1. FINTECH MARKET
1.1 Evolution of the Fintech Market
Since the announcement of its fintech strategy in November 2017, the Bermuda government has positioned Bermuda as a market-leading jurisdiction with respect to fintech, with a view to Bermuda operating as an innovation hub for businesses seeking to conduct operations utilising new technologies or to deploy new technologies to provide services and solutions for other business sectors.
The Bermuda government, along with Bermuda's sole financial services regulator, the Bermuda Monetary Authority (BMA), have taken a collaborative approach and, with the assistance of technical advisers from other pioneering jurisdictions and participation across Bermuda's private industry sectors, Bermuda has developed a robust and effective, fit-for-purpose legal and regulatory framework that offers certainty with respect to the regulatory status of digital assets issuances and digital assets business activities, providing adequate protection for customers and investors, while also encouraging and fostering innovation.
Bermuda operates one of the largest (re)insurance markets in the world, which itself is a sector that is known for developing cutting-edge risk solutions and innovative alternative-risk structures. The BMA was able to leverage its experience in supervising and regulating companies in the (re)insurance sector (from start-ups to global giants) to develop a risk-based, proportionate but flexible regulatory regime that is dynamic and receptive to the needs of digital asset businesses and issuers, and responsive to the rapid deployment of distributed ledger and other technologies.
The Bermuda government has also implemented an island-wide initiative whereby stablecoins can be used for payment of government taxes, fees and services, and they are also currently being utilised in a digital stimulus project following the COVID-19 pandemic.
As part of its fintech strategy, Bermuda has passed the following key pieces of legislation:
- the landmark first-in-class Digital Asset Business Act 2018 (DABA), which provides for the licensing and supervision of digital asset business activities in Bermuda, along with associated codes of practice, statement of principles, client disclosure rules, cybersecurity rules, accounts rules and sector-specific anti-money laundering and anti-terrorist financing guidelines, specifically tailored to the digital asset business sector;
- the enactment of the Digital Asset Issuance Act 2020, which regulates the conduct of digital asset issuances, in a similar manner to initial public offerings of shares;
- amendments to the Banks and Deposit Companies Act 1999, to provide for a special class of banking licence to promote the establishment of banking institutions offering services to the fintech sector; and
- amendments to the Insurance Act 1978, to create a special class of insurance regulatory sandbox licence to be issued by the BMA to innovative insurers, insurance managers and other insurance intermediaries, as well as the creation of a new class of innovative insurance company that companies can apply to register as, or mitigate from the sandbox into.
DABA has been enhanced a number of times since its enactment, to extend the scope of digital asset business activities that are captured under the DABA regime, and which require a licence from the BMA to conduct such activities in Bermuda, in line with the fast-paced developments intrinsic to this sector. One of the key enhancements was the introduction of regulation for the digital assets derivative market, including digital assets such as options, futures, contracts for differences and swaps. In addition, the licensing regime was extended to those who operate as a digital assets derivative exchange or who act as digital asset benchmark administrators and trustee companies that safeguard and administer digital assets. The definition of "market marker" was also refined in line with the actual activities of market makers on digital assets exchanges and includes anyone:
- quoting buy and sell prices in furtherance of profit or gain on the bid offer spread;
- fulfilling orders initiated by clients or in response to clients' requests to trade; or
- hedging positions arising from the fulfilment of tasks under the two points above.
Bermuda intends to embrace and enable the acceleration of digital asset businesses from within Bermuda, while protecting its longstanding reputation as one of the world's leading offshore financial centres. Fintech businesses, investors and financiers will find a highly developed ecosystem in Bermuda, which benefits from a sophisticated legal system, significant wealth of intellectual capital, regulatory sandboxes, an innovation hub, a significant customer base and a progressive government and regulator seeking to establish Bermuda as a leading jurisdiction for fintech, while maintaining and, in some cases, establishing international standards and best practices that protect investors, customers and other stakeholders.
2. FINTECH BUSINESS MODELS AND REGULATION IN GENERAL
2.1 Predominant Business Models
Bermuda is currently home to a variety of business models, due to the wide scope of the licensing regime for digital asset businesses, and there is currently no predominant business model. These business models cover a range of industry sectors, including investment funds, fund managers and administrators; digital banks; payment service providers; financial services businesses; digital assets and digital asset derivatives exchanges and trading platforms; crypto lending and yield platforms; innovative insurance companies, managers and intermediaries; custodians and custodial wallet providers; regtech businesses; and companies seeking to raise capital and fund products or services through the issuance of digital assets.
2.2 Regulatory Regime
The DAI Act
The Digital Asset Issuance Act 2020 ("DAI Act") replaced the previous amendment to the Companies Act 1981 (as amended) for initial coin offerings and creates a statutory framework for the authorisation of digital asset issuances by the regulator, the BMA, which has produced the Statement of Principles and Digital Asset Issuance Rules 2020 (in draft form at the time of publication) ("DAI Rules") to expand upon the requirements under the DAI Act.
The DAI Act applies to any person who wishes to conduct an offer to the public to acquire "digital assets" or to enter into an agreement to acquire digital assets at a future date in or from within Bermuda. Such person is required to incorporate a company, limited liability company or partnership and, because the conduct of such an offer to the public is categorised as a "restricted business activity", to seek the consent of the minister of finance of Bermuda prior to launching the offer.
To read the full article click here
Originally Published by Chambers Global Practice Guides
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.