Crypto License in Bermuda
With the increase in use of cryptocurrency as a digital currency, an amendment was made in 2019 in the Bermudan Digital Asset Business Act that allowed an expansion in the range of activities pertaining to licensable DAB or Digital Asset Business. The amendment of 2019 paved way for two new exchange forms namely – the Digital Asset Exchange and the Digital Asset Derivative Exchange. Let us learn what a Digital Asset Business means according to the Bermudan Law.
Defining a Digital Asset Business or DAB
The definition states that a business making provision for all or any of these mentioned activities towards the public in general falls under the category of a DAB or Digital Asset Business:
1. Providing, redeeming, or selling virtual tokens, coins or any such other digital asset format;
2. Functioning in the form of a business that provides payment service utilizing various digital assets, including providing the service of funds transfer;
3. Functioning in the form of an electronic exchange;
4. Supplying services related to custodial wallets;
5. Functioning in the form of a vendor for digital asset-related services
Defining a Digital Asset
The Bermudan Law defines a Digital Asset as anything existing in the form of binary format that involves the right to use that asset as well as is inclusive of a value in digital representation of that asset, which:
1. is used in the form of a unit of account, store of value, and exchange medium and does not categorize as legal tender, whether it accounts as a legal tender denomination or not;
2. is meant to be a representation of assets such as equity or debt in the promoter;
3. is otherwise meant to be a representation of any rights or assets associated with corresponding assets; or
4. is meant to give accessibility to a service or application or product through the Distributed Ledger Technology.
However, an asset cannot be defined as a Digital Asset if:
1. it is a transaction that grants value to an individual as a part of a rewards or affinity programme, in which the value cannot be exchanged or taken from the individual for bank credit, legal tender, or any other digital asset; or if
2. it is a value’s digital representation that is issued on behalf or by the publisher, which is then used in any online game, or gaming platform, or a family of games that is put on sale by that very publisher or provided on that very gaming platform.
Digital Asset Business License Classes
The DABA in its Article 12(3) clearly states the different classes of license for Digital Asset Business, which are listed below:
1. Class F (or Full License) – In this, an individual shall obtain license for providing all or any of the activities pertaining to Digital Asset Business.
Class F is intended for administering a proven business model’ at scale that uses a compliance programme that is fully developed. It is categorized as a full license’ that is valid indefinitely, and which requires a minimum share capital worth $100,000+.
2. Class M (or Modified License) – In this, an individual shall obtain license for providing all or any of the activities pertaining to Digital Asset Business for a definite time period that the Bermuda Monetary Authority determines.
This license class is directed at individuals who want to scale up their business model, provided their model has been tested previously, and is establishing a comprehensive compliance programme. In this category of license, supervision takes place on a regular basis along with monthly supervisory meetings, and provides feedback on predetermined key indicators. Class M license remains valid from anywhere between 3 and 12 months, and can be potentially extended, but it requires a minimum share capital $100,000 plus insurance.
3. Class T (or Testing License) – In this, an individual shall obtain license for providing any activities pertaining to Digital Asset Business for a definite time period that the Bermuda Monetary Authority determines, and it is provided for executing beta or pilot testing related to such an activity.
This license is provided for piloting and testing a business model, a service, or a product that is yet to be proven under a specific or general context. Class T comes with exceedingly limited scale, a pre-set category or number of participants, limited reporting, and crucial emphasis on disclosure of limitations and risks of a test in relation to prospective consumers/customers. It remains valid from anywhere between 3 and 12 months, and can be potentially extended, but it requires a minimum share capital $10,000.
The Process of Applying for Crypto License in Bermuda
The Process of Licensing
An individual cannot execute any of the business activities stipulated in the Digital Asset Business definition without first obtaining a license. These activities include:
1. Providing, redeeming, or selling virtual tokens, coins or any other digital asset format;
2. Functioning in the form of a business that provides payment service utilizing various digital assets including providing the service of funds transfer;
3. Functioning in the form of an electronic exchange;
4. Supplying services related to custodial wallets;
5. Functioning in the form of a vendor for digital asset related services
However, there is an exemption from the requirement of obtaining a license for any individual in the legal profession, provided they obtain an exemption order that is issued by the Minister. This exception is allowed for specific individual or individuals who fall under a specific class.
Activities That Do Not Fall Under Digital Asset Business
In compliance with Article 10 these following activities shall not fall under Digital asset Businesses:
1. providing computing power or connectivity software to decentralized digital asset, or to any protocol that governs the transfer of a value in digital representation;
2. solely providing security or data storage services to a Digital Asset Business, and is in no other way engaged in the activity of the DAB on behalf of any other individual/s;
3. providing any activity pertaining to a Digital Asset Business through an undertaking that is solely for business operations purposes, or for business operations of its subsidiary.
Crypto License in Bermuda and Main Requirements for Applicants
An individual requiring a DAB license will have to write and submit an application (that can be withdrawn in writing by notice), which shall include the following:
1. A proper business plan that sets out the scale and nature of the activity related to DAB that the applicant intends to carry out;
2. Particulars related to the applicant’s arrangements for business management;
3. Procedures and policies that the applicant intends to adopt for meeting the obligations under this Act as well as the Proceeds of Crime (Anti-Money Laundering and Anti-Terrorist Financing) Regulations 2008;
4. Other such documents and information that the Authority may deem necessary and reasonably require for determination of the application; and
5. An application fee whose amount shall be determined by the Authority corresponding to the scale, complexity, and nature of the DAB that the applicant intends to carry out, and as may be prescribed under the Bermuda Monetary Authority Act 1969.
Prudence must be maintained at the time of conducting business through:
1. Compliance with DABA, and any other law applicable including the CFT and AML laws (Proceeds of Crime Act 1997), the Proceeds of Crime Regulations 2008, and the Anti-Terrorism Act 2004;
2. Maintenance of minimum net assets worth $100,000 or any other such amount that maybe directed by the authorities by taking into account the complexity, nature, and size of the said licensed undertaking;
3. Maintenance of accounting as well as other business records;
4. Maintenance of sufficient systems of control of its records and business;
5. Ensuring that the licensed DAB has built procedures and policies related to its obligations under DABA or any other Act (as aforementioned);
6. Ensuring that the licensed undertaking has an insurance policy for covering risks that are inherent to its business operations in an amount that corresponds to the scale and nature of its Digital Asset Business, or has incorporated other measures of risk mitigation as agreed by the BMA.
Client Assets Ruling
A licensed DAB in charge of client assets must ensure that its accounts related to these assets are kept separate from other accounts related to other business (The principle of segregation). Moreover, a licensed undertaking in charge of client assets will need to maintain an indemnity insurance, or a surety bond, or a trust account so that its clients are benefitted, and this needs to be in such an amount and form as the BMA deems acceptable for protections its clients. Alternatively, it should make other similar arrangements as approved by the BMA.
Only a qualified custodian should be in charge of maintaining a trust account. If a DAB is in custody of one or multiple clients’ one or multiple digital assets then it must have adequate amount of each digital asset type so that it can meet the clients’ obligations.
Implementing Corporate Governance
It is imperative for the licensed DAB to implement necessary corporate governance processes and policies as is deemed appropriate by the Authority with regard to the complexity, size, risk profile, and nature of the said licensed company. It is required of the DAB to be effectively directed by a minimum of two individuals who will act as non-executive directors appointed by the Authority taking into consideration the size, complexity, risk-profile, and nature of the licensed DAB.
The officers and controllers in charge of license must possess the following qualities –
• The individual’s probity is taken into regard;
• Sound judgment and competence of the individual to fulfill the position’s responsibility;
• Diligence in fulfilling or likely to fulfill their given responsibilities; and
• Whether or not the interests and needs of the potential clients or clients of the licensed undertaking get to be threatened in any way by the individual’s position.
It is required for a licensed Digital Asset Business to place its head office within Bermuda. This licensed DAB needs to be managed and directed from within Bermuda. The BMA will determine this based of various factors such as risk management, operational management, location of board meetings and senior executives.
It is required of a licensed Digital Asset Business to have a Senior Representative who is BMA-approved, and who shall act on behalf of the licensed digital asset business while maintaining an office within Bermuda. Once a DAB obtains its license, it needs to update the BMA with its office location and other particulars. In case these get altered later on, a notification should be sent to the BMA within a time span of 14 days.
If You Are Interested in Obtaining Crypto License in Bermuda our Lawyers will Help you With:
Analyzing your business model and adopting it within legal frameworks in Bermuda;
Incorporation a company in Bermuda;
Drafting internal rules and procedures, compliance manuals;
Drafting business plan and financial forecasts;
Preparing all the required due diligence documents;
Finding an office space and hiring local experts;
Opening bank account for your business;
Launching your crypto project according to legislation in Bermuda;