Bermuda has enacted a comprehensive regulatory regime governing cryptocurrency–indeed, one of the first legal and regulatory regimes in the world specifically designed to govern digital assets. As one of the offshore financial centers of the world, Bermuda has adopted a business-friendly approach to the governance of digital assets and related businesses.
In 2018, Bermuda introduced a regime to govern initial coin offerings, as well as digital business assets: the Digital Asset Business Act and the Companies and Limited Liability Company (Initial Coin Offering) Amendment Act 2018 (ICO Act). These acts have been supplemented with, among other things, the Digital Asset Business (Cybersecurity) Rules 2018,  the Digital Asset Business (Client Disclosure) Rules 2018, and the Digital Asset Business (Prudential Standards) (Annual Return) Rules 2018.
The legislation provides standards governing ICOs and digital asset businesses. Under Bermuda regulatory regime, an ICO is classified as a restricted business activity that requires approval from the Bermuda Monetary Authority.
Bermuda law does not require physical presence in order to conduct a token sale. It generally merely requires corporate existence and registration in Bermuda, although Bermuda law also imposes an economic substance requirement, which requires additional compliance standards.
Digital asset businesses are required to comply with AML/ATF legislation and licensed businesses must adopt and comply with a comprehensive AML policy.
The 2018 Act regulates “digital asset businesses” in Bermuda, and requires businesses that are incorporated or formed either within or outside of Bermuda that conduct digital asset business in, or from within, Bermuda to obtain a license from the Bermuda Monetary Authority. Digital assets are defined as
anything that exists in binary format and comes with the right to use it and includes a digital representation of value that—
(a) is used as a medium of exchange, unit of account, or store of value and is not legal tender, whether or not denominated in legal tender;
(b) is intended to represent assets such as debt or equity in the promoter;
(c) is otherwise intended to represent any assets or rights associated with such assets; or
(d) is intended to provide access to an application or service or product by means of distributed ledger technology;
but does not include—
(e) a transaction in which a person grants value as part of an affinity or rewards program, which value cannot be taken from or exchanged with the person for legal tender, bank credit or any digital asset; or
(f) a digital representation of value issued by or on behalf of the publisher and used within an online game, game platform, or family of games sold by the same publisher or offered on the same game platform[.]
Businesses that require a license under the Act include those involved in
(a) issuing, selling or redeeming virtual coins, tokens or any other form of digital assets;
(b) operating as a payment service business utilising digital assets which includes the provision of services for the transfer of funds;
(c) operating as an electronic exchange;
(d) providing custodial wallet services;
(e) operating as a digital assets services vendor.
The Act specifically excludes the following activities from the definition of digital asset businesses:
(a) contributing connectivity software or computing power to a decentralized digital asset, or to a protocol governing transfer of the digital representation of value;
(b) providing data storage or security services for a digital asset business, but is not otherwise engaged in digital asset business activity on behalf of other persons;
(c) the provision of any digital asset business activity by an undertaking solely for the purposed of its business operations or the business operations of any subsidiary of it.
In order to obtain a license, the business must pay a fee and apply to the Bermuda Monetary Authority. The Act requires businesses to include the following information in the application:
(a) a business plan setting out the nature and scale of the digital asset business activity which is to be carried on by the applicant;
(b) particulars of the applicant’s arrangements for the management of the business;
(c) policies and procedures to be adopted by the applicant to meet the obligations under this Act and the Proceeds of Crime (Anti-Money Laundering and Anti-Terrorist Financing) Regulations 2008;
(d) such other information and documents as the Authority may reasonably require for the purpose of determining the application; and
(e) an application fee which shall be an amount determined by the Authority commensurate to the nature, scale and complexity of the digital asset business to be carried on by the undertaking and as may be prescribed under the Bermuda Monetary Authority Act 1969.
Bermuda offers two types of digital asset business licenses:
- Class F licenses enable individuals to provide any digital asset business activities.
- Class M licenses enables a person to provide all digital asset business activities for a specified period of time, which may be extended by the Bermuda Monetary Authority.
Applicants requesting a license under the Act should specify the type of class of license they are seeking. The Bermuda Monetary Authority also has the authority to determine which class of license is issued to a business. When making this determination, the Bermuda Monetary Authority considers the interests of clients, potential clients, and the public and any obligations it believes should be imposed on the applicant “due to the nature of the digital asset business activities it intends to carry on.”
In order to issue a license, the Bermuda Monetary Authority must be satisfied of the following:
- Controllers of the business are fit and proper persons;
- Business is conducted in a prudent manner and in compliance with any codes of practice, accounting requirements, and Bermuda’s anti-money laundering legislation;
- Business is undertaken with skill and integrity;
- Minimum net assets of US$100,000 will be maintained, unless the Bermuda Monetary Authority has determined another amount;
- Sufficient insurance is carried to cover the risks inherent in the operation of its business, and the amount must be “commensurate with the nature and scale of its digital asset business”; and
- The business is directed by two individuals overseen by non-executive members.
More detailed guidance on these requirements is contained in a “Statement of Principles” issued by the Bermuda Monetary Authority. Businesses that conduct digital asset activities without a license are subject to a fine of up to US$250,000 and/or up to five years imprisonment.
In order to aid efficient oversight of activities conducted under the Act, licensed digital asset businesses must maintain a head office in Bermuda that directs and manages the digital asset business. When determining whether such operations occur in Bermuda, the Bermuda Monetary Authority considers where the majority of decision making of the business occurs, if senior executives responsible for the digital asset business are located in Bermuda, and where meetings of the board of directors occur.
Businesses licensed under the Act are also required to appoint a senior representative who has been approved by the Bermuda Monetary Authority to act in this capacity on behalf of the business. The Act imposes a duty on the senior representative to notify the Bermuda Monetary Authority where he or she believes any of the following circumstances has arisen in the digital asset business:
- There is a likelihood of the business becoming insolvent;
- The business is failing to comply with any conditions imposed by the Bermuda Monetary Authority;
- The business is involved in any criminal proceedings in Bermuda or overseas;
- The business stops operating a digital asset business;
- There are any material changes to the business; or
- A cyber-reporting event occurs.
The Act bestows the Bermuda Monetary Authority with a number of supervisory powers, including the right to investigate into the activities of businesses; power to obtain information and reports; the ability to require licensed businesses to produce documentation; and a right of entry onto licensed businesses to obtain information and documents.
Businesses licensed under the Digital Asset Business Act are required to prepare annual audited financial statements or accounts from an approved auditor of all transactions and balances of its businesses.
Initial Coin Offerings
The Companies and Limited Liability Company (Initial Coin Offering) Amendment Act 2018 (ICO Act) entered into force on July 9, 2018. The ICO Act provides a framework for ICOs that occur in, or from within, Bermuda. The Act provides that no person is permitted to conduct an ICO from in, or within, Bermuda unless they are a company that is registered with the Registrar of Companies. The ICO Act further provides that ICOs are a “restricted activity” and thus requires Bermuda companies to apply to the Minister for consent before launching one from in, or within, Bermuda. The ICO Act defines digital asset in the same manner as the Digital Asset Business Act, set out above.
The Fintech Advisory Committee reviews each application and then makes a recommendation to the Minister as to whether or not it should be approved. The application must include the details of the development and implementation of the product or services, how long it will take to complete, along with information about rights, functionality, features, and transferability. To ensure that anti-money laundering laws are complied with, the ICO must collect, confirm, and store the identity of any purchasers of tokens or coins offered.
Upon approval from the Minister, the ICO must publish an “offer document” and file it with the Registrar of Companies. The document must include details such as the business, or proposed business, the project, rights and restrictions on the digital assets as well as warning language about the risks associated with investing in ICOs. The warning should appear both in the offer document and on the ICO platform itself when the offer is open or suspended. The warning statement must include the following details:
(a) information regarding any substantial risks to the project which are known or reasonably foreseeable;
(b) information as to a person’s rights or options if the project which is the subject of the Initial Coin Offering in question does not go forward;
(c) a description of the rights (if any) in relation to the digital assets that are being offered;
(d) information regarding any disclaimer in respect of guarantees or warranties in relation to the project to be developed or any other asset related to the Initial Coin Offering.
The ICO Act provides for two different regimes according to the type of assets issued. ICOs that are launched solely for crowdfunding purposes are regulated by the Companies Act 1981, the Limited Liability Company Act and the Register of Companies. ICOs that involve virtual currencies or digital assets fall under the Digital Asset Business Act 2018 and are overseen by the Bermuda Monetary Authority.
The Digital Asset Business Act 2018 requires licensed businesses to conduct their business in a prudent manner, and specifically states that the business
shall not be regarded as conducting its business in a prudent manner unless it maintains or, as the case may be, will maintain minimum net assets of $100,000 or such amount as the Authority may direct taking into consideration the nature, size and complexity of the licensed undertaking.
The Digital Asset Business Act requires licensed businesses that hold client assets to keep these assets separately from other business accounts.It further requires licensed businesses to maintain either a surety bond, trust account maintained by a qualified custodian, or indemnity insurance in the form and amount, as approved by the Bermuda Monetary Authority in order to protect the businesses clients.
Licensed businesses that have custody of one or more digital assets are required to maintain a sufficient amount of digital assets to meet the obligations it owes to its clients. The Digital Asset Business Act further mandates businesses should
ensure that any assets belonging to clients are kept segregated from the DAB’s own assets. The DAB may place client assets in a trust with a qualified custodian, or have a surety bond or indemnity insurance, or implement other arrangements to ensure the return of client assets in the event the DAB is placed into liquidation, becomes insolvent or is a victim of theft.
The Bermuda Monetary Authority has issued a draft code of practice on the custody of digital assets to provide further clarity over the standards it expects from businesses when safeguarding customer assets. The draft code covers the safekeeping of digital assets in the custody of the digital asset business, including recovery protocols in cases of compromised or corrupted assets, the handling of transactions, and operational policies and procedures.
The Bermuda Monetary Authority may direct licensed businesses to conduct certain actions that are “desirable for safeguarding the interests of the licensed undertaking’s clients or proposed clients” if it believes the businesses are in breach of any provisions of the Act, regulations, or rules that apply to it. Failing to comply with a direction is publishable by a fine of up to US$2 million. The Bermuda Monetary Authority may also conduct an investigation into the nature, conduct, or state of a business licensed under the Digital Asset Business Act, suspected contraventions of the Digital Asset Business Act, as well as the ownership and control of a licensed business.
Anti-Money Laundering Laws
The Digital Asset Business Act amended Bermuda’s anti-money laundering laws to include businesses licensed to conduct digital asset business within the definition of regulated financial institution under the Proceeds of Crime Act 1997 (POCA Act), the Anti-Terrorism (Financial and Other Measures) Act 2004, and the Proceeds of Crime (Anti-Money Laundering and Anti-Terrorist Financing) Regulations 2008, The obligations contained in these Acts therefore apply to businesses licensed under the Digital Asset Business Act. Anti-money laundering procedures and policies are required to be included in the license application under the Digital Asset Business Act, and any branches or subsidiaries located overseas must also comply with Bermuda’s anti-money laundering laws. In addition, the Digital Asset Business Act requires licensed businesses to operate in a prudent manner, and states part of that prudent manner involves complying with Bermuda’s anti-money laundering legislation.
The anti-money laundering laws require that senior management of digital asset businesses
- Ensure compliance with the Acts and Regulations;
- Identify, assess and effectively mitigate the ML/TF risks the RFI faces amongst its customers, products, services, transactions, delivery channels, outsourcing arrangements and geographic connections;
- Conduct an AML and Sanctions risk assessment and ensure that the risk assessment findings are maintained up to date;
- Appoint a Compliance Officer at the senior management level to oversee the establishment, maintenance and effectiveness of the RFI’s AML/ATF policies, procedures and controls;
- Appoint a Reporting Officer to process client disclosures;
- Screen employees against high standards;
- Ensure that adequate resources are periodically trained and devoted to the RFI’s AML/ATF policies, procedures and controls;
- Audit and periodically test the RFI’s AML/ATF policies, procedures and controls for effectiveness and address any issues uncovered adequately and timely; and
- Recognise potential personal liability if legal obligations are not met.
Failing to comply with Bermuda’s anti-money laundering laws can result in substantial penalties. Failing to comply with the requirements contained in the POCA Regulations is a criminal offence, punishable by up to two years imprisonment and/or a fine of up to US$750,000. The Bermuda Monetary Authority may impose a financial penalty of up to US$10 million for each failure to comply with the regulations, along with restrictions on the license issued and other disciplinary measures.
Bermuda is a low tax jurisdiction and there are no specific taxes on income, capital gains, or other taxes on digital assets in Bermuda. 
 Digital Asset Business Act 2018, 2018/28, http://www.bermudalaws.bm/laws/Annual Laws/2018/Acts/Digital Asset Business Act 2018.pdf, archived at https://perma.cc/KA74-XMSH.
 Companies and Limited Liability Company (Initial Coin Offering) Amendment Act 2018, 2018/20, http://www.bermudalaws.bm/laws/Annual Laws/2018/Acts/Companies and Limited Liability Company (Initial Coin Offering) Amendment Act 2018.pdf, archived at https://perma.cc/5REL-UF5K.
 Digital Asset Business (Cybersecurity) Rules 2018, BR 99/2018, http://www.bermudalaws.bm/laws/Annual Laws/2018/Statutory Instruments/Digital Asset Business (Cybersecurity) Rules 2018.pdf, archived at https://perma.cc/WNK8-5SLD.
 Digital Asset Business (Client Disclosure) Rules 2018, BR 100/2018, www.bermudalaws.bm/laws/Annual Laws/2018/Statutory Instruments/Digital Asset Business (Client Disclosure) Rules 2018.pdf, archived at https://perma.cc/X4ES-6SD5.
 Digital Asset Business (Prudential Standards) (Annual Return) Rules 2018, BR 98/2018, http://www.bermudalaws.bm/laws/Annual%20Laws/2018/Statutory%20Instruments/Digital%20Asset%20Business%20(Prudential%20Standards)%20(Annual%20Return)%20Rules%202018.pdf, , archived at https://perma.cc/93DQ-WMQL.
 Analysis adapted from Library of Congress, Regulatory Approaches to Crypto.