Column: Crypto Banks & Digital Transformation

February 27, 2019

[Opinion column written by Chris Garrod]

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


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Comments (12)

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  1. Y-Gurl says:

    Crypto currency, I think there’s enough fake about Bermuda’s economy without the introduction of a virtual currency that hasn’t been really accepted anywhere else except by the fraudsters of course

  2. sage says:

    Crypto currency has been said to have been created to cut out the middlemen and de-centralize banking or am I mistaken.

    • Black Soil says:

      It was created to satisfy a demand by persons who don’t want to be seen on an audit trail. Persons who want to frustrate the efforts of law enforcement to figure out fraud.

  3. Ryan says:

    I personally look forward to a future where Bermuda offers crypto friendly banking solutions. In my opinion, crypto and specifically Bitcoin, are here to stay and offer many advantages. The youth of Bermuda will thank the Premier and his party for this in the years to come.

    • Bermie says:

      I would agree with you, if it had not been made clear that any crypto currency implementation will be along the same lines as normal banking. This undermines the whole purpose of crypto currency, the idea of which is instant transfer of value (not waiting 3 working days for example) and reduction or elimination of unnecessary banking charges. By inviting the existing banks to become players, it will be business as usual and it begs the question as to why anyone will be interested it.

      • Really says:

        Tbh sir the banks are already putting in their hands. JP Morgan and Chase just announced that they created their own crypto currency to compete cause they realized they were out of touch and feared of being left behind. The whole world is embracing Fintech which includes Crypto currency and Blockchain technology. Indeed this will benefit the youth of Bermuda a whole lot. I’m in my 30s and I just recently got into IT and tech and tbh I should’ve done this while I was still in high school.

    • wahoo says:

      Wow that sounds like a bulletin from Alaska Hall…Would like to think that it is a thing but so far nothing but smoke and mirrors from the secretive groups that the plp have been courting. Chicken farms and gold. The youth still have a huge debt coming their way and it won’t go away.

      • Really says:

        Coming from you a troll who has shown has no knowledge or expertise of what Fintech is. All you oba lot just keep referencing bitcoin which shows how smart you all really are on the subject. Everything you say against it comes right out of the OBA handbook.

        • LaV says:

          Really, what is your expertise in anything?
          We know you’re good at lying…like your hero, trump.
          We know you’re a racist, like your hero, trump.
          We know you’re a homophobe, like your hero, trump.
          We know you’re a xenophobe, like your hero, trump.
          What else are you expert in, really?

    • Black Soil says:

      Maybe our esteemed Premier will lead by example and be the first person in Bermuda to be paid in crypto’s ! Then every PLP MP should follow suit. Then I will start having respect for their fake news.

      • Really says:

        Fake news but the world is transitioning into Fintech. You oba lot really need to get of the narcotics you are on

  4. Bob&Margaret says:

    I am all for ‘fintech’ transforming the way we all do business and conduct our daily lives. What makes me nervous is the confluence of modernising business through the use of technology and ICO’s. Fundamentally ICO’s are different. An ICO (initial coin offering) is the process of issuing cryptocurrency to raise funds for a business venture without being subjected to the same rigorous regulations (friction/cost) as a traditional security. The business idea for which the capital is raised in an ICO is not necessarily a technology business or indeed a good idea/good business prospect. However, the hype around ‘crypto’ can mislead naïve investors, and in a completely unprotected manner. The cash/FIAT currency an investor pays is taken by the promoters of the ICO in return for coins. That cash/FIAT currency is used by the business in its traditional cash form and more often than not used to promote the sale of more coins in advance of actually being put to work developing the business concept.