In the wake of the pivotal COP28 conference, International Finance Centers (IFCs) continue to redefine their strategies to align with the new commitments and initiatives set forth for sustainable development and climate finance. Throughout 2023, the global business community battled against continuous economic headwinds. Faced with a series of geopolitical shocks and the breakneck speed of technological innovation, the ability to respond rapidly to unfolding events has been paramount for survival.
Yet as we enter the new year, it has become evident that responding reactively is not always enough. IFCs will need to take a proactive approach to change, identifying the emerging opportunities in the new economic landscape, to succeed and contribute to global solutions.
The financial services sector has experienced a series of step-changes in recent years. Our financial systems are being shaped by geopolitical shifts and the development of new regulatory frameworks. Elsewhere, the growing popularity of digital assets, AI, and green finance are opening a host of new opportunities for the sector.
The British Virgin Islands (BVI) is at the forefront of these changes. Its international finance and business centre has long been highly regarded for its ability to remain agile in the face of changes, embracing new opportunities as they arise and embedding innovation and compliance into its foundations.
In 2023, we have witnessed evidence of the bloc economy starting to emerge. Geopolitical tensions and regional conflicts have accelerated the trend, with terms such as ‘nearshoring’ and ‘friend-shoring’ becoming popular catchwords to describe the impact of these concerns on supply chains, as countries seek stability in their regional or politically aligned allies. The BRICs Summit in the summer also cemented this trend, as the five-nation BRICs group sought to expand their membership to other emerging economies.
This was one of the trends predicted in a report looking at the future of globalisation commissioned by the BVI and conducted by Pragmatix Advisory. The report ‘Beyond Globalisation: The British Virgin Islands’ Contribution to Global Prosperity in an Uncertain World,’ outlined three possible scenarios for the future of international trade; weaker internationalism where globalisation continues but at a much slower pace; the bloc economy, which will see economic and regulatory integration between countries based on diverging geopolitical alliances; and a new economic nationalism, where countries adopt a more protectionist approach.
Despite these disruptive trends, there are indications that globalisation is remaining resilient. In November 2023, China’s Premier Xi Jinping held high-profile meetings with United States President Joe Biden and President of the European Commission Ursula von der Leyen, seeking to discuss global economic issues and align on key subjects. With China’s economic turbulence continuing to concern global markets, it is evident that the benefits of globalised trade and investment are a major driver for these conversations.
In this context, IFCs can re-energize economic growth by facilitating cross-border trade and investment – particularly the much-needed flow of capital into developing markets. There are two areas of innovation where the BVI is taking a leading role – digital and climate finance.
The disruptive force of technological innovation has touched every industry over the past decade. In financial services, the rise of fintech, open banking and digital assets are transforming the sector and diversifying its offerings.
Exploring how innovative technologies can provide new financial solutions is a priority of the BVI. In 2020, the launch of the ‘Regulatory Sandbox’ from the Financial Services Commission was a major step in welcoming and encouraging investment in the financial technology sector.
With the total addressable market for digital assets expected to be worth between $8tr and $13tr by 2030, the opportunities in this sector are vast. The BVI has been at the forefront of this, working to support businesses in their journey and creating innovative regulatory frameworks, establishing itself as a respected and forward-thinking jurisdiction.
However, as with many new technologies, with opportunity comes responsibility. Fallout from high-profile controversies, such as the collapse of FTX and the conviction of its founder and CEO, have exposed the risks that occur when innovation outpaces regulation and due diligence.
This has led to a renewed call for a co-ordinated regulatory approach to digital assets, with the Financial Stability Board last month calling for enhanced measures to prevent turmoil in the space, which could risk exacerbating vulnerabilities in the wider financial system.
Recognising these challenges, the BVI has already taken significant steps to ensure that its comprehensive regulatory frameworks are extended to cover digital assets. The introduction of the BVI’s Virtual Assets Service Providers Act at the beginning of 2023has expanded the regulatory regime for BVI entities and legal arrangements involved in virtual assets. This legislation complements the existing regulatory framework, supports fintech development, and aligns with international standards for virtual asset regulation. Since its implementation, the BVI Financial Services Commission has received close to seventy applications from businesses and entities looking to establish in the jurisdiction.
Adapting To Climate Change
COP28 marked a significant juncture in addressing global climate challenges, with a particular focus on sustainable finance.
There is an extensive gap between the need for climate finance and what funding is available. A recent report from the Grantham Research Institute on Climate Change and the Environment estimated that emerging markets and developing countries will need $2.4 trillion annually to adapt to the challenges posed by climate change.
The UAE President Mohammed bin Zayed Al Nahyan’s announcement of a $30 billion fund for global climate solutions, aimed at attracting $250 billion of investment by the end of the decade, and the additional pledges of $700 million to help lower-income countries cope with loss and damage caused by climate change is a major step in that direction.
Additionally, the focus on meeting the $100 billion funding commitment and operationalizing the Loss and Damage Fund necessitates a strategic shift in IFCs to support these global objectives.
This issue of climate finance is one that the BVI is highly engaged with. As an island nation, the jurisdiction is particularly vulnerable to the impact of climate change and extreme weather patterns. This was brought to the world’s attention in 2017 when Hurricane Irma devastated 80 per cent of the Islands’ buildings and infrastructure. The BVI therefore has skin in the game and a vested interest to tackle complex issues that will require complex solutions. The BVI is using its experience as part of the global ecosystem to play a key role as the world looks for solutions to the climate challenge.
A key component of this is the Bridgetown initiative. Led by Barbados Prime Minister Mia Mottley, this initiative calls for the widespread reform of the global financial system to transform climate- resilient finance and ensure better outcomes for developing nations. At the core, the initiative aims to create a fairer relationship between developed countries, responsible for the majority of carbon emissions, and the developing nations who are disproportionally feeling the impact.
Another key innovation is the rise of “green finance” and “blue finance” – a new financing structure to support projects focused on the sustainable use of ocean resources. The BVI is at the forefront of this developing field and has established one of the first Climate Change Trust Funds in the Caribbean, allowing it to receive funding for climate-related projects and to explore how it can maximize the impact of funding.
As we turn our focus to 2024, the outlook for the global economy remains uncertain. What is clear is that innovation is essential to drive economic growth - creating prosperity and alleviating poverty – and to address the climate challenge. The BVI is committed to playing a constructive role in supporting these fundamental global goals for charting towards a sustainable future.