Is Blockchain Barbados’ Next Innovation Strategy?

Before attempting to answer the question posed, it is important to briefly describe blockchain technology and its potential applications.

Blockchain is a distributed ledger technology (DLT) that has evolved from the internet and has been described as its ‘second phase’. Blockchain emerged in late 2008, in the middle of the global financial crisis when its creator/s (with the designated alias of Satoshi Nakamoto) released a new electronic protocol for a ‘peer-to-peer electronic cash system’ and in so doing created a virtual currency known as Bitcoin, which is now known as a form of cryptocurrency.

However, a blockchain is much more than a cryptocurrency. It is a DLT which allows bundled records of transactions or ‘blocks’ to be chronologically linked and, more importantly, secured cryptographically so as to prevent alteration. The system, therefore, ensures that all users have the same information which can be shared among organisations, with all transactions being recorded on a distributed ledger which is visible to everyone on the DLT network. In addition, DLT allows for peer-to-peer communications or transactions, thereby eliminating middle men such as brokers, financial intermediaries and clearing houses. This can have the effect of substantially reducing the cost and time associated with financial and other transactions.

Potential Uses and Applications of DLT

In terms of the potential uses and applications of DLT technology, the following have been identified as some of the existing or potential uses:

•  a stable and revolutionary e-commerce money transfer system, mainly through the use of cryptocurrencies. The global cryptocurrency market passed US$700 billion as of January 2017.

•  a money remittance system, which can result in as much as a 95 per cent reduction in costs

•  the creation of central bank digital currencies, which could enable and enhance both regional and global trade

•  a payment system for any form of property or assets, including retail goods and/or services

•  a means of storing, tracking and managing digital identities in a secure low-cost and efficient manner, e.g. the storing of Know-Your-Client information

•  a means of providing a secure digital voting system

•  a means of storage and speedy access to public and other records (such as the Land Registry and Corporate Affairs) in a secure and cost-efficient manner, which could itself significantly accelerate business facilitation

•  a means of recording transactions and trading activity on security exchanges

•  the digitization of securities into tradeable smart contract tokens which have the ability to transform capital markets

•  a possible solution to bank de-risking through provision of alternatives to traditional payment systems

•  a means of raising significant capital for new businesses through the mechanism of new public offerings such as Initial Coin Offerings (ICOs). In 2016, the amount raised in ICOs grew from approximately US$39.3 million to US$37.6 billion by December 2017 (and is likely to skyrocket further in future).

DLT technology has been described as a revolution and it will probably result in biggest change we operate our businesses and possibly our personal lives since the internet. It has also defined by some commentators as ‘the free market at its purest’.

Speaking at a Bank of England conference in September 2017, Christine Lagarde, the managing director of the International Monetary Fund (IMF) commented on the future of cryptocurrencies speculating that they have the potential to give existing currencies and monetary policy a run for their money. She also pointed out that the existing problems or technological challenges associated with cryptocurrency are fixable over time. She reportedly even went so far as to chastise her colleagues for failing to embrace the future.

International Approach to Regulation

The exponential growth of ICOs has attracted the attention of regulators worldwide, especially given the uncertainty as to whether existing legal regulatory frameworks are applicable to this new technology and mode of financial activity. Regulators are particularly concerned with the need to protect consumers from unregulated Ponzi-like schemes and are keen to safeguard against risks associated with money laundering and the funding of terrorism, which some argue this new technology may permit.

In Hong Kong for example,  authorities are seeking to implement a new, tailored regulatory framework. The Russian government, although initially suggesting that it would be a criminal offence to use cryptocurrencies, has now shifted its mind-set and has announced that draft legislation is being developed to define the legal and tax status of cryptocurrencies. Singapore has also reacted by announcing its intention to regulate virtual currencies particularly in relation to money laundering and terrorism financing risks. While the UK has yet to pass any legislation to deal with the regulation of ICOs, it has publicly issued warnings to potential investors which may indicate that it is actively monitoring the situation. Finally, in the US, regulators have generally indicated that the offer and sale of digital tokens may be subject to existing security laws.

Gibraltar has seemingly taken the lead in putting in place a regulatory framework for DLT for storing or transmitting value, in that, on  1 January 2018 any undertaking engaging in these activities needs to be authorised by the Gibraltar Financial Services Commission (GFSC) as a DLT provider. According to the GFSC, the new framework positions Gibraltar as a jurisdiction that facilitates innovation whilst at the same time ensuring it continues to meet its regulatory and strategic objectives. The GFSC, in a public statement, recognised that a flexible and adaptive approach is required in the case of these novel business activities, products and business models, which are better achieved through the application of principles rather than rigid rules which can be quickly outdated. As a result, the GFSC has instituted legislation setting out regulatory principles which any licensee will have to comply with. These regulatory principles in essence include ensuring honesty, integrity and reputation, as well as imposing requirements in respect of licences, skill, competence, adequate corporate governance, care and experience, as well as requiring the disclosure of certain risks, terms and conditions and conflicts of interest. The legislation also provides for the monitoring of capital levels and the protection of investors through possible indemnity insurance and the like. Significantly the legislation requires DLT providers to have systems in place to deal with AML/CTF requirements.

Opportunities for Barbados Offered by DLT

Given both the exponential growth and potential uses of DLT, it is clear that this area presents substantial opportunities for Barbados to implement strategies to attract  business in the financial marketplace in keeping with its aim to grow and expand the Barbadian offshore sector.

Barbados is already home to Bitt Inc. which was established five years ago and has reportedly developed one of the first and most secure exchange and wallet operations internationally and is regarded as a global leader in the DLT market. Indeed, Bitt has established business operations employing approximately 40 people already. Bitt has also fully engaged with regulatory authorities in the region (including the Barbados Central Bank) to gain regulatory acceptance of its business model, as well as to promote a digital Barbados dollar for the local economy, notwithstanding the unfortunate and continuing  challenges with the local banking system  given the current trend of de-risking being undertaken by these banks.  The writer is also aware that several ICOs been already launched from Barbados with more on the way. 

The benefits of adopting progressive and flexible regulation for Barbados are potentially very significant in terms of the additional revenue it can generate and the opportunities for employment it can create. In this respect, Barbados can utilise this opportunity to make further use of its existing tax treaties while at the same time seeking to make the jurisdiction more competitive and user friendly.

In addition to the foregoing, DLT offers Barbados the opportunity to significantly enhance and improve the way in which government transacts its business both on the macro-economic and micro-economic levels, which could significantly improve the ease and cost of doing business in Barbados, thereby making the island more competitive. To fail to capitalise on what is a unique opportunity, could see Barbados fall behind in this very competitive market.

That said, even though this opportunity exists for Barbados to be at the forefront of what is described as a ‘financial revolution’, there is an urgent need to put in place effective and acceptable regulation which meets international standards to govern this market. Doing so would serve to attract legitimate business while protecting the reputation of the Barbadian jurisdiction.

Given the potential for the island, it is the writer’s opinion that DLT should be embraced and adopted by the Barbados government as a strategy to stay at the forefront of what is undoubtedly, a ‘financial revolution in the digital world’. To do otherwise would be in proverbial terms, ‘to miss the boat’.

The Barbados Government should act with haste and set up a task-force or a special committee in conjunction with agencies such as the Barbados International Business Association and other relevant professional organisations to prepare a report for the government with a view to the implementation of an appropriate regulatory and legal framework to facilitate this new financial business opportunity. As in the case of Gibraltar, this regulation should not be such as to hamper innovation and should be flexible so as to be able to respond to change while at the same time protecting the reputation of this jurisdiction.

Barry Gale QC
Barry Gale QC is an attorney at Hastings Attorneys who specialises in conveyancing, mortgages, incorporations, partnerships, corporate acquisitions, mergers, joint ventures, corporate finance and public offerings.