Bermuda: set to be a digital ‘Fort Knox’
First published in The Royal Gazette, Legally Speaking, March 2022
Bermuda has long been recognised as a jurisdiction where custodians of traditional assets can thrive.
We think that the same is true for digital assets and that the digital asset custodian industry in Bermuda is set to grow significantly over the coming months.
A traditional asset custodian is a regulated financial institution, which holds assets in its custody on behalf of others to minimise the risk of theft or loss. Portfolio managers and advisers are often required to use a custodian to hold the assets that they manage for their clients.
There are a number of recognised benefits of using traditional asset custodians, who employ financial experts who understand the market and the type of assets that they are holding. They are insured and so the owner of the asset has some protection in the event that the asset is lost. Finally, they are strictly regulated by the Bermuda Monetary Authority.
All of these benefits apply equally to digital assets.
Digital assets do not fall neatly into any category of asset that the law has traditionally recognised.
They are neither property that can be physically possessed (a “chose in possession”) nor are they property that is possessed by enforcement of an action against another party (a “chose in action”).
Digital assets are a new type of intangible property, unique in this regard. Nevertheless, there is a consensus developing that crypto currency and other digital assets such as non-fungible tokens or other tokenised assets are property that can be owned by an individual as opposed to a mere enforceable contractual right.
The growth of the digital asset industry is undeniable.
CoinMarketCap, a digital asset price tracker, estimates that the value of all digital assets now in circulation is in the region of $1.76 trillion.
This is a market capitalisation exceeded by only the three largest companies in the world — Microsoft, Saudi Aramco and Apple.
The BMA is a pioneer in the regulation of digital assets businesses. Through the Digital Asset Business Act 2018 and Digital Asset Issuance Act 2020, Bermuda has demonstrated that it is a jurisdiction on the cutting edge of digital asset regulation.
Law firms, like Appleby, have worked with the BMA throughout the process of creating a regulatory standard for digital asset businesses in Bermuda and are available to provide legal advice on how to navigate and interpret the legislation.
Digital assets businesses consider Bermuda to be a welcoming and visibly well-regulated jurisdiction and have been entering the market as a result.
Recent technology conferences have highlighted Bermuda as a destination for digital assets business on the international stage.
The island is also recognised as a world leader in the insurance industry and has a growing insurtech industry.
There is an opportunity for institutional wealth managers to provide fully backed insurance coverage of digital assets.
A digital asset stored by an individual consumer, whether online or using their own offline storage carries risk: whether risk of loss, risk of corruption or risk of theft by hacking.
Often, increasing protection against one risk increases risk of other forms of loss.
For instance, it is possible to store the keys to a digital asset on an offline, physical device, reducing the risk of hacking but creating the risk of physically losing the device while also reducing the convenience and accessibility of accessing those digital assets.
Any digital asset custodian will also have to consider how to strike the balance of useability and safety.
The BMA, in 2019, released a code of practice for digital asset custody, which outlines the regulatory requirements digital asset businesses must meet in order to hold client assets.
The code provides guidance on how the BMA regulation will vary depending on which form of storage is used by the digital asset business. The regulation of these risks combined with the ability to aggregate these risks and insure them has the potential to significantly boost confidence in the digital asset industry.
The ability to fully insure digital assets held by custodians, exchanges or other financial institutions is an important step to their recognition as a safe investment alongside traditional assets.
We see this as likely to increase investment in digital assets, particularly among those who might otherwise be wary of the complexity and novelty of the digital asset markets. If the insurance of digital assets becomes commonplace, it could result in a boom in mainstream consumer confidence in these assets.
If you are interested in applying for a digital asset business licence, have a proposal on how the use of digital assets can be adopted by your business or have questions as to how your company’s use of digital assets will be regulated by the BMA, please do not hesitate to reach out to a member of Appleby’s technology and innovation team for legal advice.
We are excited about the future of the digital assets industry in Bermuda as it matures into a regulated, insurable and consumer-friendly form of investment.
