While frightening to some, “finance bros” and “tech bros” are now wearing the same gilets as traditional finance products and structures are being infused with digital asset adaptation.

The natural evolution of the digital asset ecosystem into mainstream sectors brings a welcome confluence of tech and finance, which is altogether exciting, useful, unique and disruptive.

However, a much less attractive body of work must be undertaken - ensuring that the regulatory framework remains fit for purpose at each stage of the industry’s development.

Bermuda has proclaimed itself as a global leader in the digital asset space and its legal/regulatory readiness will need to be equally overt.

Today, I explore two key areas of digital asset developments - tokenisation of assets and stablecoin adaptation - and Bermuda’s laws and regulations in place to facilitate these waves.

The tokenisation of assets includes the process of generating and recording a digital representation of traditional assets on a programmable platform (Bank for International Settlements definition), such as a blockchain or other distributed ledger technology.

Under the Digital Asset Business Act, 2018, “digital assets” are defined broadly, allowing Bermuda to already capture tokens and tokenisation activities within its ambit.

Last November, the Bermuda Monetary Authority issued a discussion paper on asset tokenisation, which was followed up by its feedback on March 30.

In both, the BMA noted that the definition of “digital asset business” (which includes issuing, selling, or redeeming virtual coins, tokens or any other form of digital asset) encompasses activities related to all tokenised assets.

Prospective applicants interested in obtaining a DABA licence under which traditional assets are brought on-chain, can find a home in Bermuda, based on the existing regulatory foundation.

The BMA said tokenised investments will inherently qualify as a digital asset, but they may also qualify as “investments” under the Investment Business Act 2003. The BMA is review the IBA to provide specific guidance about when a token may be considered an investment.

Moreover, the BMA said where a DABA licensee intends to conduct investment business specific to tokenised investments, they would likely be exempt from dual licensing requirements under the IBA. Similarly, with a few exceptions, where an IBA licensee intends to engage solely in tokenised investments, they may be exempted from dual licensing requirements under DABA.

Tokenised funds regulation in Bermuda falls primarily within the remit of the Investment Funds Act 2006. The current regulatory regime therefore requires licensing under the funds legislation rather than under DABA.

However, the BMA said the intention is to amend the IFA to allow a fund register to be tokenised and be maintained on-chain, and to recognise service providers that offer services solely in the context of tokenisation as having satisfied the principles that underpin traditional service provider appointment requirements.

The BMA said that licensees providing fund administration business services to tokenised funds will be exempt from licensing under DABA.

The regulator said Bermuda has two classes of insurance licence within its “innovative framework”, which, coupled with the existing provisions of the DABA as well as segregated accounts companies legislation, serve as foundations on which tokenisation of insurance products is being explored.

Parametric insurance products are primarily suited to the use of distributed ledger technology/smart contracts, and with the likely establishment of a parametric special purpose insurer licence here, there is room for facilitating innovation in that space.

The framework in Bermuda provides possibilities for tokenised shares, however, the legal recognition of distributed ledger technology-based registers would need to be assessed.

The BMA said it will consider whether changes are required to permit digital share transfer instruments. Further, the tokenisation of limited partnership and limited liability company interests may require legislative adjustments.

David Burt, the Premier, said at this year’s World Economic Forum in Davos that the island intends to become the world’s first fully on-chain national economy. Stablecoin adaptation is central to this initiative, with USDC intended to be used for everyday payments in the local economy.

This builds on the regulatory foundation for stablecoin adaptation under DABA, with entities able to issue stablecoin backed by assets in quantity and quality to support the stability of the designated peg in value of the stablecoin issuance.

Stablecoin issuers with coins backed 1:1 to US dollars can find a regulatory home here, with those pegged to other assets considered on a case-by-case basis.

Bermuda has instituted policy through which limited purpose insurers (captive classes) can utilise recognised stablecoins, including for premium collection, claims payment and as part of their regulatory capital base.

The BMA recently issued a consultation paper, and a stakeholder letter, about a new Payment Services Act, to regulate digital wallet providers, payment handling providers and payment technology providers, which will include overlaps with the DABA regime, and under which it is expected that stablecoin adaptation will see a boost from a regulatory perspective and practical use. Entities licensed under DABA are expected to be exempt from licensing under the PSA.

The regulator said it will soon provide further guidance on tokenisation, another sign that it intends to be ready for what’s next in this innovative space.

• George McCallum is a senior associate in Appleby’s corporate practice in Bermuda. A copy of this column can be obtained 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