Current Regulatory Regimes

Bermuda was one of the first jurisdictions to introduce sector specific laws and regulations relating to the issuance of ‘digital assets’ and the provision of ’digital asset business’ services.  Bermuda's regime regulates the activities of issuers and services providers rather than the technology or digital assets themselves.  The issuance regime is agnostic to the type of token involved and, unless an exemption is applicable, applies the same principles to all issuers.  The same approach is taken to the licensing of digital asset service providers, except a proportionality principle is applied when assessing an application for a digital asset business licence.  This means that whilst the same requirements exist, the level of governance, capitalisation and oversight is dependent upon the nature, scale and complexity of the products or services being provided. 

For a digital asset issuance, an issuer needs to apply to the Bermuda Monetary Authority (BMA) for prior permission to conduct the issuance.  For digital asset business services, the service provider needs to apply to the BMA for a licence. ‘Digital Asset Business’ means the business of providing any or all of the following activities to the general public:

• Issuing, selling or redeeming virtual coins, tokens or any other form of digital asset.
• Operating as a payment service provider business utilising digital assets, which includes the provision of services for the transfer of funds.
• Operating as a digital asset exchange.
• Carrying on digital asset trust services.
• Providing custodial wallet services.
• Operating as a digital asset derivative exchange provider, and
• Operating as a digital asset services vendor. 

The regime also provides for three different grades of licence that recognises the differences between a business that is in testing (Class T), scaling (Class M) and fully operational (Class F) phases.

Both the Cayman Islands and the BVI have introduced their own set of specific legislation dealing with digital assets in the form of acts governing virtual asset service providers (VASPs), with Cayman introducing its version in 2020 and the BVI more recently in 2023.  In both jurisdictions, activities such as operating a centralised exchange or custody business are regulated activities, as are other services such as exchange and transfer.  Cayman also regulates public sales of virtual assets whereas the BVI does not. As with Bermuda, the Cayman regime is agnostic as to the types of token which may be issued.

To provide virtual asset services in Cayman, one must either apply for registration or a licence (in the case of centralised exchanges and custodians), albeit the licensing framework has not been introduced, meaning that as things stand, all businesses need to apply for registration until the licensing framework comes in.  In the BVI, registration as a VASP is required for all businesses wanting to offer virtual asset services, albeit there is a similar delineation for exchanges and custodians who must provide additional information.  Any BVI VASPs operating prior to the introduction of the regime on 1 February 2023 had until 31 July 2023 to submit an application for registration.  Provided they did so, they can continue operating whilst the application is processed.

Notable Trends And Changes In The Past 18 Months

While Bermuda, the BVI, and the Cayman Islands each have a digital/virtual asset regime, there have been noticeable differences between the types of projects that have chosen between them.  Notwithstanding those early nuances, we have seen several similar trends across all three jurisdictions.   In Bermuda and Cayman we are increasingly working with clients on registration and licensing applications involving ever more complex, novel and innovative projects and in the BVI we have assisted a large number of clients apply for registration before the 31 July deadline.

With what seemed like a never-ending run of negative crypto events in the news in 2022, including the fallout from Terra Luna and FTX, not to mention the overarching "crypto winter", we saw a rapid, but short-lived loss of confidence in both the markets and service providers alike who were operating out of unregulated jurisdictions.  We saw a simultaneous surge of interest in regulated service providers and by service providers wanting to be regulated and seeking to secure reputable licenses to evidence this.  Another short-lived but major trend has been the reluctance of traditional finance to be involved, or even be seen to be involved, in the digital/virtual asset sectors during the latter half of 2022 and early parts of 2023. This stance appears to be thawing as the legal and regulatory landscape in some jurisdictions, where businesses have shown resilience to the events of the past 18 months, has proven how effective and proportionate regulation can mitigate against the types of risks seen in many of the recent business failures.

Together with the rise in interest in regulatory scrutiny and certainty for both providers and users, we have seen an increase in business projects with real use case examples of blockchain technology gaining traction and, with adequate funding behind them, seeking regulatory licenses in those jurisdictions that have not only shown resilience in the digital/virtual asset sector, but also credibility in the traditional financial markets.  This is driven in part by businesses wanting regulatory and legal certainty but also because there is an increasing perception that, in order to interact with institutional and traditional regulated businesses service providers need to show credibility through reputable regulation themselves.

The market is maturing, and we are now seeing more digital/virtual asset businesses that are led by a mixture of people coming from both sides of the regulatory spectrum.  The technical coders and engineers are still core to the projects and are still often the brains behind the brand or product/service offering, but they are more and more often surrounded and supported by people with compliance, banking, trading, structured products and funds experience, who can help introduce and apply the principles of proper corporate governance, capitalisation and regulatory compliance oversight. This shows a broader acceptance and understanding of the technology by those from traditional lines of business, as well as an increased acceptance and understanding of the risks blockchain technology brings to the global monetary system and financial markets, as well as political and consumer influence by the industry.

We are also seeing the results of some of the first legal cases and regulatory enforcement action taken around the world, in some instances across multiple jurisdictions.  This is providing a level of certainty and understanding as to how the law and regulations in different jurisdictions are being interpreted and applied to digital/virtual asset issuers and service providers.  When combined with the increase in the number of jurisdictions that are either introducing sector specific or amendments to existing legal and regulatory regimes to govern the sector, we are seeing a surge in both the number of businesses wanting to be regulated and the number of projects seeking to develop more traditional use cases of the technology.

Across our offices around the world, we have seen a change in the type of enquiries and a change in attitude towards regulation around digital/virtual asset business services. 

There are still some places where you can operate a digital/virtual asset business without any applicable regulatory oversight, but that number is dwindling as the global appetite and pressure for sound regulation and risk mitigation increases.

An original version of this article first appeared in IFC Review, August 2023

Carey Olsen Bermuda Limited is a company limited by shares incorporated in Bermuda and approved and recognised under the Bermuda Bar (Professional Companies) Rules 2009. The use of the title “Partner” is merely to denote seniority. Services are provided on the basis of our current terms of business, which can be viewed at: https://www.careyolsen.com/terms-business