Category Archives: Cryptocurrency

Bermuda, Blockchain, Cryptocurrency, Digital Transformation, Fintech

Digital Assets, Fintech, What?

Fairly recently, I helped my Firm draft what was initially described then as our new “Fintech Onboarding” protocol.  I’m the head of our Bermuda Fintech group. That’s really because I was involved in starting up our Fintech practice from the start.  Well, Bermuda’s Fintech industry.  

The start.

It began with my AppleWatch back in October 2017. “Can we chat tonight about a potential ICO, as I see you are a blockchain Bermuda blockchain lawyer?” I was standing in my kitchen, drinking a glass of wine.

I’m a blockchain lawyer?

Yeah. I had in my LinkedIn profile that one of my interests was fintech and blockchain. An easy Google search at that time of “Bermuda fintech blockchain lawyer” would have brought up my name, pretty easily.

I jumped on a call with the guy.  It was the CFO of an e-gaming/sports company that wanted to do an ICO using an offshore vehicle and Bermuda seemed like the right jurisdiction. It was backed by some fairly heavyweight folks in the start-up industry, so after the call, I was immediately on a call with the Bermuda Business Development Agency.

It kinda went from there. I was hurled onto Bermuda Government committees, helping draft legislation, notwithstanding helping my actual clients.

It all moved too quickly. Memorandum of Understandings were signed between crypto entities and our Government, folks flew down to the Island, started to rent office space, and headlines were all over the place… the pressure for this new industry to take-off just out of the blue was… too much. The naysayers were everywhere (“Are you kidding???”).

Quality, not quantity

So, I rang Bermuda’s bells. Attending conferences, sitting on panels, speeches, and writing articles. The thrust is, and still is: this is a jurisdiction that does focus on wanting companies to set up here with an emphasis on quality over quantity.  

When the Island’s industry was fledgling, my Firm had taken on a few ICO clients (the summer of 2018). The market was hot, but many of those start-ups ended up, well… broke. I tried to help as much as possible to get those set up, incorporated, and able to issue their tokens, but I was naive. 

Well, ok, they were naive. 

So, as a result, we lost revenue and by 2021, we wanted to try to fix it, to make sure we didn’t going forward, i.e. lose time and money. We wanted to put something into place. Some kind of protocol to help protect us from future mishaps. Understandable. We don’t want dodgy or potentially “we cannot pay you” clients. 

Fintech?

First off, OK, yes, I’m the head of our Fintech practice.  

Now, I don’t really like that word in this context. 

“Fintech.”

I will use it because I know what it means. Many others don’t. It still makes me slightly uncomfortable. 

Our onboarding policy was initially called “Fintech Onboarding.”  I had to change our onboarding protocol to “Digital Asset Onboarding.”  Not Fintech. Because fintech was being used everywhere across the Island. The growth of our “Bermuda Fintech” industry. I was also there, front and center. 

What we are, and have always been, is an offshore island building a digital asset business industry.  Crypto. Stablecoin. Perhaps looking forward, to DAO and DeFi. But, regardless, a jurisdiction that will remain one that is very well-regulated, respected, and demanding. Not for the naive. 

Many clients want that now. They want to be regulated… and well-regulated. 

This is 2022, not 2018. 

Fintech is of course technology that seeks to improve and automate the delivery and use of financial services.  It is so wide… digital banking services, mobile applications, AI/ML, education, regtech, etc. You could probably argue many more fall within its umbrella (I still like to argue that legaltech does!)

Yes, it includes insurtech (something which Bermuda now, as an industry, is working towards being a leading player in this space), and yes, it includes cryptocurrency (let’s not use the term “digital assets” anymore).

So, my Firm now has a new “Digital Asset Onboarding” policy.

It is a relief. Crypto onboarding is a totally different bucket than “Fintech”.

Chris Garrod, October 2022

Bermuda, Blockchain, Cryptocurrency, Digital Transformation, Fintech, Technology

The Fintech Flexibility Of Bermuda

After less than two years, the island’s core digital asset laws have been amended.

Bermuda’s new Digital Asset Issuance Act 2020, which became effective on May 6th, 2020, comes soon after the introduction in 2018 of two fundamental pieces of Fintech legislation.

First, we had what is commonly called Bermuda’s “ICO legislation”, amending the island’s companies’ laws to allow the issuance of digital assets to the public.

Second, we introduced digital asset business legislation, the Digital Asset Business Act 2018 [DABA], creating a framework for the regulation of Bermuda-based digital asset businesses.

The ICO legislation provided that any issuance of, say, coins or tokens to the public required that the proposed offering document related to the ICO be approved by Bermuda’s Minister of Finance [who could call upon the advice of a Fintech Advisory Committee]. The offering had to be vetted initially, but once clearing that hurdle, the offering could commence and it would not be regulated on an ongoing basis.

The DABA regulates those in the business of providing digital asset services: digital asset custodians, crypto exchanges, market makers, for instance. This legislation is aimed at companies providing these as digital services on an ongoing basis. The Island’s regulator, the Bermuda Monetary Authority [BMA] regulates these entities with the mindset of consumer protection.

There is a high bar to meet certain minimum criteria to be able to register as a digital asset business with the BMA and, once established, there are stringent ongoing AML/ATF requirements along with head office requirements.

So, in addition to the DABA and replacing the ICO legislation, we have the new Digital Asset Issuance Act 2020 [DAIA].

The Major Change

Say goodbye to the ICO legislation which was embedded into the Island’s Companies Act and Limited Liability Companies legislation. In 2018, when the legislation was drafted, the term “initial coin offerings” was popular. The term is now viewed less favourably and often associated with fraud, crypto scams and unfortunate issuances like … cryptokitties.

Call it what you want, but an initial coin offering, or any form of digital asset offering, fundamentally has one underlying purpose: crowdfunding using distributed asset technology — blockchain.

One of the key advantages to such offerings is that they offer financing for small and medium-sized enterprises [“SME’s”] and start-ups: entities which cannot contemplate undertaking an expensive initial public offering, or other traditional methods of funding to begin their business.

So Bermuda has now created the Digital Asset Issuance Act  regulating “digital asset issuances” and not “initial coin offerings”. The scrapping of the ICO legislation and the introduction of a new digital asset issuance regime ,  the DAIA ,  is dramatic. Digital asset issuances, unlike the majority of other jurisdictions, are now subject to regulation.

Bermuda’s House of Parliament [Darryl Brooks]

Hamilton Bermuda Sessions Building

The DAIA: Regulation

Digital asset offerings have become increasingly less attractive. One of the main reasons for this is the fact that there is no, or very little, regulation of this space. A majority of countries still have no digital asset offering regulation in place.

While the regulation of digital asset issuances brings certain disadvantages [such as a lack of speed to market, a degree of inefficiency and inflexibility], the increase in consumer and investor protection, greater legal certainty, and overall regulatory supervision are very attractive features for potential digital asset buyers which could help foster confidence in this sector.

For SME’s looking to raise capital a safe regulatory environment can have huge benefits.

Step forward Bermuda with the introduction of DAIA, looking to create a positive and safer environment for digital issuances.

Prospective digital asset issuers will require an application process similar to that of the DABA. An entity making an offering to the public [over 150 persons, rather than 35 persons which the ICO legislation required] must file a business plan for review and vetting by the BMA [not the Ministry of Finance]. The BMA is a longstanding, well respected regulator and the application will attract a significant level of scrutiny from the BMA.

At its core, much of the legislation has been drafted with the protection of the average digital asset investor or purchaser in mind.

Built into the legislation are numerous powers granted to the BMA specifically to ensure that digital asset issuers are held accountable for their offerings. There are certain content requirements for the disclosure documents in order for potential investors to have as much information as possible.

For example, the persons behind the issuance should be disclosed. An appropriate risk warning must appear in the issuance document clearly setting out any rights or risks in relation to the digital assets being offered. That would include detailed information regarding the investor’s rights if the offering doesn’t proceed and what substantial risks there may be which are reasonably foreseeable.

The application to the BMA must include a copy of the issuance document for the BMA’s Fintech team to review, along with the applicant’s arrangements for the management of the offering. The BMA, of course, can request such other information it views as reasonably necessary in order for it to assess the application.

The BMA is further able to make rules relating to the issuance of the digital assets and these could cover matters such as risk management, information technology and cybersecurity, financial reporting, KYC, due diligence, recording keeping, custody arrangements and any other matter which the BMA deems appropriate.

A digital copy of the signed issuance document and whatever accompanying documents are required to comply with any rules promulgated by the BMA will all be published by the BMA. An electronic “communication facility” must also kept open during the period of the offering for people to be able to post messages, see messages made by others and ask the issuer questions regarding the offering.

The facility is an excellent way to allow the persons behind the issuance to be able to respond to any queries which potential investors may have prior to investing.

Other DAIA Protections

From a high level perspective, the DAIA has embedded within it certain other protections which are provided to the BMA:

  • a requirement to appoint a BMA-approved local representative who must report certain events to the BMA [e.g. a possibility of insolvency, failure to comply with BMA conditions, material misstatements, etc.];
  • material change approval requirements [such as if the entity plans to make a new offering of digital assets or wishes to make any change to its most recent issuance document];
  • imposing a broad range of conditions, prohibitions or requirements such as removing officers, limiting the scope of the issuance and entering into any other class of transactions;
  • revoking the authorisation to act as a digital asset issuer; and
  • winding up the issuer.

There are also requirements to seek the BMA’s no-objection in connection with changes to any 10% shareholder controller or a majority shareholder [i.e. one with more than a 50% controlling interest in the entity] and there are notification requirements if there are changes of directors, senior executives, managers or officers of the entity which must be made to the BMA.

In addition to the above, the BMA has been granted various disciplinary measures [e.g. injunctions, public censure and prohibition orders], rights to obtain information [including rights of entry, if need be] and investigation rights and powers to require documents.

Map and Flag of Bermuda [blodg]

Bermuda on black World Map. Map and flag of Bermuda.Regulation Works

Government: Bermuda is a jurisdiction which already has a Fintech framework in place. It has a very Fintech-friendly Government, led by Bermuda’s youngest ever Premier, the Hon. E David Burt. He is backed by a Fintech and Blockchain development team led by Denis Pitcher, an Economic Development Department and also several private industry Fintech committees and organisations looking to help the jurisdiction develop this industry.

To facilitate formations, there is a Government of Bermuda Concierge Service which will assist entities seeking to incorporate and set up their operations on the Island. This includes assistance on matters such as registering with the Department of Social Insurance, payroll tax registration and any necessary work permit applications from the Department of Immigration.

The Regulator: Bermuda is the second-largest reinsurance jurisdiction in the world and is regulated by an advanced and sophisticated regulator which has been operating and regulating insurance companies since 1978. It has a dedicated Fintech devoted team, which operates and regulates Fintech vehicles using very similar legislation to the Island’s insurance legislation.

Just as the BMA treats insurance applicants, its door is always open to DABA and DAIA applicants. They are happy to discuss applications prior to being formally filed; that is an opportunity which is invaluable to potential issuers thinking of starting down the road towards a Bermuda formation. From the BMA’s perspective, it can be an early opportunity to weed out applicants that clearly do not meet Bermuda’s standards.

Flexibility

The Government and its advisors remain very keen to stay on top of the Fintech environment and the industry it has already built. It has been repeated many times: Bermuda is in favour of quality over quantity. The island wants to admit those who understand this regime; not those who don’t.

Bermuda will listen, and it will assist those who do. Also, with the current financial uncertainty as a result of the COVID-19 virus, the new DAIA, along with the growing digital asset business sector, should help foster increased foreign direct investment into Bermuda’s economy.

The aim of DAIA is to attract those digital asset issuers to Bermuda who wish to be regulated in a well respected, blue-chip environment which could help potential purchasers overcome their fears of investing in an unregulated space. Based on the experience the island has with its current Fintech leadership, Bermuda has an understanding of the potential for over-regulation.

The tightrope between under-regulating and over-regulating in the digital asset world is a difficult one to navigate but Bermuda is confident it has struck the right balance.

With the regulatory and legal infrastructure that has been carefully assembled, the Island offers Fintech flexibility, an element very much required in this still nascent and ever evolving industry.

 

Bermuda, Blockchain, Cryptocurrency, Digital Transformation, Disruption, Fintech

How easy is it to build a digital economy?

Bermuda has worked to be a major player in a Fintech revolution. Is it?

Fintech and Bermuda. I’m sure you have all read many articles over the last few years and seen much press regarding the rise of Fintech vehicles forming on the Island. They haven’t formed at a rampant rate, but growth has been slow and steady.

As digital assets have become more widespread and the word “crypto” more widely understood (or at least, less feared), it comes as no surprise to see more countries regulating companies carrying out offerings of digital assets (coins and tokens) and/or those who are just digital asset businesses. The main focus for most regulators: anti-money laundering, know your customer, and counter-terrorist financing measures. Regulatory authorities are concentrating on the correct thing, which is consumer protection.

Bermuda’s Fintech trail

1*re5DawpEg062NxXeRew2CAA lot happened in Bermuda in 2018 such as a bundle of new Fintech legislation which, at the end of the year was passed to lay the foundation for a new pillar to the Island’s economy.

The Island created an ecosystem for new companies to incorporate and develop their digital asset businesses under the Digital Business Digital Act, legislation created so that those businesses would be regulated by the Bermuda Monetary Authority (BMA) within one of the world’s premier offshore financial centers. Consumer protection is at the top of the BMA’s list when it comes to licensing these businesses.

Digital asset token legislation was introduced to allow companies to incorporate digital asset issuers to conduct their offerings to the public using a relatively straightforward approval process which requires the offering documentation vetted and approved by the Bermuda Ministry of Finance.

Shifting to Insurtech, Bermuda’s Insurance Act was also amended to allow the formation of innovative insurers, which can be one of the two types: (a) those entering a sandbox to experiment with their new technologies before leaving it and (b) those who don’t require that period of experimentation.

Finally, provisions were made to amend the Island’s banking legislation to allow digital asset companies to operate within the jurisdiction. While fairly common in the Far East, crypto banking is still a problematic proposition in the West. As things stand, most banks remain wary and appear not to be interested. But Bermuda is ready when the tides shift.

Progress?

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The Bermuda Government has always acknowledged that the creation of this new economy wouldn’t happen overnight. You hear it all the time.

Much formative work has been created, an example being Circle, a major crypto payment firm which has been granted a full digital asset business license (Class F) by the BMA.

A dedicated Bermuda Tech Week occurred in mid October with a TechBeach Bermuda within it. It was a roaring success for the Island.

The foundation for a Fintech economy has undoubtedly been laid in Bermuda. But has it been laid successfully?

Expectations. In November 2017, the Government announced that the Island was launching itself into the Blockchain arena. Two working groups — a blockchain legal and regulatory working group and a business development working group were formed to assist in developing the ecosystem. I know all too well as I was in both of these groups.

The token offering legislation was drafted swiftly and passed in July 2018. The first Insurtech changes were passed in the same month. The banking legislative changes were pushed through in August. During this process, the Digital Asset Business Act was drafted primarily between the Government and the BMA, so that as soon as the summer break was over, it was passed in September 2018.

The legislation — much of which has now already been updated or is in the process of being amended- wasn’t perfect, but it certainly was a fantastic effort to push the Island into this competitive arena. The process for registering either as a token issuer or as a digital asset business remains a work in progress. Mistakes along the way have occurred.

Rome wasn’t built in a day and Quo Fata Ferunt?

1*KlIRC7pGFDiarRrKidwq9wIn late 2017, the Bermuda Government dived headfirst into the world of digital transformation and committed itself both to looking at the use of Blockchain technology with a view to improving as many sectors of the Island as possible, and also to embracing Fintech generally to bring new business to the Island.

Bermuda’s motto is “Quo Fata Ferunt” — Wherever the fates lead us. One interpretation is that Bermudians can face life as it is, no matter where it takes us. The other, perhaps, is that whatever obstacles we have to confront, we will confront them with endurance and determination. The way Fintech has been introduced, one thing is for sure: Bermuda isn’t merely waiting to see where we may end up, and there is no stopping Bermuda and its determination to become a leading Fintech jurisdiction.1*MPgNZPVY7dduQyeKvUwRng

Banking, Bermuda, Cryptocurrency, Digital Transformation, Disruption, Fintech, Technology

“Do you take credit cards?”

When did you last hear someone say that? If I had to guess, for most people, perhaps 2 or 3 years ago. Perhaps at a cafe, in a taxi?

But it is unbelievably rare now.

Taking Bermuda, where I live, as an example. Bermuda’s oldest bank, The Bank of N.T. Butterfield & Son Limited, announced a little while back that it had to take the unfortunate action of allowing 30 employees to take early retirement, making 11 employees redundant and closing retail banking services (“walk-in’s”) and drive-thru teller services at one of its branches.

Fintech is the overriding catalyst behind the job cuts. “Walk-up and drive-thru ATMs will remain in place” according to the press release, which also emphasized the Bank adopting a “more automated back office environment.”

First, the “tech” part: technology. People still bank using ATMs (a technology which will celebrate its 50th year anniversary this year) but have increasingly moved online. The growth of online banking is leading to the death of [physical] retail banking. People generally don’t use traditional retail banking services, let alone drive-thru banking any more. Those services that might, you know, involve people.

I just haven’t used a bank teller for… I can’t remember how long.

 

And the “Fin” part — a bank is like any company, and although there are examples of socially responsible companies, most simply are firmly focused on one thing: return to shareholders. As painful as it may be for staff, closures of branches and employee cuts are required to make them leaner and more profitable. In order to compete with other banks and financial institutions, their focus has shifted to creating easier, more flexible online banking services for their consumers.

The Debate

There has been a lot of debate over what can or should be done regarding those individuals who have lost their jobs or taken early retirement. One of the frequent questions: “who will be next”?

The initial statement from Bermuda’s Premier Burt: “the Government will increase our efforts to diversify our banking sector as a matter of national priority.” Diversification must in part allude to Bermuda’s development of crypto banking and digital asset businesses.

Both the Island’s new Digital Asset Business Act 2018 and the amendments to The Banks and Deposit Companies Act 1999 (which accommodates crypto banks to form on the Island) will result in the formation of new licensed entities which will have to have a physical presence in Bermuda and should provide some employment opportunities. Crypto banking and digital asset financing will also develop in Bermuda over time.

1_9mFgmLFaq0KKNMtcz6Kj-Q@2xThe Potential

It is up to the companies themselves within financial sectors to adapt to the new technological pressures that a disruptive, Fintech driven environment creates.

New skill sets can be developed. Retooling and transitioning from traditional banking to Fintech technology can happen but it won’t be easy.

Employees within the existing banks and financial institutions may be able to take advantage of the new opportunities to work in Fintech related areas which are new and exciting, so long as there is a willingness to learn and adapt. These companies can try to re-skill their existing employees, or at least give them the opportunity to work in other, more viable areas within the organization itself.

Potential jobs with “cyber”, “tech” or “data” in their titles may be attractive to those for looking for future employment opportunities, particularly in the cybersecurity sector.

Of course, in addition to the pure financial aspects of Fintech, the increase of automation, artificial intelligence and machine learning are also becoming bigger factors. So is the use of chatbots. As machine learning increases in sophistication, human financial advisors are also being replaced by robo-advisors.

 

1_uCqnn2y2q_Sb5wTiBQp47w@2xThe Reality

So what, realistically, can Bermuda’s Government do to help protect jobs in the financial sector?

Bermuda’s digital asset businesses and crypto banking are being encouraged. The amendments to Bermuda’s Insurance Act to attract new Insurtech companies forming is also helpful, as many new Fintech companies, outside of finance, are in the Insurtech sector.

So, “diversification” will occur. Everything can and will be done to speed up that process. From Bermuda’s perspective, being a leader in the digital asset business sector and a creative force in the crypto banking sector will not just create jobs; the hope is that it will make the Island an innovative, global jurisdiction.

But the reality is: when looking at the disruption Fintech may cause at this current time …. it is really just an impossible question to answer in the short term. It is an impossible question to ask anywhere.

We have an uncertain future full of disruption but one also full of technological efficiency, advancement and promise…. advancement and promise for those who are willing to embrace the possibilities which Fintech may bring.

But those within the traditional financial sector will be under the most pressure to adapt because this kind of disruptive change will hurt. It will hurt those entities who are slow to move and regrettably it will hurt a number of people as a result, no matter what.

This is a disruptive digital revolution which you cannot stop. But you can prepare for it.

 

1_R-oh4wA6CnjWF_et9IhkFw@2x

Banking, Bermuda, Blockchain, Cryptocurrency, Digital Transformation, Fintech, Internet, Technology

Bermuda’s Digital Asset Revolution

It’s called The Digital Asset Business Act 2018, which doesn’t really sound that interesting, I suppose.

But, yes, it is.

The Act introduced the concept of digital asset businesses setting up and being regulated in Bermuda. Creating a new regulatory approach, while also one which is very much founded on the Island’s existing, successful (re)insurance industry.

Basically, the Act is trying to achieve what the Island’s Insurance Act did in 1978: the establishment of an entirely new sector of Bermuda’s economy. One which is regulated by the Island’s prime regulator, the Bermuda Monetary Authority.

An industry which over time will become a new “economic pillar” for the Island. A fledgling digital asset industry which may also turn out to be an innovative example for other jurisdictions to follow.

Digital Assets and Digital Business

As a basic summary, digital assets are just assets which are digital. They cannot be used as legal tender; they are meant to be the assets of the person issuing them and they are accessible using virtual ledger technology (i.e. blockchain).

As set out in the Act, “digital asset businesses” will do the following:

  • issue, sell or redeem any kind of digital asset (anyone issuing digital assets or allow customers to redeem their digital assets into cash);
  • be a payment service provider including using digital assets to transfer funds;
  • operate an electronic exchange (Coinbase, Krakken, Bittrex, Binance are examples);
  • provide “custodial wallet services” (basically a service provider where they store and maintain “keys” for controlling your digital assets, which is then kept on servers of third party service companies who can then allow you to send, receive and otherwise monitor your digital assets); and
  • be a digital asset service vendors, i.e. someone carrying digital asset transactions for another person or those who are essentially “market makers” — traders of digital assets.

Licensing

Like insurance companies, digital asset businesses are subject to regulation. From an insurance perspective, the Bermuda Monetary Authority (BMA) will always view policyholder protection as being the most important factor when regulating insurance vehicles.

When it comes to digital asset businesses, they look at consumer protection.

This is a whole new ballgame as we are now dealing with digital assets. An entirely new industry. The BMA, like many other global regulators, issued a warning to the public generally about initial coin offerings (ICOs) and the fact that they are not subject to regulation. Bermuda’s own Initial Coin Offering legislation came into effect in May 2018, requiring ICOs to apply for their offerings to be approved by the Island’s Ministry of Finance.

The Digital Asset Business Act, which came into force in June 2018, is focused entirely on actual digital asset businesses and not ICOs. These businesses which operate in or from within Bermuda absolutely must be regulated.

There are two separate classes of license which the BMA can issue:

  • a Class M license: one which can carry on activities for a defined period. To date, one company, Omega One Bermuda Ltd., has been issued a six month Class M license to act as an exchange and a custodial wallet service provider; and
  • a Class F license: one which can carry on all of the activities as described above. To date, none have been issued such a license.

The BMA has to be cautious. Rightly so. The Act was drafted based on a mix of the Insurance Act provisions as well as existing FATF recommendations. Similar to the Insurance Act, there are head office requirements, broad intervention and disciplinary measures given to the BMA, and also provisions to notify the BMA regarding matters such as license breaches, material changes of business, etc.

The application process is also quite similar. A business plan needs to be filed with the BMA which focuses on how consumers will ultimately be protected — e.g. cyber security details, risk management functions, insolvency mitigation and more than anything else, an overview of how the applicant’s Anti-Money Laundering and Anti-Terrorism Financing policies will be implemented. AML and Know-Your-Customer requirements are absolutely key in this very nascent digital asset business world.

The BMA has drafted a proposed Code of Practice which the regulator will expect digital asset businesses to follow (similar to the Code of Conduct which insurance companies also must meet). The requirements are detailed and include matters such as requiring all digital businesses to have IT security awareness training, monitoring key storage, data sanitation requirements…. the list is lengthy.

In short, Bermuda’s licensing requirements show that it is not moving lightly into the world of digital asset business. Bermuda wants to be at the forefront of a new industry, but it wants to do so in such a way to ensure its reputation remains intact.

Looking Forward

So what next?

Crypto banking. The gates have been opened and the Bermuda Government has also amended the Island’s banking legislation to allow both digital asset businesses as well as digital asset or security token issuers to do business in the Island, with the prospect of potential “crypto friendly” banks to form at some point in the future.

Digitised Banking / E-IDs. Although nothing has been formally implemented, there has been much talk regarding the introduction of a national electronic ID platform or e-ED. It would be hard to imagine that prior to the end of 2019, the Bermuda Government in co-operation with other private industry players does not implement such a service.

Cyber-insurance. Bearing in mind Bermuda being an existing insurance and reinsurance market leader and also taking into account the increasing threats represented by cyber criminals which must be handled by insurers, it feels inevitable that heading further into 2019 Bermuda will be at the forefront leading the way to address these concerns.

Looking Back?

A year and a half ago, in November 2017, the Bermuda Government, the Bermuda Business Development Agency, certain OECD experts and various sectors of Bermuda’s private industry came together, as stated by Premier Burt: to create a “bring new business to the Island, help boost GDP and create meaningful jobs, while helping to prepare our financial system and economy for the future.”

A lot has happened since then, with much more on the horizon. Bermuda appears certainly to be looking forward and not back.

Chris Garrod, April 2019

Banking, Bermuda, Blockchain, Cryptocurrency, Digital Transformation, Fintech, Internet of Things, Technology

The final pieces of Bermuda’s puzzle: crypto banks and digital transformation

pig

(C) CryptoVest

Bermuda’s Banks and Deposit Companies Act was amended in August 2018.

While the amendment legislation is less than three pages long, the amendments should be far-reaching. Its provisions permit the creation and/or licensing of a new category of Bermuda bank to be regulated by the Island’s primary regulator, the Bermuda Monetary Authority (BMA). The new bank’s target customers should be either:

(a) digital asset (token) issuers approved by its Minister of Finance pursuant to the Island’s recent legislative amendments to its companies legislation (commonly referred to as Bermuda’s new “ICO legislation”); or

(b) companies which have been issued a digital asset business license under a new regime created by the Digital Asset Business Act and therefore regulated by the BMA.

Already an established and well known offshore financial center and having recently branded itself as being “Fintech-friendly”, the purpose behind the banking amendments is the creation of crypto banking in Bermuda, allowing Fintech clients to deal with crypto; buying and selling cryptocurrencies, whether using fiat (i.e. real money) or other forms of crypto.

The Crypto Banking Sector

Several onshore financial institutions have embraced the use of distributed ledger technology in order to clear and settle cross border – but fiat – payments using that particular technology (blockchain). But the development of crypto banking has been scarce. On a worldwide basis, there are very few banks, let alone jurisdictions, which are genuinely crypto friendly.

The existing banking situation in Bermuda is no different. In October 2018, Bermuda’s Premier Burt stated that the Island was heading into the Fintech banking sector whether the existing Bermuda local banks “liked it or not”. The ambition was made very clear that this was just the beginning of a long-term project when he stated: “We understand the future we are trying to build.”

Crypto banking requires banks to venture into a nascent, volatile and perhaps, from a security standpoint, risky new territory. Cryptocurrencies have an uncertain edge to them, and banks are, by their very nature, cautious.

Bermuda’s “Fintech-friendly” position

Looking back to early July 2018, while the new “Fintech-friendly” banking legislation was being debated and then approved by the Island’s legislature, the Premier announced that “Bermuda must be nimble or we will be left behind”.

The ICO legislation quickly came into force later that same month, allowing Bermuda vehicles to offer and issue tokens to the public (similar to a company issuing shares in an initial public offering). In addition to a filing requirement with the Registrar of Companies in Bermuda, an offering document related to the offering must be vetted and approved by the Bermuda Minister of Finance prior to the commencement of the offering, but there is otherwise no ongoing regulation.

The Digital Asset Business Act came into effect in September 2018 to allow digital asset platforms, exchanges, digital wallet providers and vendors to operate in Bermuda under the supervision of the BMA. As regulated entities, there is a physical presence requirement, and therefore the Government’s hope is that these businesses will inevitably lead to new jobs being created.

The new crypto banking legislation has only recently been introduced in Bermuda, so it is not surprising that no new crypto banks have yet been approved and licensed. Very few institutions have the resources to create a new Bermuda based bank which meet all of the banking and AML/KYC requirements imposed by the BMA. The same applies to any new applicants wishing to obtain a license under the Digital Asset Business Act. The standards imposed by the Bermuda authorities in order to be regulated are very high.

Bermuda’s Crypto friendly reality

A few statements have been made recently regarding the possibility of a new bank being set up in Bermuda to start accepting crypto and blockchain companies as clients.

From a general Fintech perspective, there is no doubt that the introduction of a crypto banking sector is one of “the final pieces of the puzzle” as described by Bermuda’s Premier last year.

Bermuda has certainly begun the process and it has moved rapidly. The Island’s Government passed three pieces of legislation in 2018 (not including the ‘Insurtech’ changes to its Insurance Act), all dedicated to building a new digital platform its future; a remarkable effort for any jurisdiction.

Resolving the crypto banking sector is a lofty and well overdue worldwide issue, bearing in mind the inevitability of digital assets and cryptocurrencies becoming the norm. Switzerland is a jurisdiction which has also recognized this and is developing a new crypto banking sector (having already a well-established “Crypto Valley” in Zug).

Bermuda appears to have laid a promising foundation for new entities to do business in or from within the Island, creating jobs and digitally educating its young people. The recently formed Bermuda Fintech Business Unit is a good example of where the Island should be heading, not just from a Fintech perspective, but from the perspective of digital transformation in its entirety.

The developed world is now in the midst of a Fourth Industrial Revolution (4iR), one which is changing the way we work and live: disruptive technology and trends such as robotics, artificial intelligence, the Internet of Things (IoT), 3D printing, automation, chatbots, augmented and virtual reality, etc. Most significantly, connectivity – the 4iR is connecting our physical world with an increasingly digital one.

Of course, the inevitability of a new banking sector – what may still loosely be described as “Fintech banks” – is no different.

But when one says “Fintech banks” that shouldn’t be a category of bank which merely accepts crypto payments. “Fintech” is a far broader term. Such banks are ones which have or are embracing technologies such as chatbots, artificial intelligence, IoT, all which ultimately have one thing in common – providing a far better, more efficient customer experience than they are able to provide now. The existing banks in Bermuda are already using or investigating the use of Fintech.

If the Island wants to truly evolve and embrace a digital future, the future of job creation and its youth is not crypto, it is digital transformation and riding the wave of digital disruption. The requirement is to think outside of the box, away from just crypto, and focus on what is happening on a worldwide basis. From a financial perspective, that is a Fintech world which comprises so much more than one tends to think: digital asset issuers, digital asset exchanges, financial institutions utilizing digital platforms and new technologies.

While Bermuda must be nimble moving forward, it must ensure it takes its time to build its digital future. The creation of a crypto banking sector will hinge on the establishment of a broader Fintech sector with clients for those crypto banks to service; ensuring that all of the pieces of the puzzle which the Island is trying to put into place is done so carefully and correctly is going to be essential for the future of its proposed digital transformation.

Chris Garrod, February 2019