Preliminary provisions and definitions

The Act begins by defining key terms, such as “digital asset”, “director”, “controller”, and “senior executive”, to ensure clarity in its application. It outlines the scope of digital asset business activities, including issuing, selling, or redeeming digital assets; operating exchanges; providing custodial wallet services; and facilitating digital asset lending or derivative transactions. The BMA is tasked with issuing codes of practice, prudential standards, and guidance to ensure businesses operate in a manner that safeguards client interests and maintains market stability.

Licensing requirements

A cornerstone of the Act is the requirement for businesses to obtain a licence before conducting digital asset activities in or from Bermuda. Licences are categorised into three classes: Class F (full licence), Class M (medium-term licence), and Class T (temporary licence for pilot testing). Applicants must submit detailed business plans, policies, and procedures, along with evidence of compliance with anti-money laundering (AML) and anti-terrorist financing (ATF) regulations. The BMA evaluates applications based on minimum criteria, including the fitness and propriety of controllers and officers, the prudence of business operations, and the adequacy of corporate governance structures.

Client asset protection and financial accountability

The Act mandates licensed undertakings to maintain separate accounts for client assets, ensuring their protection from creditors and operational risks. Businesses must also secure indemnity insurance or equivalent measures to safeguard client interests. Annual financial statements, audited by approved auditors, are required to ensure transparency and accountability. Auditors are obligated to report any material concerns to the BMA, further enhancing oversight.

Compliance and enforcement mechanisms

To uphold regulatory standards, the Act grants the BMA extensive powers to monitor and investigate licensed undertakings. This includes the authority to require the production of documents, conduct on-site inspections, and appoint investigators to examine suspected contraventions. The BMA can impose civil penalties, issue public censures, and revoke or restrict licences in cases of non-compliance. Prohibition orders may also be issued to individuals deemed unfit to perform functions related to regulated activities.

Shareholder and controller oversight

The Act introduces stringent controls over shareholder and controller activities. Any individual or entity seeking to acquire significant control over a licensed undertaking must notify the BMA and obtain approval. The Authority retains the right to object to new or existing controllers if their influence poses a risk to clients or the business’s compliance with regulatory standards.

Appeals and legal recourse

Licensed undertakings and individuals affected by BMA decisions have the right to appeal to a tribunal. The tribunal, constituted by experienced legal and financial professionals, reviews cases to ensure decisions are lawful and evidence-based. Further appeals on points of law may be made to the courts, providing an additional layer of judicial oversight.

Confidentiality and information sharing

The Act emphasises the confidentiality of information obtained during regulatory activities. Disclosure is permitted only under specific circumstances, such as facilitating the BMA’s functions or assisting other regulatory authorities. Strict penalties are imposed for unauthorised disclosures, ensuring the integrity of sensitive information.

Miscellaneous provisions

Additional provisions address the maintenance of transaction records, the prohibition of misleading business names, and the issuance of certificates of compliance. Transitional arrangements allow businesses operating before the Act’s commencement to continue their activities while applying for a licence.

Conclusion

In summary, the Bermuda Digital Asset Business Act 2018 establishes a robust regulatory framework that balances innovation in the digital asset sector with the need for client protection and market integrity. By empowering the BMA with comprehensive oversight capabilities, the Act positions Bermuda as a leading jurisdiction for digital asset businesses while maintaining high standards of financial regulation.

Further reading

• Digital Asset Business Act