On Fintech Regulation & CBDCs: a Chat with Bermuda’s Chief Fintech Advisor

Denis Pitcher speaks on Bermuda's attitude toward fintech, crypto, CBDCs and more.

Cryptocurrency regulation has come a long way over the course of the last several years. What was once a ‘Wild West’ is now largely moving toward ‘lawful good’: a space that is held to high regulatory standards across the globe.

However, while regulations are certainly more abundant than they used to be in crypto, there is still a lot of regulatory evolution that needs to take place in order for innovation to continue to progress. In large countries like the United States, this process is slow and often primarily benefits larger players.

However, in smaller jurisdictions, regulators have the means to make regulatory changes more quickly; they can allow greater levels of flexibility to entrepreneurs and innovators; they can figure out which regulatory structures work, and which do not, more quickly.

Recently, Finance Magnates spoke with Denis Pitcher, the Bermudian government’s Chief Fintech Advisor, about the future of fintech regulation in Bermuda and beyond.


This is an excerpt that has been edited for clarity and length. To hear more of Finance Magnates’ interview with Denis Pitcher, visit us on Soundcloud or Youtube.

“We Struggled to Get Companies ‘across the Line’ in the Very Beginning.”

We asked Denis about the progress that Bermuda has made in its regulatory journey so far.

“By September of 2018, we rolled out our regulatory framework, which included amendments to our Companies Act to support ICOs; our Digital Asset Business Act that governed conducting business around digital assets and provided clarity around the core risks associated with virtual assets,” Denis said.

“There was a lot of initial interest. We had a number of companies come to the island and express a lot of interest in our framework and the clarity we were providing,” he said.

However, “one of the challenges we’ve had is that we’re not traditionally a banking jurisdiction, so we kind of lacked core banking support,” Denis explained, adding that “this is something that a number of companies have been waiting on.”

As a result, “we struggled to get companies ‘across the line’ in the very beginning,” Denis said. “Our regulator was getting up-to-speed on how to actually implement the framework, as were companies. But, over the last couple of years, we’ve had about eight companies get licenses, so companies like Bittrex Global, Cross Tower, Stable House, XBTO and a number of others.”

“So, we’ve had fairly steady progress this year in terms of licenses being granted,” he said, adding that “we have a tiered licensing structure to our licensing regime.”

Bermuda’s Test License “Allows You to Scope out a Project without Really Knowing Your Business Model”

This structure includes three tiers: the first of these, “the upcoming ‘Test License’”, is “designed for Pilot Projects or Test Projects, and allows you to scope out a project without really knowing your business model and your business plan. It’s a disclosure-based regime: you map out what you’re going to do and test it within a limited scope environment.”

“From there, the premise is that you can then develop your business model and your business plan,” Denis said.

“A lot of our regulatory framework is built around the business plan: what are the risks associated with your business, what are the risks associated with the industry, like custody of assets, compliance with cybersecurity policy, et cetera.” Additionally, the framework takes into account “how you are defining those risks around your business plan.”

Once the business plan and risk management policy procedures are developed, Denis said, it is possible to enter Bermuda’s regulatory sandbox with a test license.

“The sandbox environment is a limited-scope environment where you’re not dealing with a full scope of customers, but you’re able to test out and demonstrate that you can implement your risk-management procedures. Then you can graduate to a full license that allows you to operate fully within the scope of what your business plan is and the classes of activities that you’re able to do.”

“Technologists Are Trying to Move Quickly, They’re Not Necessarily Knowing How to Manage All the Risks.”

“We’ve got a lot of history of being a top-tier jurisdiction globally for reinsurance,” Denis said. “When you take all of that and apply it to a new technology,” there are a different set of parameters: “technologists are trying to move quickly. They’re not necessarily knowing how to manage all the risks.”

As a result, most jurisdictions around the world “created a very high barrier to entry” for new technology companies. “I equate it to a sort of ladder,” Denis said. “We’ve scored in the top six globally for our Caribbean Financial Action Task Force (CFATF) mutual evaluation report so, very high in our global compliance standing.”

However, “it’s a very difficult set of ‘rungs’ to climb,” Denis said. “So, in order to try to make it easier for startups and innovators, we wanted to introduce more structure that actually allows you to develop your business model. Because, if you have to higher lawyers and auditors and all of these risk professionals when you don’t even know what your business is yet, then you can’t really scale. And, it means that it costs you millions of dollars to get started.”

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“We didn’t want to lower our standards, but we wanted to lower the barrier of entry,” Denis said. “That led us to introduce this lower tier. This test license that allows you to do pilot projects.”

“We’re trying to attract more players that want to experiment under the supervision of a competent regulator that can then climb through the rungs and then be able to use that as a means to show regulators and legislators in other jurisdictions: ‘here’s how we manage the risk with a top-tier regulator, and here’s what we want to do on a larger scale in your jurisdiction.’”

In other words, “it’s really kind of a jumping-off point to be able to take your product elsewhere.”

Banking Support for Crypto Institutions Is a “Significant Hurdle”

However, there are still some structural issues that are preventing the virtual asset ecosystem from growing in Bermuda.

“We’re still really struggling with banking support,” Denis said. “So, we have a local bank that’s willing to now open accounts for [these companies] to pay their local bills in, but we’re not really allowing for exchange accounts. So, if you’re looking to exchange between fiat and crypto, you can’t do that with local banks.”

“It’s been a significant hurdle, in that many in the industry have been looking for that crypto-to-fiat bridge as a means to grow the business and really have that ability to move into and out of the crypto and fintech space from the traditional finance space,” he said.

Still, Denis explained that he’s been in discussions with local banks to see how the situation could progress: “one of the discussions that’s most promising is around risk-controlled stablecoins,” he said.

“They’re willing to start banking accounts that are tied to individuals who have existing bank accounts on islands. So, it will allow for a crypto-to-fiat of sorts for Bermudian entities that have bank accounts, which is at least a good first step. But, you end up needing to have a white-listed stablecoin to support that.”

So, “we’re exploring how that can be used to educate and drive comfort with the space because a lot of it is that traditional bankers don’t really understand this space. They don’t understand the risk and they don’t understand the benefits. So, it’s easier to show them than try to walk them through the theory.”

“Because We’re So Small, We Actually Don’t Have Monetary Policy or a Central Bank.”

We also asked Denis about Bermuda’s stance on central bank digital currencies or CBDCs.

“CBDCs in the classical sense are an effort to digitize central bank money,” he explained. “It’s where you have monetary policy objectives and you want to be able to change the controls around your local economy–the interest rates, et cetera; you want to be able to give consumers the ability to hold central bank assets directly, or you want to be able to replace traditional cash, or you want to do a wholesale coin that supports movement of money within the banking system.”

“In Bermuda’s context, we’re actually kind of small,” Denis went on. “We’re 60,000 people, 21 square miles (40 square kilometers) a very small island, but we have some of the top infrastructure on the planet because of our insurance industry,” he said.

“Because we’re so small, we actually don’t have a monetary policy or a central bank,” he said. “Our Bermuda Dollar is effectively just a non-digital token: there’s one USD in reserve for every Bermuda Dollar that’s issued, so we’re 100 percent USD-reserve.”

“So, if we don’t have a monetary policy and we don’t have a central bank, then a central bank digital currency (CBDC) doesn’t make a whole lot of sense.”

“A lot of where the central banks are focused is on how they can control money, control risks, control privacy, but they’re not necessarily looking at how the nature of money is going to change,” he went on.

In other words, “how is it going to become programmable? How is it going to become interoperable? How is it going to blend into society the way the internet has?”

“It Makes More Sense to Try and Encourage Private-Sector Innovators to Come Here and Figure Out the Optimum Solution.”

“So, if you’re looking at it from that perspective, there’s a big focus globally on ‘let’s control the issuance of money’,” he explained. This is what makes Bermuda so unique: it doesn’t have its own currency to control the issuance of.

So, “why don’t we just look to the next stage, and think about programmability and interoperability of money, and how the future of global trade, and how stablecoins can have a big impact or even CBDCs. We’re likely to just use an American CBDC as opposed to heavily using our own,” he said.

Additionally, “when it really comes down to it, maybe large jurisdictions have the resources, but a small jurisdiction like Bermuda doesn’t have the technical skillset or other resources to be able to even pick the right solution.”

Therefore, “it makes more sense to try and encourage private-sector innovators to come here and figure out the optimum solution.”

This is an excerpt that has been edited for clarity and length. To hear more of Finance Magnates’ interview with Denis Pitcher, visit us on Soundcloud or Youtube.

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