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Huge blockchain opportunity seen for island

Cutting edge: R3 demonstrated how distributed ledger technology could work in the insurance and reinsurance industry, at a presentation during the ILS Bermuda Convergence conference this month (Photograph supplied)

Bermuda has the potential to be a leading light in the development and implementation of blockchain technology.

A high-profile company researching and developing blockchain, R3, visited Bermuda and gave a demonstration of the potential benefits distributed ledger technology can bring. The demonstration was attended by brokers, insurers, reinsurers and financial services organisations.

Tim Grant, chief executive officer of R3 Lab and Research Centre, and consultant Todd Bault, were speakers at the ILS Bermuda Convergence conference earlier this month.

On the second day of the conference, a small team from R3 gave a real-time demonstration of how blockchain technology can potentially be used by companies in Bermuda.

“We had brokers, underwriters, Bank of New York Mellon, who are a big trustee, the Bermuda Monetary Authority, people from underwriting to operations on the reinsurance side, and guys from the advisory companies,” said Stafford Lowe, head of human capital management at R3.

“We wanted to take an industry loss warranty on a real ledger. So we had a broker screen, an underwriter screen, and a trustee’s screen. We followed it through the process and saw the numbers change on everyone’s screen. This was a representation of three people’s very separate views on things.

“But the most important thing was that whenever an action was performed you saw something get written to the ledger. That really resonated with people.

“It was a real example. It was designed to be a starting point. This was something we knocked together in two weeks; imagine if we built this thing together, and where we could get very quickly.”

For Bermuda, there is an opportunity to embrace the technology and take a leading role in its development and implementation.

Mr Lowe, who is married to a Bermudian and lives on the island, said: “Bermuda should be looking at this as a balance between a threat and an opportunity. We have an amazing opportunity to get ahead of our competing jurisdictions.”

Blockchain is an online distributed ledger. It is best known for supporting bitcoin, the digital currency. However, the architecture of distributed ledger technology means it has the potential to be applied across many aspects of the financial services industry.

Mr Lowe said R3’s goal at the conference was to demystify blockchain and crystallise what the company does and how the technology can be applied.

Blockchain eradicates the need for double-entry bookkeeping, speeding up processes and potentially saving billions of dollars across industries.

“A transaction is agreed between two parties. The details of that transaction are stored on a immutable, unchanging, tamper-proof single ledger that both parties can go back and refer to,” said Mr Lowe.

“There is just one agreed truth, and it is stored forever. You are creating a new database for the industry. From a regulatory and audit perspective you have this time-stamped record that will never change.”

He said R3 was created to become a “centre of gravity” for distributed technology expertise “and a facilitator to the financial services industry in coming together to figure out how they are going to re-engineer their businesses”.

A group of ten Wall Street banks that spent millions of dollars researching blockchain technology, aware that it had the potential to eliminate a huge amount of costly, day-to-day processes, realised it made more sense if they pooled their resources and collaborated. However, they needed an “honest broker” to help project-manage the research and experiments.

New York-headquartered R3 has filled that role, and the membership of the alliance has grown from the initial ten banks to 70 of the world’s biggest financial institutions. Although yesterday, two of the original members of the R3 group, Goldman Sachs and Banco Santander dropped out. The two banks are involved in other bitcoin and blockchain initiatives.

R3 has a team that now numbers up to 90 people, spread across ten countries. As possibilities for the technology increase, that number could easily double within the coming year, said Mr Lowe.

“The exciting thing in the journey of R3 is the banks came to us and said it’s a peer-to-peer paradigm; it’s not just about banks trading with banks, it’s the entire financial services ecosystem.

“It’s asset managers, insurers, reinsurers, clearinghouses, exchanges, technology vendors, and treasury businesses of large Fortune 500 companies.

“When I heard the news that we were extending beyond the banking industry, I immediately put up my hand and said you have to come to Bermuda.”

He said the collaborative model fits perfectly with Bermuda’s tradition of working together and innovating, and its “very sophisticated financial services ecosystem”.

Mr Lowe added: “We have 20 or 30 of the most globally significant insurance and reinsurance companies here all within half a mile of each other. We have a highly accessible and pragmatic regulator in the BMA, which is very interested in fintech innovation.

“While it is true there are not hundreds of technologists on the island, there are some. We have the end-users of the technology, the people who will be interacting with this new technology. They are the ones who have the opinion on how to build this.”

Also attending the ILS Bermuda event was David Rutter, CEO of R3. Mr Lowe said the presence of three key figures from the company was significant.

“They see what I see, which is a huge opportunity here that is good for R3 and Bermuda.

“I want companies like R3 to come to Bermuda and work on their innovation and test out their ideas in our ecosystem.”

Mr Lowe said it was difficult to predict when there will be an “enterprise grade solution” using the distributed ledger technology, although some specific areas of technology may go into production in the next few years.

If a group of companies on the island came together to work on a distributed ledger initiative that would benefit them all, then there would be a strong case for R3 to set up a local office. Mr Lowe believes R3 would do well in Bermuda.

“There are a handful of reinsurance companies here who are genuinely interested in what we are doing. We hope they join R3, and see this as an opportunity to gather the Bermuda market together as a global statement of intent to remain at the leading edge of the industry,” he said.

“New technologies like this are going to be built collaboratively, and Bermuda has always been a wonderful place for collaboration.”