The COVID-19 pandemic has caused unprecedented disruption to the global economy, pausing trade and business, and plunging major economies into crisis. However, as we reflect on what has been one of the most tumultuous periods in recent history, we recognise that there is now an urgent need to help global business get back on track. With an added layer of complexity for businesses around the globe, this is the moment when International Financial Centres (IFCs), like the British Virgin Islands (BVI), can come to the fore as conduits to global growth, investment and trade. IFCs are able to help businesses navigate the uncertainties of an ever-evolving regulatory landscape and help businesses to thrive in more innovative and diverse ways. As the global economy starts to build back from the COVID-19 crisis, there are four key areas where IFCs can help support the ‘great reset’.
Supporting emerging entrepreneurs
It is expected that by 2030 the global middle class will reach 5.3 billion people, and the key to this growth will be the ability to cultivate start-up and entrepreneurial cultures and allow them to flourish around the world. The World Bank estimates that 600 million jobs will be needed by 2030 to absorb the growing global workforce. In emerging markets, most formal jobs are generated by small businesses, which create seven out of 10 jobs. IFCs are already helping young businesses – vital to a burgeoning middle class – thrive in developing economies. With many start-ups operating under conditions of greater uncertainty, as well as facing more unique pressures around capital and access to funding, ensuring business-friendly environments with stable and clearly stated rules and regulations is key.
While current times have only enhanced these immense pressures for businesses, with alignment to international standards and increasing use of technology giving rise to greater synergy in international business, IFCs have been able to provide fertile ground to help start-ups grow and upscale. For many years, IFCs have allowed small businesses to set up secure and robust business structures offshore, so entrepreneurs can run their business with greater agility and without fear of tripping over arduous rules or prohibitively expensive administrative costs in their home jurisdiction. The tried-and-tested structures of IFCs have given those setting up a new business in these jurisdictions, as well as investors, more confidence to help a company grow. IFCs are therefore increasingly becoming an essential conduit for emerging entrepreneurs, making it easier for them to succeed.
Enabling sophisticated businesses
Alongside providing entrepreneurs with access to these tried-and-tested structures, IFCs have developed increasingly sophisticated mechanisms that have also enabled institutional investors and businesses to benefit from the ability to custom-build entities and transactions to meet their needs. In an industry report recently published by Vistra, which looked at global trends in international finance, the findings showed that “offshore centres have been some of the fastest to cater to the needs of increasingly sophisticated clients.” IFCs have developed complex business infrastructure and are specialised in providing financial services, particularly those that are vital for capital flows and facilitating inbound and outbound investment. For example, it is well noted that IFCs like the BVI are an important hub for overseas investment and have played a major role in the growth of a number of Asian economies, especially China.
Additionally, in an era of unprecedented economic uncertainty, mitigating risk and keeping assets protected from greater loss will play a hugely important part for many established businesses and their post-COVID recovery plans. IFCs provide a reliable and legitimate platform to facilitate cross-border trade and investment, especially with countries like China as we have seen with jurisdictions like the BVI. As China continues its remarkable recovery from the pandemic – which is forecast to be the only economy in the world to show positive growth in 2020, according to the IMF – IFCs will continue to play a vital role in this period of post-pandemic recovery for established businesses.
Championing the digital economy
One striking effect of the pandemic is that technological adoption and digital innovation have rapidly accelerated in all major economies. Despite initial hurdles, we have seen the continuation of deals, transactions, and other financial activities that have been made possible through adapting to digital methods and by using digital platforms. However, for those economies that are lagging in innovation, there is now a greater urgency to innovate digitally – not only to overcome the barriers presented by COVID-19 but also to keep up with the irreversible technological transformation that we’ve seen throughout the pandemic. For example, China has recently carried out trials of its digital currency and is actively pushing towards a cashless society. We have already seen that cryptocurrency has fast become a symbol of ‘stateless’ digital economies.
The potential for digital assets and a new digital economy is huge for the unbanked population in Africa, Latin America, Asia and the Middle East
By 2030, it is likely that currency managed on distributed ledger technology will be commonplace and could be instrumental in driving global business. The pioneers of stateless, digital assets are seeking jurisdictions that support and encourage these new asset classes. And IFCs are leading the way in developing and facilitating this new global technology.
A recent report found that the BVI, Cayman Islands and Singapore were the top three jurisdictions of choice for Initial Coin Offerings in the world in 2018. Moreover, another recent study found that 80 percent of all crypto hedge funds operating in 2019 were domiciled in IFCs. The potential for digital assets and a new digital economy is huge for the unbanked population in Africa, Latin America, Asia and the Middle East. We’re already seeing how mobile financial technology is revolutionising the movement of money around Africa, for example.
As innovative incubators for these technologies, IFCs can have a hand in making financial services available to billions. Furthermore, IFCs provide agile, sophisticated yet cost-efficient financial products within a supportive regulatory and business environment. For example, the BVI’s “incubator” funds, which target small start-up funds, allow clients to attract and pool a small amount of investment and manage it through their own fund while avoiding high administrative costs. These are also well suited to the digital fund space. These incubator funds enable a new manager to get established without having to appoint local directors, therefore speeding up the entire process significantly.
Adaptive regulatory environment
IFCs have a proven resilience and ability to respond to new regulation. As uncertainty and complexity define the growth environment in 2020, the importance of IFCs in exercising this resilience and adaptive regulatory regime to facilitate the formation of cross-border entities and guarantee strong shareholder protections cannot be overstated. Those within the industry recognise that in order to maintain a position as a leading IFC, there needs to be a strong track record of effective regulation. IFCs are often the first adopters of international standards set by global regulatory bodies, such as the Financial Action Task Force (FATF) and the OECD, and have often achieved a higher compliance rating compared to other financial jurisdictions around the world. The trusted and proven structures and neutrality of IFCs are able to provide businesses with greater security and confidence, with such structures also helping to enable economic stability and monetary benefits too.
According to the industry report by Vistra, for some clients, increased regulation is actually becoming a draw when choosing a jurisdiction. Therefore, in this age of continued uncertainty, businesses are finding reassurance in moving to jurisdictions that have robust regulatory systems. IFCs are also taking the lead when it comes to regulatory innovation, and understand that if we are to truly harness the power and opportunities of fintech, existing policies need to be updated and in line with a sector that is evolving fast. For example, when it comes to cryptocurrency or crypto-assets there is no bespoke regulatory regime at present, and most transactions that take place hinge on trust of the underlying technology. However, this is still a relatively new space and as adoption grows, there is an urgent need to regulate the sector in order to reap the benefits of crypto-technology and to foster good governance.
This is why the BVI is actively investing in regulatory innovation and recently launched its Fintech Regulatory Sandbox, joining many other IFCs that have been quick to establish regulatory sandboxes. This initiative enables fintech businesses to test new fintech products in a controlled environment and within a bespoke supervisory framework while protecting market participants. The process is designed to assess whether new financial products are compliant with existing systems and to help develop targeted regulatory responses. Initiatives like these are helping to stimulate innovation and leverage technology to deliver new financial products and services that improve business processes.
A key role in the ‘great reset’
IFCs are a sound platform for business establishment, growth and diversification and will be crucial to help stimulate emerging and developed economies in the next decade. As we have seen, a contributing factor to China’s economic growth has been due to IFCs like the BVI, which have continued to facilitate a large percentage of cross-border trade and investment among Asian companies – a trend that is only set to increase. As we look ahead and plan for business and economic recovery, we must continue to champion the unique facets of IFCs, from their ability to foster international business partnerships to their capability of incubating and supporting the growth of innovative financial technologies. In doing so, IFCs can play a major role in the ‘great reset’ in the post-COVID-19 era.