Natalie Neto
Partner
Bermuda
Bermuda is currently home to a variety of business models, due to the wide scope of the licensing regime for digital asset businesses, and there is currently no predominant business model. These business models cover a range of industry sectors, including:
Bermuda continues to innovate in other areas pertinent to the Fintech sector and, in particular, has enacted amendments to the Banks and Deposit Companies Amendment Act 2018 (the “Banks Act”) to offer restricted banking licences to banks wishing to serve digital assets businesses both domestically and internationally, without the requirement for a “high street” presence. This was enacted by the Bermuda government to remove an impediment to the ability of banks and lending institutions to service the Fintech sector, given the initial reticence of Bermuda‘s incumbent banks to provide banking services to the sector. The amendments permit the issue of restricted banking licences to banks wishing to provide services to Fintech businesses. However, some of the incumbent banks have since revised their stance and are servicing Fintech businesses in Bermuda. In June 2022, the BMA issued Jewel Bank, a digital asset bank, a full banking and digital assets business licence, and was the first new bank established in Bermuda in over 20 years.
Bermuda prides itself on being an innovation hub for Fintech businesses allowing them to test and explore new products and services, whilst ensuring appropriate consumer protection. Due to Bermuda having a fit-for-purpose legal and regulatory framework for “digital assets”, there has not been a desire or need to completely rewrite traditional pieces of legislation in order to cater for those innovative Fintech products. Instead, some enhancements are necessary to ensure clarity between pieces of legislation and to allowing legislation to co-exist, helping to avoid confusion where there may have previously been inconsistencies. Where there is an overlap between digital assets and traditional financial products or services, the BMA will facilitate a streamlined dual-licensing process (which is detailed further below).
Regulatory compliance is an evolving concern for financial institutions across all industries. Failing to comply with regulatory obligations has resulted in severe financial implications and reputational damage to many companies. RegTech provides tools to ensure adherence to these requirements by automating and streamlining processes. An example of this is with respect to anti-money laundering and anti-terrorist financing (“AML/ATF”) and Know Your Customer (“KYC”) procedures. With artificial intelligence and machine learning algorithms, vast amounts of data can be analysed in a fraction of the time, identifying potentially harmful transactions, international sanctions levied against persons or jurisdictions and detecting fraudulent activities.
With access to larger volumes of data, risk management processes are more accurate and precise. Scenario modelling and predictive analytics provide a proactive way to both manage and mitigate risks. Data privacy and cybersecurity are particularly crucial areas for risk assessment. With RegTech tools, such as data encryption and identification verification systems, companies are able to better safeguard against cyber threats and ensure compliance with data privacy laws.
Comprehensive reporting and transparency are a definitive part of Bermuda’s robust regulatory framework. Automated processes for collecting and submitting data have simplified a previously burdensome task and encouraged accuracy and timeliness of reporting. With this improved data quality, reports are more reliable and compliance costs are significantly reduced.
These innovations have helped companies to become more compliant with their regulatory obligations, strengthening Bermuda’s reputation as a trusted and well-regulated financial services jurisdiction. The adoption of RegTech tools is expected to further accelerate and continue to drive efficiency and effectiveness against an ever-evolving regulatory environment.
Because the BMA has been regulating Fintech businesses for over five years, it has developed a deep understanding of the RegTech tools available to assist with compliance and accepts such tools as methods to meet Bermuda’s high standards with respect to AML/ATF and KYC requirements.
Renowned for being at the heart of the insurance and reinsurance market, Bermuda has seen first-hand how InsurTech is revolutionising the industry. Driven by technological advancements, market demand and robust regulatory support, InsurTech has gained much more traction in recent years. From improved efficiency of traditional insurance processes to enhancing the customer experience, InsurTech is providing innovative solutions that are impacting both the insurance and Fintech landscapes in Bermuda.
Advanced data analytics, artificial intelligence and machine learning algorithms are also transforming the underwriting and risk assessment process by enabling insurers to leverage vast amounts of data, leading to more accurate and efficient assessments of risk. Data-driven decision making in turn results in better risk pricing and improved profitability.
Claims management processes are becoming more and more streamlined, with innovations such as automated claims assessments and blockchain-based smart contracts. Data analytics and AI-powered tools also provide better accuracy when assessing claims validity and pinpointing potentially fraudulent transactions.
Digital platforms are the biggest driver of increased personalisation of coverage options and improved customer satisfaction. InsurTech facilitates a more tailored approach to pricing and risk prevention by using telematics and Internet of Things (“IoT”) devices to gather real-time data and offer usage-based coverage.
With these innovations, Bermuda’s Fintech landscape has seen an increase of startups collaborating with traditional insurers, to provide bespoke and cutting-edge solutions. This new technology-driven perspective has also facilitated the rise of never-before-seen business models, such as peer-to-peer insurance, parametric insurance and microinsurance, which offer more affordable and accessible options to underserved markets.
At the forefront of this industry diversification lies Bermuda’s proactive regulatory framework. The BMA continues to evolve as InsurTech develops – ensuring market stability, consumer protection and regulatory compliance whilst fostering entrepreneurship and innovation. The BMA introduced a (re)insurance specific regulatory sandbox, a controlled environment that provides InsurTech companies with a safe space to test their business models and address continuously evolving challenges within a defined regulatory framework.
This continued adoption of InsurTech solutions has both strengthened Bermuda’s position as a leading insurance market and contributed exponentially to the growth of its Fintech landscape. Through its proactive regulatory approach, Bermuda has fostered an environment suited to innovation without compromising consumer protection or market integrity.
The BMA is the sole regulator of Bermuda’s financial services sector and currently supervises, regulates and inspects financial institutions operating in the jurisdiction. As digital assets were introduced into Bermuda’s ecosystem as a regulated sector, clear parameters have been established from the outset as to how Fintech companies in the jurisdiction will be regulated, providing a clear path to Fintech businesses establishing in the jurisdiction. Upon the Bermuda government announcing its strategy, the BMA invested purposefully and hired technical advisors with a great depth of experience in traditional and Fintech sectors, including from other regulators, to form a dedicated Fintech team which reviews all digital asset business licensing applications and provides ongoing supervision for Bermuda’s digital asset business licensees. The BMA’s Fintech team are highly regarded for their sophisticated, risk-based approach to regulation and innovation.
During the application process for a digital asset business licence, an applicant can expect that the Fintech team will utilise expertise from other teams within the BMA to review the cyber and AML/ATF elements of the licensing application. From the applicant’s perspective, any feedback from other teams is often filtered directly through the Fintech team, providing a consistent point of contact for the applicant.
In the scenario where an applicant has a dual-licensing application, the BMA will only require one application to be submitted and each of the relevant licensing teams at the BMA will separately review the application under the lens of their licensing expertise. This supportive approach demonstrates the BMA’s commercial and pragmatic attitude to licensing businesses and their ability to be flexible on a case-by-case basis.
As the BMA have been reviewing digital asset business licensing applications consistently since 2018, the regulator has been able to issue a considerable amount of guidance to assist applicants, which is all accessible via their website. The BMA have provided resources such as checklists, frequently asked questions, codes of conduct and statements of principles, which provides a helpful narrative on exactly what the BMA requires for a successful digital asset business licensing application.
As the BMA is a principles-based regulator, when assessing compliance with any of the licensing requirements, the BMA will adopt a proportional approach that reflects the nature, scale and complexity of the proposed business model. This approach leads to a flexible regulator that can adapt to each risk-profile of a business model.
As part of its Fintech strategy, Bermuda has enacted the following key pieces of legislation:
Under DABA, the definition of a “digital asset” is very broadly defined. The term covers anything that exists in binary format that comes with the right to use it, and includes a digital representation of value that is:
Under DABA, the provision of the following activities to the general public as a business are captured under the definition of a “digital asset business”:
Bermuda is a British Overseas Territory which operates under its own adopted legislation and has its own financial regulatory regime that is overseen by the BMA. The BMA is an independent regulator from any other jurisdiction and is free to issue orders, guidance, codes of conduct and statement of principles, pursuant to the powers it has been granted under the Bermuda Monetary Authority Act 1969 (as amended). Bermuda is not a member of any supra-national regulatory organisations, but it has established a number of cooperative relationships with several international regulatory bodies.
For example, the BMA is a member of the International Association of Insurance Supervisors and the International Organization of Securities Commissions, which are global standard-setting bodies for insurance and securities regulation, respectively. The BMA has also previously entered into a number of cooperative arrangements with regulatory bodies in other jurisdictions, including United States, Canada and the United Kingdom, in order to facilitate cross-border supervision and information sharing.
Bermuda has implemented several international regulatory standard and guidelines, including those developed by the Basel Committee for the banking sector, the Financial Action Task Force and the Organization for Economic Co-operation and Development. These standards and guidelines help Bermuda showcase its international standard of regulation for anti-money laundering/anti-terrorist financing and financial stability. The above demonstrates the BMA’s commitment to being a gold standard for regulation and the establishment of cooperative relationships help to ensure Bermuda is globally recognised for its high standards for regulation.
DABA provides for three classes of licences in order to offer a licensing framework that is suitable for the entire lifecycle of digital asset businesses:
The determination of the appropriate licence class is a function of different variables and business imperatives. For novel activities with significant uncertainties, it is generally appropriate to leverage the Class T licence to enable the BMA to observe the evolution of risks in a controlled environment. For entities with a sound understanding of the risks associated with their intended activities but still scaling up operations and working to implement an effective compliance programme, a Class M licence may be appropriate. Entities that have a fully developed business model, with known risks and a fully effective compliance programme, may seek a Class F licence.
In addition, the BMA recognises the importance of disruptive innovation in the insurance and wider financial industry and the critical role that innovation plays in promoting efficiency and enhancing competitiveness in these markets. To this end, the BMA has established two parallel innovation tracks.
Bermuda operates one of the largest (re)insurance markets in the world, which itself is a sector that is known for developing cutting-edge risk solutions and innovative alternative-risk structures. When the Bermuda government announced its strategy to adopt Fintech as a fourth pillar to Bermuda’s economy, the government sought to leverage the BMA’s experience in supervising and regulating companies in the (re)insurance sector (from start-ups to global giants) to develop a risk-based, proportionate but flexible regulatory regime that is dynamic and receptive to the needs of digital asset businesses and issuers, and responsive to the rapid deployment of distributed ledger and other technologies.
From the outset Bermuda has welcomed Fintech to the jurisdiction by establishing a licensing framework (when other jurisdictions have been reticent to do so), and this has resulted in a wealth of resource and understanding within the jurisdiction from a wide range of service providers. For any digital asset business that holds a Class M or Class F DABA licence, there are certain head office requirements. The impact of such requirements locally is that there are now numerous Fintech companies based in the jurisdiction with employees, which helps to create an on-island ecosystem where Fintech companies can innovate and collaborate within the jurisdiction.
One of the requirements to be licensed under DABA is for a licensee to conduct an annual external audit (there is no requirement for the auditor to be based in Bermuda) and file a copy of the results as part of its annual return with the BMA. Historically, across the Fintech sector, it has been difficult for digital asset businesses to be onboarded as a client by audit firms. When this industry-wide difficulty was experienced by licensees in Bermuda, the BMA agreed to provide waivers to the requirement to obtain such audit, demonstrating the BMA’s ability to be flexible based on the current market conditions. As the industry has grown and expanded, many audit providers have revisited their business acceptance parameters and are now able to accommodate regulated Fintech companies (both in and outside the jurisdiction), providing further accessibility and ability to comply with the audit requirements under DABA.
As Bermuda is a very much a regulated jurisdiction for Fintech, the vast majority of digital asset products and services that may be offered are deliberately captured under Bermuda’s licensing regime. Bermuda has intentionally focused on ensuring that any Fintech based in the jurisdiction will be known and vetted by the BMA in order to safeguard Bermuda’s reputation internationally and for the benefits of its other regulated sectors. Upon the issuance of any licence, the BMA have the power to impose restrictions or conditions on the operations of any digital asset business to ensure compliance with the BMA’s regulatory standards and guidelines. In addition to DABA, the Digital Asset Issuance Act 2020 (as described in detail above), regulates the conduct of digital asset issuances to the public, in a similar manner to initial public offerings of shares.
The Bermuda government have annually reviewed and, where appropriate, amended and enhanced DABA to keep up with the industry changes in order to ensure that DABA captures the digital asset business activities that are being undertaken by the industry. Most recently, this has resulted in the scope of DABA being expanded to specifically include lending activities.
As with any jurisdiction involved in digital assets, we have seen the industry-wide impact of the FTX collapse, which has had a significant impact on the sector, including existing licensed entities and potential applicants. At the time of the FTX collapse, the BMA continued to regulate and to issue licences to digital asset businesses which is credited to the commitment and rigorous review they undertake as part of the licensing application.
A number of digital asset businesses based in Bermuda were also separately impacted by the collapse of the US banks, Signature and Silvergate. The BMA was diligent in overseeing its regulated entities and analysing the impact of the collapse, which meant that a number of digital asset businesses were affected and left without banking facilities. The BMA has been working with the licensees as they onboard to alternative banking solutions, cognisant of the challenges faced by the industry.
The Bermuda Government has introduced a number of incentives to attract Fintech companies to the jurisdiction, including the introduction of up to five Fintech work permits being made available to Fintech companies who wish to relocate or set-up in Bermuda. The work permit is designed for Fintech companies who are looking to establish themselves in the jurisdiction and require individuals with specialist skills in order to help set-up and develop the business in the jurisdiction, bringing along with them intellectual capital that can be shared and imparted to Bermudians.
Fintech has had a significant impact on the local markets in Bermuda particularly in the areas of insurance and reinsurance due to Insurtech being prevalent in the jurisdiction. Fintech has enabled development of new products and services leveraging technology to improve customer experience. Many digital asset businesses in Bermuda have been at the forefront of addressing the need for cross-border business enabling more efficient payment and settlement systems.
As previously outlined above, the BMA have taken a very collaborative approach with other regulators, as part of this approach the BMA is also a member of the Global Financial Innovation Network (“GFIN”). GFIN comprises more than 70 international organisations, with the mission to support financial innovation in the interest of consumers. The group comprises a number of regulators from five continents who are engaging in the initiative in an effort to build on GFIN’s cross-border testing pilot.
GFIN’s focus is on advancing financial integrity, consumer well-being and protection, financial inclusion and financial stability through innovation in financial services.
GFIN has adopted terms of reference to focus on three primary functions:
On 10 June 2024, the BMA also announced that it had entered into a Digital Asset Memorandum of Understanding (“MOU”) with the Financial Services Regulatory Authority (“FRSA”) Abu Dhabi Global Market. The MOU creates a framework enabling the BMA and FSRA to support the establishment of digital asset entities across their jurisdictions and ensure their effective supervision. The framework encompasses regulatory and supervisory co-operation, investigative assistance, and capacity enhancement initiatives.
This chapter was originally published in Global Legal Insights FinTech 2024.
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