27 August 2019Law & regulation

A proposal for a digital domicile

‘Seasteading’ is a pseudo sci-fi concept that involves creating a floating island on the sea providing permanent residents for its inhabitants. Although the general idea sounds far-fetched, the reality is that many billionaires are interested in using seasteading to create libertarian utopias, separated from the rules and regulations of traditional governments.

“As new domiciles appear on the scene, some will eventually take the steps towards establishing a fully autonomous financial services commission.”

Such possibilities look more plausible than ever. The Caribbean island of Roatán, for example, was recently provided a charter via the government of Honduras to write its own civil code, effectively turning the island into a city-state.

Between the future of seasteading and the slowly growing popularity of governments auctioning off land for cash, new governments are being born. Unlike many countries, these new entities are created free from bloodshed. Given the freedom from traditional notions of the state, new governments can create virtually any laws they see fit. As sovereigns, these governments can issue corporate licences, and insurance licences, and provide the same services as traditional governments.

In the case of the seasteading islands, these governments can be mobile and may mostly exist in cyber space.

New domiciles are nothing new in the captives industry. A number of states have no captive insurance laws on the books and could authorise the issuance of a captive insurance licence if their state legislatures decided to enter into the game. The Delaware Indian Tribe entered the captives space in 2013. Thus, the captive insurance field is uniquely familiar with assessing the viability of competing governing bodies.

These new prospective regulatory bodies are brand new and are generally being created by individuals with a “less is more” concept of governance. This invites a unique question: just what exactly does a regulator need to do for insurance companies?

In reality, most of what a regulator does could be compartmentalised into a website which, if it were sufficiently sophisticated, could provide the means to upload periodic financial statements that provide an ongoing monitoring of the captive’s solvency.

The website could provide for a near-instantaneous background check of all beneficial owners, with automatic distribution of corporate and insurance licences upon the funding of the statutory bank account. In short, same-day captive insurance delivery services is a real possibility.

Streamlining regulation
It is unlikely—and potentially impossible—that all human oversight of insurance companies will be eliminated. That said, much of the governance in US and Caribbean domiciles is bogged down with unnecessary reviews of paper submissions, backlogged administrators, and useless regulatory requirements that appear only to provide jobs to people in the local domicile.

There are not that many things that regulators need to do. In fact, there are only five things that a regulator should be doing:

  • The government should know what entities are licensed within its jurisdiction;
  • The government should be able to enforce rules and regulations;
  • The government should preclude criminals and vagabonds from creating financial services vehicles;
  • The government should establish minimum standards of capitalisation; and
  • The government should mandate independent audits of financial services companies in order to maintain transparency of accounting records and transactions.

All these directives can be automated. For example, if a captive fails to pay an annual fee then the government’s website can issue an email to the proper party assessing a fine, without any need for a human to send a letter. Further, the government’s ledger can be created in a blockchain to protect the records from hackers and minimise the hassle of oversight.

Auditors’ findings can be reviewed by bots that can look for key ratios and assess whether any issues require further investigation.

The digital age opens the door to a digital government. As new domiciles appear on the scene, some will eventually take the steps towards establishing a fully autonomous financial services commission. Whoever accomplishes this first might very well be changing the world.

A low-friction government with low overheads will be able to charge fewer annual fees to keep running and will create a major incentive for managers to consider shifting into the new domicile.

This is not to say that captive insurance, or the financial services field more broadly, should be unregulated. Far from it—there are criminals out there. But allowing robots and natural language processing algorithms to do the heavy day-to-day lifting will open the door to allowing trained investigators to focus on the real issues.

Injustice exists partly due to a lack of resources to ferret it out. Open up the regulators’ time to do their jobs and they will be able to focus on the real cases instead of worrying about the latest solvency statement from a regulated entity.

Matthew Queen is general counsel at Venture Captive Management. He can be contacted at: