Opening the gates to cryptocurrencies

Five years ago, mentioning cryptocurrencies would have been a great way to get people to stare at you quizzically. The concept was new, largely untested and not well known.

Today, things are very different. Although still not exactly widespread cryptocurrencies are better known than they were before—and they are in demand. Some governments see them as a potential economic catalyst and Bermuda’s government is one of several making moves to attract them.

Premier David Burt has spoken repeatedly about the financial possibilities offered by cryptocurrencies as his government works to widen Bermuda’s financial profile by encouraging cryptocurrency companies to come to the Island.

For many it’s a natural fit with several synergies to the Island’s other key sectors. Re/insurance companies, for example, need capital and cryptocurrencies could represent a way to provide that capital as they become better established and trusted—and the source of the capital becomes verifiable, something that is not easy at the moment.

Perhaps the bigger opportunity in the short term is to allow technology companies to raise capital via what are known as initial coin offerings (ICOs)—this could encourage technology companies in many sectors to base themselves on Bermuda, bringing economic benefits to the Island and, of course, a requirement for insurance.

A cautious approach

Some caution is still being exercised, however. The Bermuda Monetary Authority (BMA) has issued a warning of the risks involved in investing cryptocurrencies such as bitcoin. The BMA stressed that it is committed to providing a regulatory environment for Bermuda’s financial services industry that protects stakeholders and supports innovation.

It said that it closely monitors global technological developments such as ICOs, pointing out that at present these forms of investment vehicles are not subject to prudential regulation, which among other things requires regulated entities to hold sufficient capital and have adequate risk controls in place.

An ICO may be an unregulated method of raising funds for new ventures depending on the nature of the offering. It is used by startups to raise funds from various investors through the internet, bypassing the rigorous and regulated capital-raising process required by venture capitalists or banks.

With an ICO, investors are able to use a cryptocurrency such as bitcoin to purchase coins or tokens via the internet for a set period of time. The ICOs are often global offerings which can be created and accepted anonymously.

Given their newness, and their inherent risks, ICOs tend to be supported by experienced investors with technical knowledge of cryptocurrency.

The BMA highlights three particular risks:

“Today’s fast-paced global digital business environment needs to be accommodated for Bermuda to remain economically sound,” says BMA CEO Jeremy Cox.

“Sometimes there may appear to be a contradiction between this new world and the BMA’s mandate to ensure that investors and other stakeholders can operate in a climate of confidence.

“Bermuda’s financial services industry has benefited from its reputation as a highly regulated jurisdiction and we continue to strive for global standards. We will not falter in this duty to safeguard the public and other stakeholders, but we are aware that the regulator’s role is not to stand in the way of progress.”

A unified team

Cox says that while the BMA can create a regulatory framework that enables new business ideas, potential investors also need to take their responsibilities seriously. For example, “disruptive technology” is becoming increasingly important in the wider financial services industry.

However, because of its pioneering nature, disruptive technology is ground-breaking and therefore does not have a proven, longer term track record.

Despite this caution on the part of the BMA, Sean Moran, interim CEO of the Bermuda Business Development Agency (BDA), stresses that multiple authorities on Bermuda are working together to make the cryptocurrency push work.

“We are all in this together—the BMA, the BDA, and the government,” Moran says. “It’s one unified team, one unified initiative. Everyone is on the same page. This really started accelerating in July last year when the new PLP government was elected and the Premier, who is a very technically inclined person with a technology background, took office.

“Like the BDA, Premier Burt has been keen on this space for a while. He viewed it as a huge opportunity for Bermuda to build on the foundation we have already established as a leading international financial centre with robust regulation and an excellent reputation, and to become a global leader in the fintech space.”

According to Moran, the Premier quickly established two working groups to look at the opportunities and start to draw up the processes needed to go forward—the legal and regulatory group and the business development group. The first took off immediately with some international advisors attached to it, as well as local experts, that looked at other jurisdictions and the developments that were happening in them.

It also liaised with international regulators, such as the OECD and the SEC, to ensure they understand any concerns around this technology and what some regard as a new and disruptive class of business.

“We’ve been moving forwards cautiously but quickly on this. We could draft a package of regulation and legislation that was fit for purpose, that would attract the quality businesses—we’re not interested in quantity, it’s more the quality, and of course we need to make sure that any business we take on and any advances we make in this space do not jeopardise the reputation we have worked so hard to build over the last 70 years in financial services.

“Where we are now is that there are two packages of legislation. One has been enacted into law, and that’s our ICO legislation, governing initial coin offerings and token sales. It takes the form of amendments to existing legislation (specifically, the Companies Act 1981 and the Limited Liability Company Act 2016), and designates an ICO as a restricted business activity that will require consent from the Minister of Finance.

“Regulations are currently being finalised that will detail the specific information required and the process for the consent application, as well as ongoing compliance requirements. These regulations are expected by the end of June.

“The other piece of legislation is our Digital Asset Business Act, which is going to create a licensing regime for third-party service providers in the digital asset space—that’s digital asset exchanges, wallet providers, cryptocurrency brokers and other players who generally issue, sell or redeem virtual currency as a business activity.

“We’re looking into the future, with assets of many different types—not just money—being tokenised, and we expect there to be many new kinds of business coming into the space that we’re not seeing yet.”

Future plans

“The vision is for Bermuda to be a sophisticated innovation hub for those types of business to set up, operate and be well-regulated to a high standard—in fact our motto here is that we’re setting the standard,” Moran says.

“This is a market that has not been well regulated until now. It’s new, it’s nascent and it’s developing very quickly. We’re finding that the people who are coming to Bermuda to talk to us are the larger, more established, groups that have been operating in this space for a while and want to be regulated.

“They are looking for a jurisdiction with a good reputation, with a solid infrastructure for business, that they feel can facilitate their activities and help with their development and growth.

“They have a lot of investor capital and they want to use it in a very robust regulatory framework and a place where they can give their investors and customers comfort.”

With legislation being introduced and with companies looking to Bermuda—not just to set up shop there but also to see what the regulators do in terms of cryptocurrencies—the Island might see interesting times ahead as it strides forward.