Bermuda is embracing the blockchain revolution, and creating a robust and fit-for-purpose legal and regulatory framework governing initial coin and token offerings (ICOs) and digital asset businesses.
Fintech businesses could, according to Scott Watson-Brown (pictured), PwC Bermuda’s Asset Management leader, become the next pillar in Bermuda’s economy, “and we are invested in supporting its growth.”
“Fintech by definition is broad, but at PwC we are of the view that it could provide a gateway for innovators and entrepreneurs to forge opportunity and drive positive change.”
Indeed, the same features that have made Bermuda a successful centre for insurance, asset management and private-client business are now being extended to technologists and innovators who wish to establish operations in a sophisticated, modern and well-regulated jurisdiction.
Early stage VC-backed start-ups are trialling new solutions and products in the capital markets, using blockchain technology, with Bermuda as the incubator and hub for technological development. Bermuda is positioning itself as an innovation island, a springboard for entrepreneurs to launch and test their ideas, develop them, and ultimately scale them up for global distribution.
As such, this feels like a new era of digital discovery for Bermuda, much the same as when it embraced the innovative ILS market decades ago.
“From building macros in a spreadsheet through to robotic process automation, blockchain, artificial intelligence and augmented reality: all of these fall under the fintech umbrella but the key is that, wherever on the scale it sits, a fintech solution is one that makes a process cheaper, quicker, easier to use, and ameliorates the user experience,” explains James Ferris, Advisory Leader, PwC Bermuda.
From a hedge fund perspective, this is particularly relevant, with service providers, particularly fund administrators, developing next generation technologies – either internally or with fintech partners – to reduce costs and introduce more automation. RegTech, for example, has become a buzzword in recent times, as has InsurTech and with natural process language technology improving, it is giving rise to new tools with fintech companies, for example, using chatbots to improve customer experience.
Ferris points out that the BMA has launched two innovation strategies called Sandbox and Innovation Hub, to target the growing InsurTech space.
“The rise of artificial intelligence has the potential to be used to make investment decisions and monitor those investments. In addition, blockchain technology helps to verify processes and makes sure the exchange of assets and records is safe and secure.
“These developments are where we are seeing big plays in terms of fintech start-ups,” says Ferris.
He believes there is plenty of room for further automation of processes in the fund management industry and the wider financial services industry, which augurs well for Bermuda.
“People are coming to Bermuda, developing products and testing them in the market before they look to get them generally accepted. That’s the stage we are at right now with a number of fintech entities.
“As general acceptance comes, the roll out will be quick, not just in Bermuda but globally. With any innovation, having a small network of experts coming together and sharing ideas can spur innovation and act as a launch pad.
“Bermuda is such a launch pad, its size facilitating fluidity of idea exchange and creating the ecosystem to allow a small network of people with ideas to create a critical mass, enabling a quick build of creative products to fulfil industry needs.”
Bermuda is uniquely placed in that it has a relatively agile regulator in the BMA, a sophisticated and well-established financial services industry and a government and support network that are committed to promoting fintech.
In other words, it is creating an ideal environment for entrepreneurs in which to test their ideas.
Ferris admits that while many fintech solutions being developed may not change the world overnight, some of them will undoubtedly help make fund management activities more cost efficient, such as automation of fund reporting, or removal of repetitious provision of documents required for AML/KYC checks, a global challenge, through provision and sharing of common data (recognising the cybersecurity and data privacy hurdles).
Whatever the solution may be, operating in an ecosystem that is small enough to bring all the necessary actors together will really truly accelerate the value of the solution that has been built and if that solution uses blockchain technology, you have a product with built in trust.
We already seeing examples of effective deployment of blockchain technology in the trade finance arena, where transactions which would ordinarily take five to 10 days are being completed within 24 hours. “That’s the power of blockchain”, says Ferris. “Being able to execute more processes, with accurate information exchange, in a shorter window of time. Everyone on the blockchain sees the same information; it cannot be corrupted.”
There are many ways for fund managers to take advantage of these blockchain developments, from onboarding investors to reporting on performance, and as mentioned earlier, RegTech is a fertile market, as fund managers look to their service providers to streamline and remove the complexity of regulatory compliance.
“Asset managers today have to consider how to continue raising assets, make their businesses profitable and deliver value for money to their investors. That comes through adopting more efficient business processes. Investors have a base expectation that the manager will maintain compliance with regulators and safeguard their assets, thus the regulatory reporting burden is not seen as a value-adding activity. An increase in cost in this area is seen as the manager’s responsibility, so, naturally, managers are seeking ways to make things more efficient, either by outsourcing or by leaning on their service providers.
“Those service providers who are at the forefront of developing new technology, whether it is their own or with a third party developer, are going to be better able to support fund managers and bring greater cost-efficiency to business processes across the value chain and improve user (investor) experiences,” comments Watson-Brown.
“The reduction of manual intensity in certain processes will also afford the benefit of time to support clients more meaningfully, enhancing client interaction without an increased cost of service provision. For service providers it always has to come back to customer experience.”
As Bermuda embraces fintech, Ferris states that for anyone interested in creating a product that works in financial services and has appropriate regulatory oversight, Bermuda is an ideal jurisdiction.
“Developing products and building connections here can add to the credibility of what you’ve done, just from being a well-established financial centre where business activities have been taking place for decades. It’s a good place to come to develop your product, do a proof of concept, and be in a better position to market it globally.
“Our role is one of support of the industry, promotion of the territory and working with entities domiciled here through the provision of assurance to clients and their shareholders, ensuring entities and processes are established that complement the reputation upon which the island is built,” concludes Ferris.