ROUNDTABLE: BANKING, FUNDS & ASSET MANAGEMENT
Q3: TO WHAT EXTENT WILL NEW TECHNOLOGY AND CRYPTOCURRENCY PLAY A PART IN FUTURE GROWTH?
“Bermuda has indeed done a fantastic job promoting technology and digital platforms.”
Burns: Given the increased reporting and escalating regulatory, infrastructure requirements and fee pressure businesses will have to closely and wisely revise their business model and address current operational concerns. Technology is the way forward and it will be instrumental to future growth.
I’ve been in the asset management industry for over 25 years and I can testify to the tremendous shift we are witnessing on reporting and financial disclosures. One of the major topics that institution investors raise in their due diligence process is technology and its role in data accuracy and privacy. They want to know how real-time the information is—can it be accessed electronically and, if so, how is that electronic information being guarded?
These were tier 4 concerns five years ago and now they have teams that are asking these questions even before the fund launches. From our viewpoint, it wasn’t really an option to decide if you’re going to put together much more robust technological platforms for reporting and even basic accounting—it is now almost a requirement to play.
When clients and their investors assess Bermuda as a potential jurisdiction, they are keen to understand the power of technology and data protection. For me, that’s been a very big change to witness because Bermuda has indeed done a fantastic job promoting technology and digital platforms. In the end, it’s all part of the data collection process.
Expectations and demand from the institutional investor world coupled with the fact that jurisdictions around the globe are now putting data protection and security regulations into place mean that technology is mandatory, not optional—as it was, say, three years ago.
Demerling: Obviously, the BMA is cognisant of this. With insurtech, fintech, innovation hubs and sandboxes, they are looking at ways in which this could impact on the asset management side. It hasn’t started yet, but I know that working groups have been set up and consultation is being considered to see how it can be embraced. It’s another example of industry working with the regulator and then reaching out to get feedback so that it can become more proactive and more innovative.
Elsewhere, we’re seeing a lot of interest in tokenised funds. Investors can come in and have their interest represented by a cryptographic token, rather than a share. The government gave digital asset legislation a big push a couple of years ago, and we’re able to set up funds in that way, which is quite exciting. It all feels new and modern at the moment. Of course, in a month’s time or a year’s time it may be old hat, but we’re definitely seeing some interest. >>
“We don’t just have the legislation for these structures, we use them here.”
“I see the cryptocurrency sector being a bespoke separate industry.”
<< As for cryptocurrencies, mention was made earlier about the government’s new digital stimulus token. Bermuda is not only putting in place legislation to allow the technology to be advanced, we’re actually using tokens and the underlying blockchain as a pilot—to show the world that we don’t just have the legislation for these structures, we use them here.
For instance, there are plans to create a stable coin so you can pay your taxes online. It’s an exciting time and I agree with Scott, it’s fundamental, it’s critical to everybody’s business and I reckon it is definitely being embraced.
O’Rourke: We’ve been confronted with cryptocurrency/digital assets for about two years now and the big question for the banks is why aren’t you embracing this, why aren’t you providing an exchange or some kind of mechanism to convert crypto into fiat? Now we are seeing the whole space evolve into two different sectors: on the one hand there is pure crypto (Bitcoin, Ethereum and more speculative value instruments); on the other, there is stable coin which is tethered to a fiat currency or something of stable value.
What I’m seeing now is all the major jurisdictions racing to come out with the digital tokenisation of their currency, so we’re looking to tokenise something that is already tangible and put it in digital form. I see the cryptocurrency sector being a bespoke separate industry—whether that takes hold in Bermuda or not remains to be seen, but as far as the banking sector is concerned, we are going to be more aligned with digital tokenisation of currencies that have the full faith and credit of jurisdictions behind them.
Millar: From an asset management standpoint, it isn’t something that is in demand by our clients—although we can all agree that there is certainly a place for cryptocurrency given the ultimate goal of what is trying to be achieved, there have been many drawbacks to the current structures and headwinds to universal use and acceptance.
As such, it isn’t something that we have spent a lot of time analysing, given the lack of client interest and myriad of issues to be sorted out. However, I fully expect that in time this will change and cryptocurrencies will become more integrated into our lives. Others on the panel have captured the essence of what Bermuda is doing, and I would echo those comments.
In the asset management business, as with most financial services, you’re always focused on the client and providing the optimum client experience in the most operational efficient way, and therefore the technology of the future has to marry the two together.
“It isn’t something that is in demand by our clients.”
“I am very cautious of it—unless it is supported by the largest and most robust institutions.”
Neff: From a banking perspective, I agree that stable coin is more attractive than cryptocurrency, but what I come back to is this: we have a regulator and we have correspondent banks. When FATF interviewed us, the head of their group said: ‘I have two questions: do you deal in cryptocurrency, and do you deal in gaming?’.
I said: ‘no’ and ‘no’, and she looked back at me and said, ‘good, we can begin now’. I just can’t see us ever stepping out in a way that either our correspondent banks or our regulators wouldn’t be comfortable with.
Hughes: This crypto piece can be dealt with only if the investors and the institutional framework are in place to support it. We estimate that we turn away about 90 percent of cryptocurrency transactions, given the statistics regarding fraud within this framework (terrorism, money laundering, etc).
I support the fact that one day crypto will become a mainstream form of transferring payments, but at the moment, the infrastructure and the regulations aren’t robust enough for it to be fully embraced. In our business, I am very cautious of it—unless it is supported by the largest and most robust institutions, which helps to mitigate some of the risk.
A few other points around technology. Technology is your key tool for financial services businesses to differentiate themselves versus their competitors. Having straight-through processing, data security and connectivity is what clients and service buyers are looking for—the days of Excel are long gone.
You have to make that investment in technology and stay ahead of the game to provide the solution your clients expect and require.
Kearns: Technology is changing the way we do our audits. Historically, audits used to be face to face: ask for records, pull some records, check those records. Within the asset management sector we have been looking at real-time audits. That means we’re interacting directly with administrators, pulling records directly from their systems and basically automating certain parts of the audit which historically would have been more time intensive.
Things are changing quickly. If you are not keeping up, you’re going to start losing out on opportunities.
Lightbourne: It’s very positive that the BDA has a strategic focus on technology, including fintech and insurtech, and it’s exciting to hear some of the discussions we’ve had on during this roundtable especially with regard to banks accepting technology.
We have received a lot of attention from fintech firms, but our main concern—and a challenge for the industry at large—is that we want those organisations looking at Bermuda to be able to bank digital currencies here, although I have heard that the banks are considering different structures and ways that they can open accounts for these tech options.
Knox Clingerman: We’ve had to be fairly selective with prospective clients who have come forward with ideas. When this was a hot topic, maybe two years ago, people weren’t prepared to take all the steps that are necessary in terms of AML and other requirements.
Nowadays, we all have confidence in the Digital Assets Business Act and feel that we have a strong framework for eventually taking on new business.
But it is not something we’re seeing every day right now and we are also taking a cautious approach.
Image courtesy of Shutterstock / Steve Scott
“We want those organisations looking at Bermuda to be able to bank digital currencies here.”