction.

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The Digital Asset Business Act 2018

 The Digital Asset Business Act 2018 (DABA) is unique piece of legislation, and the Bermuda Government, the BMA and their advisors looked carefully at the recommendations set out by the Financial Action Task Force (FATF) in this space. Through the DABA, Bermuda is seeking to balance its desire to embrace the new technology with the need to ensure that its pristine international finance reputation is protected.  As Bermuda’s Minister of National Security, Wayne Caines, stated at an event in February 2018: “The biggest challenge is reputation. Bermuda has only one thing it trades on and that is its reputation.” Again, the Island wants to ensure that the business it attracts in this space consists only of high quality participants.

When drafting the DABA it was recognized that virtual currencies and digital asset or currency exchanges were largely unregulated across the globe, and therefore looked to FATF’s emphasis on employing a risk-based approach in considering AMF/ATF risk, especially the need for regulatory supervision over public disclosure requirements, fraud prevention, price manipulation and ensuring the integrity of an issuer’s owners.

In order to create an effective risk-based approach and regulatory regime, the DABA does not regulate companies which conduct ICOs as a funding mechanism for their own business – that comes within the scope of the ICO Act as set out above. The DABA is concerned with virtual currencies and digital asset or currency exchanges.

The DABA licensing regime consists of two classes: a full virtual currency licence (Class F) and a sandbox licence (Class M).  The latter is designed to allow for novelty start-ups looking to test new products or services for a defined period of time (which can be extended), with modified requirements – all under the supervision of the BMA. The intention is to attract innovation to the Island while ensuring customer protection.

Other general requirements of the DABA include matters which one would expect: ensuring the owners and management are fit and proper; that there is sufficient corporate governance in place; and that the business is conducted in a prudent manner. There are also provisions relating to consumer protection: public disclosure rules (for instance, whether the issuer has cyber theft insurance) as well as requirements for certain minimum cyber security measures (e.g. policies relating to hot and cold wallets and generally what provision is made for the protection of customer assets).

Much of the DABA is based on the Island’s extremely robust existing legislative framework in the insurance, funds and trust sectors.  There are, for instance, requirements for certain risk management and compliance functions, and for an internal audit. In line with the Bermuda Insurance Act 1978, there is a physical presence requirement and a requirement to appoint a representative who has certain statutory duties to report matters to the BMA (e.g. whether there is a likelihood that the issuer may become insolvent).

Finally, the DABA grants the BMA a number of enforcement powers (e.g. a power to obtain information/reports or require the issuer to remove certain members of management) and also imposes various penalties for breach or non-compliance.

In short, the BMA believes that the DABA will be the leading global standard relating to virtual currency regulation, due in no small part to the sources from which it was derived – the OECD, the G20, FATF.

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Bermuda is the world’s leading offshore jurisdiction and wishes to remain so. It is also a business friendly and innovative jurisdiction, one which recognizes the risks within the general cryptocurrency space.

Companies in this space – particularly token issuers – are not shy of reasonable and credible regulation. With the new legislation and associated regulations being introduced, Bermuda is showing ingenuity, while it continues to adhere to prudentially sound international standards.

In the blockchain arena, Bermuda is leading the way and forging a unique and exciting “Bermuda Standard” which it hopes will become the global standard for ICOs, digital assets and virtual currencies.

Chris Garrod – May 2018