Blockchain Comparative Guide

• Law Firm: Carey Olsen
• Subject Matter: Technology, Fin Tech
• Author: Mr Steven Rees Davies and Charissa Ball
• Published date: 26 January 2023

1 Legal and enforcement framework

1.1 What general regulatory regimes and issues should blockchain developers consider when building the governance framework for the operation of blockchain/distributed ledger technology protocols?

Bermuda has a digital asset sector specific legal and regulatory regime that governs both the issuance of digital assets and the carrying on of digital asset business activities in and from Bermuda. The Digital Asset Issuance Act (DAIA) requires any person seeking to offer digital assets to the public by way of a new issuance (Digital Asset Issuance) to obtain the permission of the Bermuda Monetary Authority (BMA), Bermuda's financial sector regulator. The Digital Asset Business Act (DABA) established a governing framework (DAB Framework) that regulates the conduct of digital asset business activities in and from Bermuda and requires any person seeking to conduct digital asset business activities in or from Bermuda to obtain a licence from the BMA.

"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 (b) not legal tender, whether or not denominated in legal tender, (c) is intended to represent assets such as debt or equity in the promoter, (d) is otherwise intended to represent any assets or rights associated with such assets, or (e) is intended to provide access to an application or service or product by means of distributed ledger technology, but does not include (x) 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 (y) 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.

"Digital Asset Business Activities" includes:

1. Issuing, selling or redeeming virtual coins, tokens or any form of digital assets
2. Operating as a payment service provider business utilising digital assets which includes the provision of services for the transfer of funds
3. Operating as a digital asset exchange
4. Carrying on digital asset trust services
5. Providing custodial wallet services
6. Operating as a digital asset derivative exchange provider and
7. Operating as a digital asset services vendor.

1.2 How do the foregoing considerations differ for public and private blockchains?

The DABA regulates the provision of Digital Asset Business Activities to the general public, where the word "public" is deemed to be anyone other than yourself. Further, "distributed ledger technology" is defined as a database system in which (a) information is recorded and consensually shared and synchronised across a network or multiple nodes, and (b) all copies of the database are regarded as equally authentic. There is no express differentiation between a public and a private blockchain, but the DAB Framework follows a proportionality principle which allows the BMA to assess compliance with the DAB Framework in a proportionate manner relative to the nature, scale, complexity and risk profile of the project.

1.3 What general regulatory issues should users of a blockchain application consider when using a particular blockchain/distributed ledger protocol?

The DAB Framework is technology agnostic and is focussed on the ability of the system to comply with the principles set out in the DABA Code of Practice and Statement of Principles, together with ancillary regulations, issued by the BMA. Accordingly any developer seeking to launch a product or service using a particular blockchain application or distributed ledger protocol should consider the security of the system and whether it is secure and flexible enough for them to meet these standards. For users of the products or services, the fact a digital asset business in Bermuda is required to be licensed should give a level of comfort to the stability of the platform being used.

1.4 Which administrative bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?

The BMA is responsible for regulating and licencing Digital Asset Issuances and Digital Asset Business Activities. The BMA has been granted wide-ranging powers of supervision and enforcement under the DABA and the DAIA. The BMA has the power to compel production of information and documents, the power to issue directions that safeguard the interest of the licensee's clients and the power to impose restrictions and conditions on licenses. The BMA has issued numerous documents, including guidance notes, codes of conduct, statements of principles and information bulletins, which set out the basic principles on how a digital asset business (DAB) is expected to conduct business.

If a DAB does not comply with the DAB Framework, including any specific BMA requests or directions, the BMA has the power and authority to impose fines of up to $10,000,000, depending upon the severity and type of infraction. In the most extreme cases the BMA may also revoke a DABA license. The BMA will use its enforcement powers in a manner consistent with the Statement of Principles and Guidance on the Exercise of Enforcement Powers.¹

1.5 What is the regulators' general approach to blockchain?

The BMA welcomes and openly engages with persons seeking to use blockchain thanks to the sector specific legislation and regulations in place in Bermuda. The BMA have established a FinTech Team, comprising individuals chosen for their experience in and knowledge of both the technology sector (blockchain specifically) and application of regulation, to oversee the application and implementation of the DAB Framework.

1.6 Are any industry or trade associations influential in the blockchain space?

The BDA FinTech Legal & Regulatory Sub-Committee comprises individual lawyers, licensed to provide Bermuda legal advice, who are proficient and experienced in advising DABs on the DAB Framework. The Sub-Committee's core purpose is to provide collective legal and regulatory feedback on, and propose amendments to, the DAB Framework and is actively engaged with both the Government of Bermuda and the BMA to achieve this. It is also used to seek clarification and certainty from the BMA on its interpretation and application of the principles that are the foundation of the DAB Framework.

NEXT is the Bermuda Digital Assets Industry Forum that is an autonomous industry advocacy group...