Looking for the right fit
Bermuda’s focus on fintech has been primarily around economic diversification in the application of technology. This is much broader than the narrow scope of simply initial coin offerings and cryptocurrencies.
We have spent the past two years discovering what business models fit our unique value proposition as a jurisdiction, connecting with key influencers, promoting our existing offerings and aligning ourselves with industry needs to expand our horizon. The challenge is that this space represents a fast-moving industry that is constantly innovating, and there are a narrow scope of businesses that align with what we can offer as a jurisdiction. Thus, we need to regularly engage in discussions with a variety of players across the space to discover and identify product market fit or opportunities for where we can realign our offerings to match their needs.
The primary identified fit has been companies launching digital assets and associated-services businesses that wish to leverage our high-standard regulations to differentiate themselves. Our regulations are fashioned around risk management, mirroring our approach to developing the captive insurance industry 30 years ago.
They represent four key pillars of risk management requirements:
• Secure possession or custody of digital assets
• Compliance with global regulations such as Know Your Customer and Anti-Money Laundering
• Business risks
The industry and end customers as a whole are waking up to realise that risks are not being well managed in this industry. Stories of exchanges being hacked like the recent hack of Binance are common. As are stories of company principals improperly securing assets such as the founder of QuadrigaCX, who is said to have died with sole control over most of the clients’ assets.
Compliance is largely coming as an afterthought for many, is poorly understood and will cause problems when jurisdictions with lax regimes struggle to manage the risks. Business risks are rampant as companies lack cohesive plans to accommodate adverse scenarios that can affect their ability to function. A key factor with each is understanding both the plans in place to prevent risks from impacting a business, but also mitigating the fallout if risks do occur.
This is where Bermuda has differentiated itself and attracted interest from businesses such as Circle, who are backed by the likes of Goldman Sachs and founded by a tech entrepreneur such as Jeremy Allaire, who has strong tech-industry pedigree. These are companies who are following best practices and wish to clearly differentiate themselves from those who are not.
They are gravitating to Bermuda’s regulatory framework that sets high requirements to manage these risks. To continue developing this line of business, we need to raise awareness among the industry of how we differentiate ourselves and then work to drive these leads through our sales pipeline to successful incorporation and, ultimately, job creation.
With that said, our focus is not limited to digital assets. When speaking of blockchain, distributed-ledger technologies and technology generally, there is a very wide scope of potential businesses that may fit what we can offer. Although it may be called “fintech”, the scope is really broader, encompassing the application of tech across any industry vertical, much like how finance itself crosses verticals.
We have actively engaged industry thought leaders to better understand where the industry is and where it is going. Blockchain and distributed-ledger technologies are fundamentally built on the concept of digitising agreements between parties, often referred to as smart contracts. The potential of this technology is considerable, but will take time to evolve and mature.
The first implementation of this new technology has been the development of digital currencies, which represent simple contracts and have given rise to cryptocurrencies such as bitcoin, and interbank settlement mechanisms like Signature Bank’s Signet and JP Morgan’s JPM coin.
Some bad actors have leveraged confusion in this space to push questionable ICOs. However, there are numerous good actors such as Circle that are building real innovative solutions and ecosystems around this technology.
Much of the real immediate opportunity for Bermuda is looking to digitised versions of USD and focusing on leveraging this technology to make payment processing cheaper and more competitive. We are working hard to identify, connect with and attract companies such as Circle, who are doing exactly this.
The second implementation of this technology is more sophisticated contracts that tend to represent traditional securities instruments. The codification of securities is still a developing space, as there are many companies dedicated to automating regulatory compliance processes such as global-securities laws and traditional concepts like dividend payments and voting. Some eye the potential for creative new derivative structures that blur the lines between traditional instruments and create new incentive models.
Much of the present focus and sweet spot for Bermuda is around digitising secondary markets that today are inefficient, lack liquidity and have complex regulatory burdens and settlement procedures. We are working to identify key players such as Velocity Ledger that are building institutional-focused platforms that automate much of this complexity.
The third implementation of this technology is key components that act as infrastructure and building blocks for more advanced automation of agreements. These primarily represent services businesses such as banks, compliance providers, digital-identity providers, insurance providers, data oracles and others who will set the foundation for the future.
Companies like Shyft are building platforms that will allow key compliance processes such as KYC/AML compliance to be transferable and reusable across a variety of businesses. This will significantly reduce the costs of compliance, accelerate the development of the industry and improve our competitiveness as a jurisdiction.
The fourth implementation of this technology will be more advanced forms of automated agreements among parties, particularly the automation of legal agreements and businesses processes that today lack standardisation and are primarily handcrafted at significant cost and burden on global commerce.
The automation of contracts has the potential to improve observability, verifiability, privity and enforceability of traditional processes. It has the potential to take accounting processes and automate them to the point where there are clear, observable insights into the performance of contracts.
Audit processes to detect violations of the contract can transition from being something that happens reactively to something that could theoretically happen in real time. There is potential to provide greater protection and control over the information about a contract, its parties and its performance. Finally, the improvements in observability, verifiability and privity lead to easier enforceability, where enforcement can be automated or relegated to arbitration, with the arbitrator having access to the necessary details. All of these components combined have incredible potential to unlock tremendous value for global commerce.
Absolutely critical to Bermuda attracting these industries is the creation of environments that allow them to flourish under the guise of a jurisdiction that can adapt quickly to their needs, but keeps a keen eye on the management of risks — as we always have. It is essential that we work to discover what business models fit our unique value proposition as a jurisdiction, connect with key influencers, promote our present offerings and align ourselves with industry needs to expand our horizon.
The only way we can anticipate and react to the needs of the industry is to ride the wave like a dolphin riding the bow waves of a boat — staying close to those leading the way. This is why it is essential that we continue to regularly engage in discussions with a variety of players across the space to discover and identify product market fit or opportunities for where we can realign our offerings to match their needs.
• Denis Pitcher is a Bermudian tech entrepreneur with an interest in exploring the potential of blockchain and distributed ledger technologies for Bermuda. He is a fintech consultant to the Bermuda Government’s fintech Business Unit as well as a tech cofounder and chief architect of resQwest.com, a global tourism technology solutions provider. He can be reached at firstname.lastname@example.org
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