Column: Looking Forward At Fintech In 2019

[Opinion column written by Chris Garrod]

In 2018, the Bermuda Government had a very busy year passing Fintech legislation, paving the way and laying the groundwork for future jobs and digital growth. Essentially, the Island was undergoing the process of digital transformation in the financial sector.

But benefiting from the fruits of all this effort will take time. So what can we expect from Bermuda in 2019?

The Island’s current digital position?

When anticipating potential job growth, that growth was largely driven by the two main pieces of legislation which were introduced last year: the new ICO Regulations and the Digital Asset Business Act 2018 [“DABA”]. They are completely different from each other and it can be easy to confuse the two.

Amendments to existing legislation to permit ICO’s and the ICO Regulations [“ICO Regulations”]

The ICO legislation was passed in July 2018 to allow Bermuda companies, whether local or exempted, to issue “digital assets” [e.g. digital tokens or coins] to the public.

The requirements are fairly simple: incorporate or establish a company, fill out an ICO application form, draft an offering document setting out details of the offering for the public, and file those documents with the Bermuda Ministry of Finance and Registrar of Companies for review and approval. If approved, the Minister of Finance will grant his or her consent for the ICO to be conducted as a ‘restricted business activity’ and the ICO can then commence.

There are no requirements for vehicles which fall within the ICO Regulations to have any physical presence on the Island, or to hire Bermudians. ICO issuers are not subject to the same level of regulation by the Bermuda Monetary Authority as licensed insurance companies or investment businesses are subject to.

Some ICO vehicles may very well wish to establish a physical presence on the Island for various reasons, though for the most part, the majority will simply conduct their offerings outside of Bermuda using their Bermuda exempted vehicle.

Only one company – in October 2018 – has received an ICO approval to date. The slower than hoped-for take up of this product is down to the current poor market conditions and some inefficiencies and time lag in the approval process. To the extent market conditions improve and Bermuda can do its part to improve the efficiency of the approval process and speed to market, it should hopefully see increasing demand for this product.

The DABA

As soon as someone mentions the words “Bermuda”, “Blockchain” and “Fintech” one gets the immediate feedback: “Where are the jobs?”

The DABA requires digital asset businesses to have a physical presence and they are subject to regulation by the Bermuda Monetary Authority. Jobs will certainly be created on the Island as a result of the DABA. For instance, staffing projections must be outlined in any proposal made to the Authority for a licence. A licence cannot be issued unless staff and certain senior representatives are employed on Island.

Yes, of course, it will take time – I’d estimate roughly 5 years before any form of “economic pillar” is close to being built. By the end of 2019, I’d be very surprised if more than 2 or 3 of these vehicles were licenced and formed as fully fledged DABA licenced companies.

As Minister Caines recently acknowledged: “As much as everybody wants this to happen overnight, it’s not going to happen overnight.” Some potential clients are at the preliminary stages of their due diligence on Bermuda and a few have started with the step of forming a holding company with plans to incorporate subsidiary operating companies in the future to apply for a licence under the DABA.

But to date, no company has received a DABA licence.

E-Identification

One thing which may be rolled out in 2019 as part of Bermuda’s continuing digital transformation movement is the introduction of Blockchain-based electronic identification technology [“E-ID”]. The E-ID system was announced by Bermuda’s Premier Burt in October 2018 and is hoped to be introduced in the first quarter of 2019. E-ID’s are an extremely effective use of Blockchain technology with the most sophisticated already being implemented in jurisdictions like Estonia.

If Bermuda was able to follow the Estonian model it could eventually include innovations such as internet-voting [also used in other European nations such as Denmark]. That would be quite a movement forward. Focus on cyber-security will be key in implementing such a system.

Other Predictions

One easy prediction: nothing will be totally clear. Potential Fintech customers often don’t know what they want. Some are not sure which jurisdiction they want to use. Some don’t know if they will even get to the stage of issuing tokens to the public, or becoming a digital asset exchange or platform. Others are looking at issuing tokens which clearly will not meet Bermuda’s high AML/KYC standards.

No matter what, the new Bermuda “economic pillar” depends on take up by quality clients of formations both under the ICO Regulations and under the DABA.

Although ICO issuers may not create jobs for Bermudians, they will bring investment into Bermuda’s economy, and the Island will need to cement that reputation in order for it to be seen as a jurisdiction proven to be ICO capable and business friendly, with high standards in place.

On the DABA front, the actual tech and other jobs should be created and provide opportunities over time for Bermudians to be educated and trained in the field of digital transformation. DABA applicants need to be of a very high standard, serious and experienced, as the regulatory environment for those vehicles is a strict one. The Authority recently released a Code of Practice which sets out those stringent standards.

The creation of new companies and jobs will indeed not happen overnight. But the interest is there. As Minister Caines declared, there is a “buzz around Bermuda.”

If carried out successfully, there will be a favourable impact on Bermuda’s economy and perhaps a new pillar to Bermuda’s economy will be formed as a result. But patience is key.

Chris Garrod – Opinions on Digital Transformation including Fintech, AI, Insurtech, Blockchain, Crypto and Legaltech.

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