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Fintech special report: companies praise rigour of BMA’s regulatory procedures

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Kapil Rathi, the chief executive officer and cofounder of CrossTower

Bermuda’s fintech sector is small but thriving under the watchful gaze of the island’s financial regulator, according to industry professionals.

The Royal Gazette spoke with many of the 16 companies licensed under the Digital Asset Business Act 2018 about why they came here, how many staff they have hired, their plans on the island and their view of the headline-grabbing collapse last month of the FTX crypto exchange.

All spoke highly of the Bermuda Monetary Authority, the oversight body which issues DABA licences, as a rigorous, well-respected, hands-on regulator, but some said the lack of skilled tech manpower here presented a hiring challenge.

Kapil Rathi, the CEO and cofounder of CrossTower, a crypto exchange that got a full DABA licence last year, said he and cofounder Kristin Boggiano chose Bermuda over places like Malta, the Seychelles and the Bahamas — the latter being where FTX was based — because of the BMA’s strong reputation.

“Our own credibility was very important,” said Mr Rathi. “We just didn’t want to take any chance with a jurisdiction that does not have a high regard to what it means to build a proper regulatory brand.”

He said the claims surrounding FTX and its alleged misuse of billions of dollars of client funds cast the Caribbean island’s regulators in a bad light.

Referring to FTX founder Sam Bankman-Fried, who was charged this week with defrauding investors, Mr Rathi said: “If FTX will be operating in Bermuda, I don’t think he will be able to do anything that he was [allegedly] able to do.

“The Bermuda regulators are very sophisticated. They periodically review companies’ financial practices. The regulator’s job is not only to give out the licence but to supervise.”

Oliver Linch, the CEO of Bittrex Global (Bermuda), a crypto exchange that got its DABA licence in 2020, said the BMA’s oversight was “really deep” but it was impossible to know if a situation like FTX could happen here because “regulators don’t run the company”.

Oliver Linch, the CEO of Bittrex

He said: “Certainly I am, every day, conscious that everything I do is subject to real scrutiny, not just by the BMA but by the Financial Market Authority in Liechtenstein [where Bittrex is also licensed].”

Mr Linch said Bittrex came to Bermuda to allow customers access to products that could not be offered in the European Union. He said going through the “proper, full regulatory application process [in Bermuda] is incredibly hard”.

“You have to prove a lot, and on an ongoing basis we have regular dialogues with the BMA.”

Mr Linch said: “If you are going to Bermuda to avoid regulation, you have made a massive strategic error.“

That view was echoed by Chance Barnett, the founder and chairman of Jewel digital bank, which got its full DABA licence in June and hopes to start operating in the first three months of 2023.

Chance Barnett, founder, chairman and chief strategy officer, Jewel Bank (File photograph)

He insisted: “Bermuda is not the quick and easy place to come and get licensed.”

Mr Barnett said concern about the risks of crypto were well founded because globally “there are areas of this space that have been moving fast and loose and are vaguely or not fully or not well regulated …”.

But Mr Barnett said that was changing after high-profile failures like FTX, and regulatory regimes were tightening up.

“I really think we have the right mix of things in a really important time to try to introduce and operate with trust in this space,” he said of the island’s fintech sector.

“I look at the space and the DABA regime as not being about trading tokens of questionable value. I look at the DABA regime and the digital asset space as a new underlying set of technology, a new series of services, a new internet is being built.

“That’s a huge opportunity which is not just about people trading tokens and trying to make a quick buck.”

Colin McQueen, at Ensuro Re, which received a test DABA licence in January and also has an Innovator Insurer General Business licence, said the fintech industry here was “active” and “growing” and there was much enthusiasm at the Bermuda Business Development Agency’s recent Tech Summit, despite the present “crypto winter” that has seen virtual currencies falling in value.

“What’s the alternative?” he responded, when asked if the island should encourage fintech firms to come here.

“We have got this new class of business which can yield benefits and opportunities for young Bermudians.”

He said Ensuro, which calls itself the first decentralised, licensed (re) insurer on a public blockchain, came here “clearly” because of DABA.

Cormac Kinney, the CEO of Diamond Standard, a New York company which produces standardised diamond commodities and runs an electronic diamond exchange, said the draw was getting a licence from a “world-respected regulator”.

Cormac Kinney, the CEO and founder of Diamond Standard

Mr Kinney said it took his company two years to get a modified — or M class — DABA licence from the BMA, “so it was rigorous”.

Diamond Standard is now seeking a full licence, which it hopes to get next year.

“Just two weeks ago, Bermuda sent a team to our office in New York,” said Mr Kinney. “Bermuda physically came to the US and visited. It’s that level of diligence.”

He likened the BMA to a big brother who “cares for you and wants you to succeed but also wants to keep you in line, knowing that’s what’s good for you.

“So they’ve been very, very diligent. Sometimes it’s excruciating …"

Currency trading platform 24 Exchange has offices in Miami, Connecticut, New York and London but not one in Bermuda yet.

CEO Dmitri Galinov said it registered the company here initially because its customers — mainly large banks — felt Bermuda was a “good jurisdiction, very proper”.

Dmitri Galinov, 24 Exchange CEO and founder

As a foreign exchange it did not require regulation but when its banking clients, which had been resistant to crypto, changed their stance about 18 months ago, 24 Exchange successfully applied for test DABA licences.

“What’s good about Bermuda is, it’s the only country at that time that had a solid [digital asset] law,” Mr Galinov said.

Darren Wolfberg, the CEO of Blockchain Triangle Systems, which got an M class licence in April, said fintech firms gained from having a credible regulator and the island benefited from having them here.

“Where would Bermuda be without fintech?” he asked. “How many fewer legal hours would be billed, compliance hours billed, accounting hours billed, headcount hired, dollars out into the Bermuda economy both from business visits and what would be tourist visits, and then as word of mouth has spread, what are the knock-on effects of that?”

How many jobs in digital asset sector?

The Royal Gazette surveyed the firms with a digital business asset licence to get an idea of job numbers. Not all companies could be reached or shared information but most did and we identified at least 38 filled jobs and a handful of vacancies at the firms which spoke to us.

DABA test licence holders

24 Exchange Bermuda/24 Exchange Broker: forty staff in nine countries but no office or staff in Bermuda yet. It says it will open an office if it’s successful in getting a full licence. CEO Dmitri Galinov said it may be easier for some companies to pay a higher licensing fee and not be obliged to have a physical presence, since finding technical staff here could be difficult.

Apex Fund Services: declined to give the exact number of staff or how many were Bermudian. Apex Group has 35+ employees at its office in the Vallis Building on Par-la-Ville Road. Chief innovation officer Georges Archibald said Bermuda had become a “focus point of our global digital asset service”. He said: “Over the last year, we have continued to hire senior experts in Bermuda including the appointment of Bruce Jackson, chief of digital asset funds and business, as well as relocating members of our management team to the island.”

Ensuro Re: one staff member — the chief financial officer — is based in Bermuda, working from home. The work done by the small start-up firm is “not heavily numbers intensive” according to CFO Colin McQueen, and there is not a “great pool” of the technical expertise it requires. “I emphasise ‘yet’,” said Mr McQueen, who added that more staff may be taken on in future.


DABA modified licensed holders

Blockchain Triangle Systems: employs three Bermudians, has four Bermudian advisers and has hired Bermudian interns. CEO Darren Wolfberg said the office was at 46 Reid Street at Innofund. The company plans to seek a full licence and expand its operations here.

CoinZoom (Global): was not possible to reach

Diamond Standard: has four full-time staff in Bermuda — three Canadians and one Bermudian — and two vacant positions at its office at 1 Victoria Street. CEO Cormac Kinney said: “It’s growing.” The company plans to launch a larger exchange and a “significant” number of exchange staff will be on island.

Stablehouse: seven jobs at the company’s office at Ideation House, Pitts Bay Road. Marketing director Bill Skidd said the firm, along with affiliate XBTO International, was “currently in a holding pattern on headcount out of prudence in the current economy but are deeply committed to Bermuda and will look to expand our presence in Bermuda as soon as the market is fit to do so”.


DABA full licence holders

Bittrex Global (Bermuda): six Bermudians work at its office at Canon Court in Hamilton, mainly in compliance, and there are two vacant positions. CEO Oliver Linch said: “Bermuda is absolutely key to our plans as a company … when our global footprint expands and the amount of volume that goes through the exchange expands, the company will expand as well.”

BlockFi International: has filed for liquidation, with at least two jobs in Bermuda expected to be lost.

Circle International Bermuda: declined to share job and office information.

CrossTower Bermuda: two employees in Bermuda. CEO Kapil Rathi said: “At the peak, we had about five people in our Bermuda office. We are looking to bring in more and more tech talent in Bermuda. Finding tech talent has been challenging.” The company wants to bring in “technology leaders” to work for it here and train local talent and is working on developing a scheme. Mr Rathi said he hoped to talk to the island’s leaders about “more amenable” immigration controls.

IG International: has two employees on island with the expectation that this will gradually increase over time.

Jewel 2265: six Bermudian employees here, at an office in the Swan Building at 26 Victoria Street, with plans to hire more when the digital bank is up and running.

Nayms SAC: was not possible to reach.

XBTO International: six employees in Hamilton.

Stafford Lowe, from Next, an industry body for digital asset firms, said it was inevitable some companies would fail, as they do in the insurance sector, but having a strong regulator meant it could be a “controlled implosion”.

He said: “I don’t think the BMA would have let a player like FTX continue with its business.

“The BMA doesn’t just grant licences and then go away. It grants licences and then calls you up every month.

“You can’t guard against wholesale deception and fraud but the BMA does do a very good job of asking very pertinent and very difficult questions.”

He said the regulator did not “pull any punches” because of the “huge reputational risk issue for Bermuda”.

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Published December 19, 2022 at 9:35 am (Updated December 19, 2022 at 5:20 pm)

Fintech special report: companies praise rigour of BMA’s regulatory procedures

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