Virtual currency in Bermuda
Many people in Bermuda will now have heard of virtual currencies, most likely in conjunction with “Bitcoin”. However, beyond an understanding of the idea that a virtual currency is some form of asset without a physical form, the conversation of what it is and how it could be integrated into Bermuda often goes no further.
This article puts forward a high level overview of what a “virtual currency” is and identifies some of the ways in which it may be utilised so as to complement Bermuda’s already thriving reputation as a place to do business. It does so while also outlining some of the obstacles that would need to be considered in order to do so successfully.
The Financial Action Task Force (FATF) is an inter-governmental body whose members include Canada, the UK and the US. FATF describes a virtual currency as being a “digital representation of value that can be digitally traded and functions as (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value, but does not have legal tender status (ie when tendered to a creditor, is a valid and legal offer of payment) in any jurisdiction”. While the third limb may or may not remain so, this is a fair summary for the purposes of this article.
A further distinction made by FATF is between so-called convertible and non-convertible virtual currency. The former is something with an equivalent value in real currency (eg Bitcoin) for which it can be exchanged and the latter is restricted to a particular business/virtual world (eg the currency used to make purchases from the online stores maintained by games console manufacturers).
For the purposes of developing and facilitating business in Bermuda, our focus here is upon the convertible forms of virtual currency.
Such virtual currencies are often “decentralised”, which means that there is no central administering authority with monitoring and oversight functions as would be the case with the currency issued by a sovereign nation. Instead, trust in the currency derives from the fact that its cryptography is utilised to allow for and verify the secure transfer of the virtual currency between users.
So how is virtual currency starting to fit into and develop established business structures, and how might it do so in Bermuda?
Drawing a parallel, an investor may wish to hold gold because, like convertible virtual currencies, it has an equivalent value in real currency that can fluctuate — and the investor has hopes of realising a gain. However, that investor may not wish to physically hold and be responsible for/organise the safe storage of the gold itself. Instead, that investor can buy interests in a fund that makes such investments.
A Bermuda company could be (and we understand has been) used to provide the same opportunity to potential investors in virtual currencies. Of course, should such a fund fall within the scope of Bermuda’s Investment Funds Act 2003, authorisation may be required by the Bermuda Monetary Authority.
One might also question whether it would be possible for a Bermuda company to offer a class of shares denominated in, and subscribed for by way of, virtual currency. The Companies Act 1981 was not drafted with virtual currency in mind and would appear to require that share capital be denominated in a “currency”. It is unclear whether a virtual currency will ever be considered a “currency” in Bermuda for these purposes and detailed consideration of the point may need to be undertaken if virtual currencies continue to garner popularity and demand for such a company were to grow.
The distinction between a Bermuda entity investing and having its capital denominated in virtual currency also makes for an interesting point for consideration in the insurance sphere. Again, while we are seeing insurance business being written in the context of the risks associated with holding and storing virtual currencies, further work would need to be undertaken to consider whether it would be possible and, if so, desirable to allow an insurer’s capital requirements (at least partially) to be met through virtual currency.
Acceptance of virtual currencies, or at least an awareness of the need to regulate them, has meant that we are also starting to see jurisdictions regulate exchanges used to trade this new asset class. If Bermuda were to enter this space, given its already well respected and established reputation in the regulatory sphere, Bermuda may be able to attract a new line of business activity and service providers to the Island.
Of course, to pursue that, Bermuda’s reputation and investor confidence would need to be protected through due consideration of how securely such investments could be held and the way issues of anti-money laundering and antiterrorist financing would be addressed.
While the issues outlined above would need to be carefully considered, a number of jurisdictions are engaging with virtual currencies. If there is too much of a “wait and see” approach here, it may be difficult to break what could become established players’ holds in markets should Bermuda wish to go “online” at a later date.
Lawyer Matthew Ebbs-Brewer is an Associate and a member of the Corporate Practice Group at Appleby. A copy of this column can be found on the Appleby website at www.applebyglobal.com. This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer
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