The Bermuda Monetary Authority – also known as BMA – has released a draft digital asset custody code of practice for a consultation. The main intention behind this release is to provide better regulatory standards to an industry that is searching for legal clarity around the world. The information was released on December 21st by Abacus Journal.
The draft code is related to the standards that the BMA will be imposing to companies dealing with client’s cryptocurrencies. Firms that are not able to be compliant with these standards will be under investigation regarding their business.
There are different issues that are addressed by this code of practice related to virtual currencies.
The BMA will be imposing a proportionality principle. In this case, if there is a company with very high risk or with a very unique business, it might be possible for the regulatory agency to increase the standards used to evaluate this firm.
An important topic is related to the way in which companies must hold their customer’s funds. The BMA recommends having a minimum balance kept in hot storage and the main balance in cold storage wallets. This would allow firms to have clients’ funds protected against any problem such as hacks or attacks.
The Coincheck cryptocurrency exchange in Japan experienced a hack on its NEM (XEM) tokens earlier this year due to the fact that they did not hold the virtual currencies in a cold storage wallet.
Exchanges and platforms will also have to develop a fraud detection protocol that would allow them to detect transactions that are suspicious. Furthermore, these companies will also have to document policies and procedures to client identity verification requirements. Several countries impose exchanges to have a strong Know-Your-Customer (KYC) system.
About proof of asset valuation and reserve Abacus Journal wrote about the draft:
“The draft code mandates that digital asset business have to disclose the methodology related to its asset valuation calculations and, when possible, use recognized benchmarks or observable, bona-fide, arms lengths market transactions.”
Firms should also have controls in place to ensure that digital assets are securely created and sored. Moreover, is necessary for the business to perform an regular internal audit of the backup seeds. Furthermore, these companies will have to demonstrate that clients have perpetual access to all assets in custody in case the business shuts down its operations.
There are different countries that are trying to create better regulatory systems for virtual currencies and blockchain technology companies. Countries such as Japan, Malta or Switzerland are already ahead of other nations in terms of crypto-regulations. It seems that Bermuda wants to also improve its legal framework.