BERMUDA Law and Practice Contributed by: Bourn Collier and Sharon A. Beesley, BeesMont Law Limited
specified asset or a pool or basket of assets in a single fiat currency (Single Currency Pegged Stablecoins or SCPS). The SCPS Guidance introduced a compre- hensive prudential regime for stablecoin issuers with requirements in respect of: • quality and sufficiency of backing assets; • disclosures including requirements for attestations and audits of backing assets; • stress testing; • bankruptcy remoteness of structures holding back- ing assets; • interoperability; • recovery and resolution planning; and • liquidity and net asset requirements (own funds). In the guidance, the BMA does not identify algorithmic stablecoins (as being applicable), however, note that the requirement for the issuer to have backing assets with market value equal to or higher than the value of issued stablecoin tokens in circulation would likely preclude algorithmic stablecoins from being in compli- ance with the SCPS Guidance. The majority or all of Bermuda’s stablecoin issuances licensed under DABA have had fiat currency or US Treasuries as backing assets. 6.2.3 Backing Assets The Bermuda framework imposes detailed require- ments on the backing of tokenised assets, particularly for stablecoin and tokenised investment structures. As noted, these requirements are consistent with the FSB High-Level Recommendations and the FSB’s broad- er work on the regulation of crypto-asset activities – and the IOSCO Recommendations on Decentralised Finance and Cryptoasset Markets. The BMA’s articu- lated “same risk, same regulatory outcome” principle aligns with the FSB’s “same activity, same risk, same regulation” approach. The SCPS Guidance imposes the following require- ments on SCPS issuers. • Quantity – backing assets must have a market value equal to or greater than the value of SCPS in issuance.
• Quality – backing assets must be capable of being bought or sold in the market without significantly affecting their prices, must carry limited credit, counterparty and market risk, and must be suf- ficiently liquid to meet reasonably foreseeable redemptions. Short-term marketable securities representing claims on, or guaranteed by, sover- eigns and central banks with high credit quality are treated as the benchmark. • Permitted asset classes – permitted backing assets include short-dated government bonds, reverse repurchase agreements over-collateralised by government or central bank debt securities on an overnight basis (with non-affiliated counterparties), public money market funds investing in govern- ment debt securities, and short-term cash deposits in commercial banks – each subject to BMA- agreed limits, credit ratings and legal arrange- ments. • Daily liquidity – a defined percentage of back- ing assets must be invested in assets capable of providing daily liquidity, meaning assets that can be liquidated or withdrawn on no more than one working day’s notice. • Over-collateralisation – where backing assets carry interest rate risk (longer-term backing assets), the issuer must over-collateralise the claims of digital asset holders, with the level of over-collateralisa- tion sufficient to cover potential declines in asset values during stress periods and volatile markets. • Segregation – backing assets must be segregated from the issuer’s own assets, with no rehypotheca- tion or use for the issuer’s own benefit or that of another client. • Diversification – backing assets must be diversified by investment strategy and counterparty (including banking parties and brokers) to reduce firm-specif- ic risk and any business disruption. • Daily valuation – backing assets must be valued daily, with the amount held adjusted to at least equal the original currency amount to which the SCPS is pegged. • Investment policy – issuers must maintain a documented investment policy, complemented by systems and controls ensuring adherence to it, with deviations from short-term government bonds requiring an explanation of how the increased risks are mitigated.
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