Bermuda Regulatory Update: Q4 2020

Digital Asset Business Amendment Act 2020 and Digital Asset Issuance Rules 2020

The Digital Asset Business Amendment Act 2020 (DABA Amendment 2020) became operative on 11 December 2020 and aims to give greater clarity to certain provisions, and improve the overall administration, of the Digital Asset Business Act 2018 (Act). In doing so, the DABA Amendment 2020 will establish a new testing licence, repeal and replace some definitions, extend the Bermuda Monetary Authority’s (Authority) ability to modify applicable fees, and introduce notification requirements for companies that seek an exemption order.

At present, a company investing in digital assets may be required to pay fees for both an investment business licence under the Investment Business Act 2003 and a digital asset business licence under the Act. In these particular cases, the Authority takes the view that a flexible fee structure may be appropriate. As such, the Authority is proposing to exempt a registered person from the requirement to pay any fee under section 16 of the Act, or to reduce any fee required to be paid, provided the Authority is satisfied that it is appropriate to do so having regard to the nature, scale and complexity of the business carried on by the registered person.

Perhaps one of the most significant proposed changes to the Act is the addition of the new class “T” licence. By making provisions for the testing of a minimum viable product/service via beta testing or piloting, this licence class will allow Bermuda’s digital asset business regime to support and foster all stages of innovation in the ever evolving digital asset business sector. It is proposed that applicants must: (i) develop success criterion for the test, (ii) list their pre-identified or targeted customers or counterparties, (iii) hold a minimum capital of at least $10,000, and (iv) ensure that appropriate risk disclosures for potential counterparties are in place.

The “T” licence will have an initial duration of 12 months or less and appropriate regulatory requirements based on proportionality, and if the DABA Amendment 2020 is approved as is, the licencing fee for the Class “T” licence will be limited to BD$1,000.

In February 2020 the Bermuda Government passed the Digital Asset Issuance Act 2020 (DAIA 2020) which effectively transferred the responsibility for the administration of offerings of digital assets to the public from the Registrar of Companies to the Authority. The DAIA 2020 makes provisions requiring the Authority to create rules in relation to certain matters that all authorised undertakings must comply with, amongst other things. In furtherance of this obligation and in continuance of its commitment to maintaining a safe environment for digital issuance to the public, the Authority has provided rules under the Digital Asset Issuance Rules 2020 (DAIR 2020) that explicitly outline the requirements for the way in which digital asset issuances are to be conducted.

These rules are particularly significant as they provide clarity to authorised undertakings of what is required by the Authority. More specifically, DAIA 2020 sets out the minimum required information that must be made available to digital asset acquirers via the issuer’s issuance document, which include details relating to the issuer and all of the persons involved in the issuance, a detailed description of the underlying project, the digital asset and the terms and conditions of the digital asset issuance, amongst other things.

To further protect the interests of digital asset acquirers, DAIA 2020 requires that ongoing communications and disclosures be made by the issuer to the digital asset acquirers with updates on the progress achieved with respect to the milestones set out in the issuance document.  Other important rules include the requirement for issuers to have adequate mitigating controls in place against market abuse, for issuers to implement and maintain a robust risk management framework and a robust cybersecurity programme, and to establish and maintain a data node in Bermuda where all information relevant to the digital asset issuance will be stored.

Registrar of Companies (Supervision and Regulation) Act 2020

The Registrar of Companies (Supervision and Regulation) Act 2020 came into force on 1 November 2020 and provides that the supervisory and regulatory function, particularly as it relates to the supervision of dealers in high value goods, will transfer from the Financial Intelligence Agency to the Registrar of Companies. As such, this legislation will impact the supervision of jewellery dealers, car, boat and motorcycle dealers, precious metal and stone dealers, antique dealers and auctioneers, whether or not such dealers are registered with the Registrar. Applications for registration of a dealer in high value goods under the Proceeds of Crime (Anti-Money Laundering and Anti-Terrorist Financing Supervision and Enforcement) Act 2008 must now be made to the Registrar.

Further, this legislation makes certain provisions relating to the dissemination of certain information. More specifically, a person, body or entity to which the Registrar supervises or exercises regulatory functions over, that receives information relating to the business or other affairs of any person must not disclose that information without the consent of the person to whom it relates. Where a person discloses information in contravention of this provision, he will be liable to a fine of $50,000 and to imprisonment for two years.

Covid-19 Update – 2021 Board of Directors Meetings

In light of the ongoing Covid-19 pandemic, the Bermuda Monetary Authority will take into account all the circumstances, including registrants’ inability to hold physical board meetings due to logistical and health difficulties resulting from Covid-19 in assessing compliance with the requirement to hold physical board of directors meetings in Bermuda. The Authority expects registrants to continue conducting regular board meetings by telephone, video conference or other virtual means, where it is not practical to meet physically during this period.

Consultation Paper – Proposal for a Conduct of Business Regulatory Regime (Consultation Paper)

On 15 December 2020, the Bermuda Monetary Authority (BMA) released the Consultation Paper outlining a proposal to establish a conduct of business regulatory regime in order to enhance protection for customers of financial services businesses in Bermuda.

The BMA intends for the new regime to protect retail investors without being unduly burdensome on the financial services industry. In order to achieve this, the BMA proposes to implement a principles based approach to the regime based on the following six high-level principles:

• Ensuring fair and equitable treatment of customers;
• Requiring financial service businesses to adopt responsible business practices;
• Ensuring that there is sufficient disclosure and transparency when communicating with retail investors;
• Ensuring the protection of customers assets against loss, fraud and misuse;
• Requiring financial service businesses to adopt dispute resolution mechanisms that are timely and equitable; and
• Requiring financial services businesses to provide appropriate resources to educate retail investors and ensure that they are aware of their responsibilities as customers.

The BMA has requested comments on the Consultation Paper by 15 February 2021. Please reach out to your Appleby contact if you would like to discuss submitting comments to the BMA.