Why Bermuda for your tokenised fund?
The ISAC Act Bermuda has established itself as a leading jurisdiction for the structuring, issuance, and ongoing operation of tokenised funds. The Bermuda Government has long recognized the transformative potential of distributed ledger technology and has proactively developed a comprehensive regulatory environment designed to support innovation while maintaining investor protection and regulatory certainty.
Since 2018, Bermuda has implemented cutting‑edge legislation, including the Digital Asset Business Act 2018 ('DABA') and the Digital Asset Issuance Act 2019 ('DAIA'), as well as related amendments to the Companies Act 1981, as amended. Together, these frameworks provide a clear statutory foundation for token offerings, digital asset activities, and the issuance of tokenised fund interests.
Structure:
Structuring your fund in the most optimal manner is of utmost importance. Where investors are located outside of the U.S. and/or are U.S. tax‑exempt, offshore jurisdictions such as Bermuda often form a key part of an efficient fund structure.
Bermuda has a strong reputation as an offshore jurisdiction due to the flexibility of the fund products available and the clarity of its regulatory framework. Whatever investment strategy a promoter wishes to pursue, including strategies represented through tokenised interests, we can advise on the most suitable and effective structure. A variety of fund categories can be established in Bermuda depending on the nature of the investors and the investment strategy. The most common categories are:
- Private Funds (no more than 20 investors and not offered to the public, typically used for family offices, as a master fund or seeding vehicle – can be open or closed ended);
- Professional Class A and Class B Funds (open to ‘qualified participants’, typically for high-net-worth/sophisticated/institutional type investors); and
- Standard Fund (no minimum investment or investor qualification test, favored for retail investors).
Bermuda also has legislation in place to incorporate a wide array of flexible legal structures for your fund, including companies limited by shares, partnerships, limited liability companies (LLCs) as well as segregated accounts (cell) companies and incorporated segregated accounts companies. Cell company structures allow each cell to enjoy separate legal personality, making them particularly useful where strategies or asset pools need to be ring‑fenced.
Open-ended tokenised fund (Bermuda exempted company)
Open‑ended structures are commonly used where the fund’s investment strategy involves assets that are more liquid in nature, allowing investors to redeem their interests at their own initiative. Tokenizing the fund’s equity interests does not alter the nature of those interests; the token simply represents the same equity interest the fund would otherwise issue in traditional form.
Open‑ended tokenised funds must be registered or authorised with the (BMA under the Investment Funds Act 2006, as amended. The BMA will continue to treat the equity interests as equity interests in an investment fund, even if they are issued in tokenised form. Directors and service providers must be 'fit and proper', although directors are not required to be separately registered with the BMA.
Close-ended tokenised fund (Bermuda exempted limited partnership)
Closed‑ended tokenised funds are typically used for long‑term or illiquid investment strategies where investors do not have redemption rights without the manager’s consent. When partnership interests are tokenised, the token acts as the digital representation of the investor’s limited partnership interest and does not change the regulatory classification of the fund.
Closed‑ended funds must be registered with the BMA. As with open‑ended structures, tokenizing the interests does not alter the BMA’s treatment of the fund.
Where the offering is private in nature (less than 150 persons) or limited in scope (to qualified acquirers), the DAIA private‑offering exemptions will apply. However, it is anticipated that an explicit exemption specifically for tokenized funds will be introduced in the near future as described in the Consultation Paper, to further streamline
As with open‑ended funds, a DABA licence is not required unless the manager conducts additional digital asset business beyond issuing the fund's own tokenised interests.
Service providers
Once you have decided on the most appropriate structure for your fund, it is necessary to also consider the various service providers that your fund may need to engage. The following are among the key service providers:
- A Registered Office provider in Bermuda: Under Bermuda Law it is a requirement for the fund to have a registered office ('RO') in Bermuda. The RO will carry out a wide variety of administrative matters on behalf of the fund. Such services can be provided by our affiliate entity, Walkers Corporate (Bermuda) Limited.
- An Administrator and Custodian: It is common for open-ended funds to appoint a third-party administrator who will be responsible for the accounting of investor subscriptions and redemptions, and computing the net asset value of the fund. With regards to custodians, the option to self-custody rather than appoint a third party custodian is preferred by many sponsors with expertise in the digital asset space. However, for institutional investors that invest in cryptocurrency funds a third party custodian will most likely be required.
- An Auditor: The BMA requires a registered fund, other than a private fund, to appoint an auditor; however such auditor does not need to be based in Bermuda and there is no Bermuda based sign off requirement. All of the big 4 accounting firms have a physical presence in Bermuda. In certain circumstances, the BMA may grant an exemption to the audit requirements provided appropriate arrangements are in place to safeguard the interests of participants in the fund and that all directors and investors agree in writing to the waiver.
- Independent Directors: Independent directors are more commonly seen, although not required, in open-ended structures. They are viewed as the investors’ 'watchdogs' over the investment manager and other service providers to the fund. However, as the digital asset space is relatively new, the sponsor tends to provide the directors to the funds. Directors must, however, meet a ‘fit and proper’ test.
- FATCA and Anti-Money Laundering and Anti-Terrorist Financing Requirements: Funds are required to comply with Bermuda laws relating to FATCA (Model 2), the Common Reporting Standard and Anti-Money Laundering. A fund must appoint a Money Laundering Reporting Officer ('MLRO') and a Compliance Officer ('CO'), who can be the same person satisfying the ‘fit and proper’ criteria. This is often provided by the fund administrator. It is possible for the fund to accept subscriptions in cryptocurrencies, the fund administrator would need to conduct the usual AML due diligence, including source of wealth.
Digital Asset Business Acts 2018 ('DABA') and Digital Asset Issuance Act 2019 ('DAIA')
Bermuda was an early mover in the digital asset regulatory space, introducing DABA and DAIA to provide a comprehensive statutory framework for digital asset activities and token issuances conducted in or from within Bermuda. These laws remain central to understanding when a tokenised fund must comply with licensing or token‑offering requirements.
Under the current Consultation Paper, it is proposed that tokenised funds will be explicitly exempt from the requirement of DAIA, to further streamline and enhance the experience for tokenised funds.
Importantly an investment fund that has appointed an investment manager that is licensed under the Investment Business Act 2003,as amended ('IBA'); or authorised by a recognized regulator, (as defined under the IBA) . is exempt from the requirement to obtain a DABA licence and instead is required to file a simple notification form with the BMA. This creates regulatory certainty, creates an efficient process and significantly reduces regulatory hurdles for qualifying investment managers and their tokenised funds.
