When it comes to regulating the blockchain industry, size really does matter.
Government size, that is, according to the Bermudian officials driving the island's regulatory efforts around the nascent technology.
"Small ships can turn quickly. That's the beauty of Bermuda," Premier David Burt told CoinDesk.
Bermuda is one of several small territories and microstates striving to leverage their nimble governments to attract blockchain and crypto businesses by creating regulatory certainty where other, larger governments have failed to deliver thus far. Liechtenstein, Malta, Gibraltar and, most recently, San Marino have joined the race alongside Bermuda, all offering proposals - and in some cases formal legislation - that promise "comprehensive blockchain legislation."
Typically such schemes entail detailed guidance on how initial coin offering (ICO) tokens will be viewed; secondary market controls; investor and consumer protections; and anti-money laundering (AML), know your customer (KYC) and counter-terrorist financing (CTF) measures.
And to date, Bermuda's strategy has proved fruitful.
Since launching a blockchain task force in conjunction with the Bermuda Business Development Agency (BDA) in late 2017, the government has passed legislation on ICOs and created a regulatory sandbox for those companies, put forth a Digital Asset Business Act and partnered with BitFury to shift the island's property deeds system to the blockchain.
But most recently, and perhaps most notably, the U.K. territory inked a $15 million investment agreement with major crypto exchange Binance, demonstrating that the tiny island's blockchain push is attracting real industry heavyweights.
This result is one reason, Burt argues, that Bermuda stands apart from its peers.
"We have a very simple mantra in my government, and it's 'show, don't tell,'" Burt said.
But with the competition here fierce, Bermuda is attempting to diverge from other places luring crypto and blockchain startups by moving beyond regulation, and incorporating its blockchain aspirations into its own public policy agenda - including re-envisioning its youth education and immigration policies.
With this, Burt said:
"We believe over the last nine months that our government has shown that not only are we open for business, but we mean business."
The old with the new
Understanding Bermuda's blockchain strategy, and more importantly, what sets it apart also requires a historical view.
One feature which distinguishes the island from other aspiring hubs precedes the blockchain entirely - Bermuda's multi-billion dollar insurance and reinsurance industries which have "full regulatory equivalence" with both the U.S. and the EU.
The maturity of these industries means that there are existing robust investor protection measures and other pertinent rules that regulators have been able to build on to create the Digital Asset Business Act, explained Sean Moran, head of business development at the BDA.
"We've had to tweak them, of course, to make them appropriate and fit for purpose for this industry," Moran told CoinDesk, "but we have a model that we can work from that takes all of those protections and disclosures into account, and that's what we're working from."
The dominance of Bermuda's reinsurance and insurance industries has also resulted in a burgeoning compliance-oriented sector, which Burt envisions as a critical resource for the blockchain businesses he hopes to attract.
"If you cannot meet, match the Bermuda standards, if you cannot pass our high bar, then we don't want you," Burt said.
He explained that part of creating desirable regulatory conditions is implementing high compliance standards for companies that are made in consultation with industry players - like Binance, for example.
"That is squarely in our sweet spot," Wayne Caines, Bermuda's minister of national security, told CoinDesk.
More than a haiku
And that sweet spot will be especially beneficial for ICO issuers and the various stakeholders of that burgeoning industry. While industry has been waiting with baited breath for the U.S. Securities and Exchange Commission (SEC) to come out with formal guidance - since it was revealed that the regulator was closely investigating ICOs - Bermuda regulators have already set up a framework for those companies.
The territory will not only require ICO issuers to scrutinize potential investors, but Bermuda itself will also scrutinize the issuers by requiring them to outline beneficial ownership structures and to create more robust white papers.
According to John Narraway, an emerging technologies consultant at the BDA, this is particularly helpful since:
"The regulations around what must be in an offering document or a white paper is critical because a white paper can be something like poetry or a haiku."
He thinks this collection of standards will greatly mitigate the potential for Bermudian blockchain companies to engage in fraudulent activities.
And these regulations were also based off an existing regulation, the Companies Act, that officials merely tweaked.
"We've kind of billed this as, if you will, the greenhouse off the side to start growing new things, but using the main house of structure and reputation with the success of the thing and the clarity that's going to come from that," John Narraway, emerging technologies consultant at the BDA said of the amendment.
Yet, those leading Bermuda's blockchain efforts are also cognizant of the industry's proclivity for rapid change, and believe their regulations are prepared to accommodate it.
"Think of it like software versioning," Narraway suggested. "We know it's not going to be 100 percent perfect, but it's going to be as best as it possibly can be. If we can go from whiteboard to legislation in two months, how long is it going to take us to issue a 'patch' - to use software terminology?"
"We're going to have [version] 1.1 probably pretty quickly because we're going to be listening to the industry."
Involving the locals
Likewise, another means by which the government plans to keep pace with the industry is by keeping communication lines open with the major industry players, and making sure to keep the island's citizens in mind.
For instance, the memorandum of understanding between Bermuda and Binance stipulates that the crypto exchange will not only move its compliance center to the island, but also invest $10 million into blockchain-related educational programs and $5 million in blockchain startups over the course of two to three years.
In return, Bermuda will work to provide a steady talent pool for the company.
"We want to do it because we want those players and others to come into the market and create economic activity," Burt said of the deal.
Echoing Burt, Narraway said, the arrival of such companies can bring Bermuda up to speed with the industry by converting and capitalizing on local talent, and ideally abet the island's "brain drain," whereby highly-skilled locals move to other places where the market for such talent is more competitive.
"We want to be able to pull [young people] back in and give them opportunities, real opportunities, to participate in the economy and to grow it and to develop their careers," Narraway said.
According to Burt, the Bermudian government is in talks with other heavyweights from "the entire space," though he declined to identify them. The officials plan to release further information on industry partners and legislation in upcoming weeks.
Narraway thinks local startups also stand to benefit, particularly because the industry presents new possibilities for raising early stage capital, which is in short supply on the island.
"I can tell you from the business development side, we're having meetings every week with companies that are saying, 'I think I'm going to do this startup, this is where I want to go,' and now they're saying, 'explain to me this ICO as an option for doing my first round of funding," he said.
"So I think this is a huge opportunity for the local companies and local entrepreneurs in Bermuda."
Minister Wayne Caines, John Narraway, Premier David Burt and Sean Moran image by Annaliese Milano for CoinDesk
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May 9, 2018 at 09:05AM
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