Oct 14, 2024
Key takeaways
Bermuda's sole financial services regulator, the Bermuda Monetary Authority (the "BMA") has issued a consultation paper on proposed changes to its landmark digital assets licensing legislation, the Digital Assets Business Act, 2028 (as amended) ("DABA").
Bermuda has been at the forefront of driving responsible regulation for digital asset businesses since enacting DABA in 2018, Since then, as a result of the BMA's increasingly broad technical experience in regulating fintechs of all types and sizes, it has continuously iterated upon DABA and its related rules and guidance in order to maintain effective and prudent oversight over this rapidly changing sector.
The key proposed changes outlined in the consultation paper are summarised in this client alert. The BMA is seeking feedback on or before 6 December 2024.
The BMA proposes to introduce a new definition of 'control' of assets and if a licensed undertaking has control of client assets, it will be subject to requirements to maintain separate accounts and sufficient amounts of digital assets to enable it to meet its client obligations.
The rationale stated is to ensure that the fundamental obligation for asset protection persists, bringing in the need for steadfast systems and controls in circumstances where a licensed undertaking may not be providing 'custodial wallet services' under DABA as currently in force.
Specifically, the BMA notes that by including a proposed definition of 'control' of assets, the requirements would be expanded to (a) stablecoin issuers who made need to maintain sufficient backing assets to meet redemption claim and facilitators of digital assets lending, borrowing and repurchase transactions; and (b) digital assets and digital assets derivatives exchanges. Such entities would not however need a custodial license purely by virtue of having control of assets.
The BMA has identified that as the market has grown and new business models have been introduced, particularly those that are modelled on traditional financial markets, the enhancement of prudential standards is required. This would amendments to grant the BMA express powers to make additional rules concerning; (a) additional capital and solvency; (b) wind-down plans; (c) net assets; and liquidity as well as rules concerning 'control of assets'.
Further, the minimum licensing criteria in Schedule 1 is proposed to be expanded to include minimum net asset, capital and liquidity requirements.
Successful license applicants will need to demonstrate that they have effective wind down plans in place to facilitate an orderly exit from the market in the case of an adverse event or crisis. It is proposed that such wind down plans become mandatory under DABA.
Licensed undertakings are required to notify the BMA in the event of any material changes to their business under section 22 of DABA (in respect of which the BMA has up to 30 days to serve notice of objection). The BMA proposes modifications be made to further clarify what constitutes a material change, specifically noting that only changes involving new product types will be required and providing further colour on what is meant by 'critical functions' in the context of outsourcing arrangements.
Walkers has significant experience in advising on license applications under DABA and would be delighted to discuss any questions surrounding these proposals with clients, contacts and those interested in Bermuda's risk-based regulatory regime.
Get in touch with Walkers Bermuda to raise questions and discuss these changes with Bermuda's subject-matter experts on digital assets.
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