BERMUDA Law and Practice Contributed by: Steven Rees Davies, Kyle Masters, Charissa Ball and Alexandra Fox, Carey Olsen
banking licence may be issued to persons seek - ing to provide traditional banking (including lend - ing) services to digital asset businesses. Please see 4.1 Differences in the Business or Regula - tion of Fiat Currency Loans Provided to Dif- ferent Entities for details on the lending-related regulations in Bermuda regarding digital assets and in general. 10.8 Cryptocurrency Derivatives The offering of digital asset derivatives is reg - ulated under the DABA and overseen by the BMA. The DABA imposes requirements related to – inter alia – supervision, compliance, capital, cybersecurity, risk management, AML/ATF, and reporting. Operating as a digital asset derivative exchange provider requires a licence under the DABA. 10.9 Decentralised Finance (DeFi) The DAB Regime applies to persons conduct - ing the business of providing any or all of the specified digital asset business activities to the public. DeFi is not expressly defined under the DAB Regime; however, depending on the activi - ties being conducted via or in relation to a DeFi platform or protocol, activities conducted could be caught under any number of the existing digi - tal asset business categories of the DABA. The BMA takes a pragmatic yet heightened approach to regulating persons that provide services to the public using a DeFi protocol in accordance with its proportionality principles. The key question is who is legally deemed to be responsible for the activities of the protocol. Where the proto - col is truly decentralised but requires contractual services (eg, treasury) to be provided by a legal entity, it is the legal entity that would fall under the DAB Regime. In such instances, the BMA will want to understand the constitutional basis for
the activities of the protocol and the contractual basis for the provision of services. In respect of DeFi protocols, developing soft - ware technology is currently unlikely to fall under any regulations in Bermuda (other than the economic substance regime that applies to all companies whose revenue is derived from IP in Bermuda). The BMA’s fintech team and the Ber - muda government’s DAO Working Group, com - prising the leading fintech lawyers in Bermuda, have both been working on proposals for intro - ducing regulation specifically designed for digi - tal governance models, such as DeFi protocols established as DAOs. The BMA recently issued a consultation paper that invites proposals for a collaborative pilot project aimed at testing embedded supervision practices within the con - text of DeFi, while the DAO Working Group has delivered a recommendation paper on how the existing legal and regulatory framework could be improved and adapted to recognise DAOs for the purposes of providing legal certainty and regulatory oversight. Currently, those looking to be regulated in Ber - muda and provide services to the public through a DeFi protocol should consider using a legal “wrapper” that can act on behalf of the proto - col and its participants. An example would be to use a company limited by guaranteed struc - ture whereby the company has members lim - ited by guarantee rather than shareholders and is restricted from making any distributions to its members. Another available structure is the use of a special purpose vehicle whose shares are owned by an orphaned Bermuda trust serviced by a Bermuda-regulated trustee entity. In such an instance, the BMA would regulate the legal “wrapper” as the person responsible for the pro - tocols’ compliance with the DAB Regime.
103 CHAMBERS.COM
Powered by FlippingBook