Bermuda: The Offshore Digital Assets Industry: Too Much Risk For Regulators, Banks And Insurers?

Last Updated: 11 June 2019
Article by Mark Chudleigh
Most Popular Article in Bermuda, June 2019

For most of us 2017 was the year when we first heard the word "blockchain". That year also saw the value of bitcoin grow 1,300 percent and increasing interest in "digital assets" such as cryptocurrency and initial coin offerings (ICO) using blockchain technologies. The intervening period has seen a steep learning curve for regulators, banks and insurers as they seek to understand the new digital assets industry and the risks that come with it.

Many digital asset start-ups view offshore financial centres (OFCs) as natural domiciles for their nascent businesses: most of these ventures have no attachment to any particular jurisdiction, are inherently mobile, do not require large numbers of employees or extensive office space and typically engage with investors and counterparties from around the globe. Therefore, the tax neutrality offered by OFCs is an obvious attraction, leaving investors and digital asset holders subject to the taxation regimes in their home jurisdictions without exposure to additional taxes and further red tape in a second jurisdiction.

Start-ups are also attracted by the relative ease of access to OFCs' government representatives and regulators. Typically, there is only one relevant regulator in an OFC, unlike in onshore jurisdictions where multiple regulatory bodies give rise to multiple compliance environments. Offshore regulators and legislatures are not only accessible but they can be more receptive to the individual needs of start-up businesses, crafting bespoke legislation to facilitate innovative business models, and granting accelerated regulatory approvals when justified to ensure start-ups can get off the ground.

The battle for critical mass

By late 2017 several OFCs were scrambling to position themselves as the jurisdiction of first choice for emerging digital assets businesses. These OFCs perceived there to be great value in being the first to establish the necessary "critical mass": once a particular jurisdiction establishes itself as the leading domicile, with the most responsive and knowledgeable regulator and expert service providers on hand, it then becomes much harder for other OFCs to displace the lead jurisdiction's dominance. This is what Bermuda achieved as the dominant offshore centre for insurance and Cayman has secured as the leading jurisdiction for offshore investment funds.

The desire for early critical mass led to several OFCs embarking on marketing campaigns to attract new digital asset businesses to their shores, offering incentives such as work permit waivers and licenses to purchase local property. To accommodate these new businesses, legislatures pushed through new statutes and regulations, governments appointed ministers with special responsibility for the digital assets sector and "sandbox" initiatives were announced to encourage start-ups and innovation.

But these strategies were not without risk and the push to attain critical mass was a veritable egg and spoon race for most OFCs who had to balance the desire to be "first to market" with the need to proceed with due caution to minimise the risk of reputational harm if the attendant risks were not clearly identified and managed. With lack of transparency and traceability being hallmarks of digital assets, the start-ups carried with them obvious risks that they would be used to promote money laundering and other criminal activity.

In recognition of the risks presented by digital assets businesses (including to third parties), OFCs produced extensive legislation and codes of practice requiring detailed business plans and risk assessments for licensing applications, prospectus filing for offerings, written AML, conflict of interest and outsourcing policies, the presence of non-executive directors (in most cases), enhanced customer due diligence for specified categories, qualified compliance officers and AML compliance officers.

Reality bytes

Then in 2018 bitcoin and other cryptocurrencies plummeted in value, widespread theft and fraud was reported and in one well-publicized case the CEO of a digital asset exchange died without sharing the all important exchange password. Media investigations into crypto-promoters revealed that all that glitters is not gold and regulators realised that, while politicians are happy to appear in pre-launch photo opportunities, it would be the regulator in the spotlight when financial scandals result.

Much to the irritation of government officials, bankers - converted to conservatism after years of financial scandals - refused to offer banking services to the crypto-industry. Insurers, whose capacity was needed for the various first and third party risks (from theft cover for the digital assets to D&O and E&O covers) shared the concerns of the regulators and bankers and had limited appetite for these unfamiliar risks.

By the end of 2018 the future of the digital assets sector was not looking bright and enthusiasm in the OFCs and insurance markets had waned.

Overcoming the obstacles

Despite the setbacks of 2018 and increased skepticism, cryptocurrencies as a means of exchange and asset holding and ICOs as a source of funding will not be consigned to history. Far from it: many see the problems of 2018 as mere teething troubles as regulators and commercial counterparties get to grips with the unique challenges presented by these emerging businesses and predict that confidence and growth will return. Indeed, the recent announcements that Google intends to launch a cryptocurrency in 2020 and that a number of major US retailers – including Crate & Barrel, Nordstrom and Whole Foods – will accept certain cryptocurrencies, will have boosted confidence in the future of digital assets.

The challenge of "getting to grips" with digital asset businesses is one that is shared by regulators, banks and insurance companies, all of which are trying to figure out how to identify the well-run, responsible and legitimate businesses from the cowboys and crooks. Although each will have a different perspective, when looking at digital asset start-ups all three look for comfort-inducing features such as:

  • The identity and track records of the individuals behind the start-up
  • The presence of independent directors on the board
  • The identity of service providers and auditors
  • The presence of qualified compliance and anti-money laundering personnel
  • The profile of the investors.

When considering proposals for insurance, underwriters should have a high level of current data available to them including the detailed risk assessments and other information that accompanied licensing applications to the regulatory authorities in the OFC. Cautious insurers may wish to limit their risk appetite to those OFCs with the most stringent regulations on the basis that the less reputable and higher risk businesses may prefer to avoid those jurisdictions in favour of those OFCs with the lightest regulatory touch.

A bright future?

However, comparisons between the rapid growth of the insurance and funds industries in Bermuda and Cayman and the emerging offshore digit assets sector are inappropriate. Unlike digital asset businesses, the insurance and funds industries were already highly developed industries when they moved offshore. Insurance start-ups and offshore funds were, for the most part, run by experienced individuals, backed by sophisticated capital and assisted by experienced service providers. Whilst these industries may have been new to the OFC, offshore regulators were able to hire experienced personnel from overseas and could adopt tried and tested onshore regulations and practices.

This type of environment simply does not exist for fledgling crypto-currency and ICO risks and there is little if any actuarial data available to assist loss analysis or insurance pricing.

However, the stakeholders have a shared interest in seeing the digital asset sector succeed and, in time, a combination of robust risk management by the industry and sophisticated analytics and oversight by the regulators, bankers and insurers (combined, no doubt, with some learning from mistakes) should create an environment conducive to the steady growth of the industry. Whilst it seems likely that much of this growth will be offshore, it remains to be seen which OFC will be the first to establish the necessary critical mass and solid regulatory reputation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Kennedys operates in Bermuda in association with Kennedys Chudleigh Ltd.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions