Bermuda: The Regulation Of Crypto-Currencies

Last Updated: 18 February 2019
Article by Steven Rees Davies, Peter Colegate and Rebecca Jack

The sudden emergence and rapid growth of crypto-currencies and other digital assets in recent years, combined with seemingly unlimited potential applications for blockchain and distributed ledger technologies in a range of industries, has led to an unprecedented period of technological innovation and the emergence of disruptive businesses and entirely new models of funding. As the pace of technological change accelerates, the legal and regulatory side of doing business is becoming more complex.

The Cayman Islands, Bermuda and the British Virgin Islands are three of the world’s largest offshore jurisdictions. All three have ambitions to become globally important technological hubs and have taken steps in recent years to become attractive destinations for technological entrepreneurs, especially those who want to launch, host and develop digital assets using blockchain technology.

In this article we evaluate the approach that each jurisdiction is taking in this fast-evolving business and consider some of the likeliest developments in 2019. Information about the laws and regulations of each jurisdiction will come in the form of questions and answers.

The Cayman Islands

The Cayman Islands are home to approximately 70% of the world’s offshore investment funds and their Government does not tax companies or people directly. As one of the offshore world's foremost financial centres, this jurisdiction is well placed to become an attractive destination for technological entrepreneurs. Its ambitions are also supported by a sound body of law, a modern infrastructure, state-of-the-art communication systems and a stable political climate.

Most of the Cayman Islands' financial service legislation comes from the time before the blockchain revolution began, but in recent years the Government has taken some legal and regulatory steps to make such innovation thrive.

Are there any 'sandboxes' or other regulatory 'neutral zones'?

In November the Government announced that it was going to set up a "technology neutral regulatory sandbox" in the Cayman Islands to encourage, foster and incubate companies that operate in the sector. Further details have yet to emerge.

Is there a digital 'incubator' or 'hub'?

The Government has set up a Special Economic Zone (SEZ) in which technological companies from outside the islands can set themselves up and operate offshore with a genuine physical presence. The benefits of residing in the SEZ include:

  • fast-track set-up in 4-6 weeks;
  • renewable five-year work/residency visas granted in five days to staff from outside the Cayman Islands;
  • no Government reporting or filing requirements; and
  • presence in a tech cluster with cross-marketing opportunities.

How are initial coin offerings (ICOs) regulated?

There is no separate body of law for the regulation of ICOs in the Cayman Islands. The primary piece of legislation regarding securities and investment business in the Cayman Islands is the Securities Investment Business Law (SIBL). SIBL provides for the licensing and control of persons engaged in securities investment business in or from the Cayman Islands. It sets out an exhaustive list of financial instruments that constitute ‘securities’ and cryptographic tokens are not included in that list. However, the question of whether a token might constitute a security as defined by SIBL rests on the facts that surround it and the unique ways in which it operates. If it does indeed qualify as a security, the issuer is either dealing in, or arranging deals in, securities, although the issuer’s activities may appear on a list of activities that SIBL excludes from this. Every issuer of a token in the Cayman Islands is also subject to the general criminal laws that forbid fraud and the laws that govern intentional or negligent misrepresentation.

Does anyone who wants to conduct a token sale in the Cayman Islands have to be present physically?

Not at present, but in December last year the Cayman Islands introduced an 'economic substance' requirement for certain companies that operate there. Operators ought to seek legal advice on a case-by-case basis at the start of any project to find out whether or not the project will have to comply with these new requirements.

Can an ICO project set up a local bank account?

Yes. A number of banks in the Cayman Islands will accept ICO account business but they might ask for additional documents. Anyone wants to launch an ICO project from the Cayman Islands ought to try to open a bank account as early as possible.

Are ICOs subject to the local anti-money laundering (AML) regime?

Yes. The Financial Action Task Force (FATF) is the international anti-money-laundering standard-setter. As a member of the Caribbean FATF, the Cayman Islands have to abide by the FATF's so-called 40 recommendations. Every issuer of tokens in the Cayman Islands ought to prepare a know-your-customer or KYC policy that applies to all participants in the token sale and which seeks to comply with 'enhanced' AML procedures.

Are any legal or regulatory changes to be expected?

In 2018 the Government set up some working groups to set broad boundaries for new laws that might promote and regulate emerging technology such as blockchain and crypto-assets – they are still consulting interested parties. The Government is looking at ways in which "regulated digital identity solutions" could help streamline and replace more traditional ways of obeying AML and KYC laws.

Bermuda

As one of the foremost offshore financial centres, renowned for its strong (re)insurance, investment fund, asset management and trust sectors which are supported by a world-class advisory and financial services infrastructure, including a sophisticated legal system, a robust regulatory regime, speed-to-market capability, a business-friendly government, a simple tax regime and a highly skilled work force, Bermuda has become an attractive destination for technological entrepreneurs.

Through the introduction of one of the first legal and regulatory regimes in the world that was tailored specifically for the digital asset and crypto-currency sectors, Bermuda has made a bold statement about its commitment to creating a business environment that balances the interests of both entrepreneurs and consumers, through a legal and regulatory framework that offers certainty and security to both sides.

Are there any 'sandboxes' or other regulatory neutral zones?

In 2018 Bermuda introduced new laws and regulatory rules to govern and regulate initial coin offerings, digital asset business and 'insuretech.' The new legislation sets out standards of disclosure for ICOs, a dual licensing system (including a 'sandbox') for anyone who wants to provide digital asset business services to the sector and both a 'sandbox' regime and an 'innovation hub' for those in insuretech.

Is there a digital 'incubator' or hub?

No, but Bermuda's Government is in the process of developing numerous projects aimed at stimulating innovation, co-operation and development in the technological sector as well as cross-departmental policies to streamline the process by which people can establish IT companies on the island. Attractive immigration policies and payroll tax relief has also been introduced to give immediate economic benefit to firms that establish their IT business in Bermuda.

How are ICOs regulated?

New ICO legislation became operative on 9 July last year. It claims to protect both consumers and the integrity of markets. Under the new law, an ICO is treated as a restricted business activity which requires consent from the Bermuda Monetary Authority (BMA). Other key provisions of the ICO legislation include:

  • the establishment of a FinTech Advisory Committee to advise the minister on all matters relating to FinTech, or the development of the FinTech industry, which the minister may refer to it;
  • establishing minimum requirements for all ICOs (including a Code of Conduct); and
  • setting out requirements for the publication and content of ICO white papers.

Does anyone who wants to conduct a token sale in Bermuda have to be present physically?

Not at present. As long as the standard minimum level of corporate existence required of any company incorporated and registered in Bermuda is met, there are no additional physical presence requirements placed upon companies that conduct ICOs. In December last year, however, Bermuda introduced an 'economic substance' requirement for certain companies that operate there. Operators ought to seek legal advice on a case-by-case basis at the start of any project to find out whether or not the project will have to comply with these new requirements.

Can an ICO project set up a local bank account?

Although the financial institutions that are licensed to provide banking and deposit services in Bermuda remain cautious towards businesses that operate in this sector, none have imposed a blanket prohibition and most are prepared to support legitimate business on a case-by-case basis. It is expected that as the AML/anti-terrorist finance (ATF) sector-specific guidance becomes more established, the financial institutions may soften in their approach. Notwithstanding this, the Bermuda Government has created a new type of banking licence for anyone who wants to set up a digital asset company.

Are ICOs subject to the local AML regime?

A: AML/ATF legislation and regulation in Bermuda is based on the recommendations promulgated by the FATF. Any company that does digital asset business must obey AML laws and regulations. Anyone who wants to be licensed under the new ICO legislation must have a comprehensive AML policy.

Are any legal or regulatory changes expected?

No.

The British Virgin Islands

These islands are a British Overseas Territory and are recognised across the globe as the premier jurisdiction for the registration of asset-holding companies. BVI corporate legislation is generally regarded as 'non-prescriptive' in that companies are able to devise the corporate structures and procedures that apply to their businesses, subject to certain limited statutory requirements. The flexibilities inherent in such a system make BVI companies extremely attractive as part of asset-holding structures. Thanks to the attractiveness of BVI corporate vehicles for international businesses, asset holding and investments, there has been a steady increase in the use of BVI companies as holding and operating companies throughout the software industry.

Are there any 'sandboxes' or other regulatory neutral zones?

No such zones or initiatives have been established in the BVI. The Financial Services Commission (FSC) has indicated that it is thinking of establishing a regulatory 'sandbox' to help companies in the technology sector, but the admission criteria, regulatory exemptions and time-frame for implementation remain unknown at the time of writing.

Is there a digital 'incubator' or hub?

No special economic zones have currently been established in the BVI to benefit companies in the FinTech sector. Although the FSC has indicated that it is considering initiatives to encourage entities to operate there physically, any such project is unlikely to be viable without significant infrastructural investment.

How are ICOs regulated?

There is no separate body of law to govern the regulation of ICOs in the BVI. The primary piece of legislation regarding securities and investment businesses in the BVI is the Securities and Investment Business Act (SIBA). SIBA provides for the licensing and control of persons engaged in investment businesses in or from within the BVI.

SIBA sets out an exhaustive list of financial instruments that constitute ‘investments’ but cryptographic tokens are not expressly included in that list. However, the question of whether a token might constitute a security as defined by SIBA rests on the facts that surround it and the unique ways in which it operates. If it does indeed qualify as a security, the issuer is either dealing in, or arranging deals in, securities, although the issuer’s activities may appear on a list of activities that SIBA excludes from this.

A person who is not carrying on an investment business in accordance with SIBA may still have to be licensed if he/it claims to be carrying out an investment business. He/it should therefore not use words, in any language, that connote the existence of a securities investment business in the description or title of the business in question. He/it should also make no representation in any document or in any other manner to the effect that anyone is doing investment business.

Every issuer of a token in the BVI is also subject to the general criminal laws that forbid fraud and the laws that govern intentional or negligent misrepresentation.

Does anyone who wants to conduct an IPO in the BVI have to be present physically?

Not at present, but in December the BVI introduced an ‘economic substance’ requirement for certain companies that operate there. Operators ought to seek legal advice on a case-by-case basis at the start of any project to find out whether or not the project will have to comply with these new requirements.

Can an ICO project set up a local bank account?

Not unless the project establishes a physical presence in the BVI or otherwise can show evidence a ‘nexus’ or connection between the BVI and its business operations. Local banks have, traditionally, been reluctant to open accounts for BVI-incorporated entities. It is typical for BVI entities to set up bank accounts elsewhere, whether in other overseas jurisdictions or onshore.

Are ICOs subject to the local AML regime?

Generally speaking, a utility token sale would not constitute a ‘relevant business’ and therefore would not have to adhere to the "enhanced due diligence" (EDD) AML requirements of the jurisdiction. Notwithstanding this, it is recommended that issuers of tokens in the BVI prepare a KYC policy that applies to all participants in the token sale and which seeks to comply with enhanced AML procedures.

In August 2018, the Government changed the AML Code to permit entities in the BVI to verify identities digitally and receive electronic copies of documents instead of traditional 'wet ink' paper-based documents. The amendments are further evidence of regulators in the BVI embracing the blockchain revolution and will set a new standard for AML verification in the region.

Are any legal or regulatory changes expected?

At the time of writing, neither the BVI Government nor the FSC has issued any regulatory guidelines to govern ICOs. We understand, however, that both are mulling over legislative and regulatory changes to spur the growth of the FinTech, blockchain and ICO industry in the BVI. Any such reform is only likely to happen after the Government consults the financial sector in detail.

Originally published in Compliance Matters, February 2019 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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