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|Sandboxes provides a testing ground for creation of financial services for tomorrow’s consumers, Photo: Le Toan|
Regulators around the world are working hard to keep pace with the rapid rise of new products and services that are based on the advancement of technologies. The key challenge for regulators is striking the balance between customer and investor protection while providing a framework where innovative products and services can be developed and provided.
|Dr. Nguyen Thanh Binh and Dr. Huy Pham|
To respond quickly to evolving technology-based products and services, governments are increasingly creating more and more regulatory sandboxes for businesses to operate in.
A sandbox is a framework set up by regulators that allows small-scale, live testing of innovations by private companies in a controlled environment under the regulator’s supervision. Companies that are allowed to join the sandbox can operate with special exemptions and might have special rights. A regulatory sandbox is an interactive platform where regulators and service providers can have a more open and active dialogue, and where the regulatory parties can revise and shape the supervisory framework quickly according to the insights gained from the sandbox. Although a sharing economy is more about changing people’s behaviour than the technology, a regulatory sandbox might help innovators avoid unnecessary lawsuits such as Grab’s regulatory battles with local taxi firm Vinasun, since traditional companies often complain that these innovators are involved in unfair business practice due to their innovations that have not yet been regulated.
Innovators might face tough challenges to operate efficiently in Vietnam because of factors such as costs, stiff competition with both other innovators and traditional players, and lack of regulatory support without an appropriate sandbox. Vietnam could learn from the experience of the failure of Project Catalyst led by the Consumer Financial Protection Bureau in the United States, in which non-alignment among regulators, agencies, and innovators led to “anti-innovation”.
On the other hand, the United Kingdom has a more friendly approach towards innovation whereby regulators work directly with innovators to test whether they can achieve their underlying policy goals. One of the key takeaways from the UK regulatory sandbox is the rigorous review process. This process not only ensures the suitability of those being accepted into the sandbox, but also boosts their credibility with both consumers and investors.
Since the financial industry is a highly regulated space in every jurisdiction, where financial service providers need many different types of licences and are required to strictly comply to a large set of rules, sandboxes for financial technology products and services are becoming increasingly popular.
According to law firm Baker McKenzie, many countries in the Asia-Pacific region have launched regulatory sandboxes for fintech products and services, such as Australia, Malaysia, Singapore, and Thailand. While the areas of focus and restrictions on time and participation requirements across the sandboxes in different jurisdictions differ, they all allow financial service providers to test new products and services without having to acquire the standard licenses and without the need to fully comply with rigorous regulatory frameworks. Examples of products and services in a sandbox include blockchain usage for a letter of guarantee and cross-border fund transfer in Thailand, and the application of Artificial Intelligence and Big Data solutions in Malaysia and Singapore.
The main benefits for financial innovators operating in the sandbox include a more rapid launch of their new technology-based financial products, as they do not need to fully comply to all regulatory requirements for the pre-defined space and duration of the sandbox, and the possibility to gain real market data on their new financial products, helping them to enhance their products and services at relatively low cost. The regulatory authorities for fintech sandboxes differ across jurisdictions, with central banks and securities commissions playing key roles in the admission of businesses to the sandboxes and the monitoring of the financial innovators with respect to their time and space boundaries.
After the duration of the sandboxes, companies offering new fintech products and services still need to acquire all necessary licences as well as comply with the set of rules of the standard regulatory frameworks.
So far, there is little convergence and integration of fintech sandboxes across different jurisdictions in the Asia-Pacific region. However, since more and more new fintech products and services that originate in one country might be demanded in another country with a different jurisdiction, the cross-border integration of sandboxes such as that proposed by the UK’s Financial Conduct Authority will become more and more important, requiring the co-ordination and collaboration of regulators from different jurisdictions.
There are many areas that regulators should pay attention to when regulatory sandboxes come into practice. First, they need to provide a clear definition of which types of businesses are allowed to join it and what the requirements are. Second, the space and time of the sandbox need to be well-defined helping businesses to evaluate the benefits of joining.
Moreover, the proposal of the companies intending to join the sandbox must have true and genuine innovation. This means regulators need to carefully consider the potential impact of proposed testings. Businesses need to have a testable product or proposed technologies must reach a sufficient stage of maturity. They also need a well-developed plan with clear objectives and have enough resources at this stage.
Next, the scope of the innovation shall be relevant to the Vietnamese context, and the innovation shall be applied in the country’s financial services market. These innovations should also be aligned with Vietnam’s specific goals and have the potential to solve nation-specific problems. The potential benefits for consumers and the significance of these benefits should also be considered.
In addition, the sandbox should have broad coverage – it should be applicable to the whole country since a city-specific sandbox would limit its usefulness and prevent the businesses from scaling or tapping into a new market. Since financial innovations can come from both startups and major businesses, the sandbox should be designed in a way that covers both of them.
The objectives of the sandbox should be clear from the strategic and servicing perspectives, meaning they align with Vietnam’s strategic objectives, and bring benefits to consumers, innovators, and regulators. The scope should also be clearly communicated to the innovators. Furthermore, Vietnam should consider the types of applicant. Regulators must clearly define who can apply for the sandbox and provide a clear step-by-step process starting from application to exiting stage with an estimated timeframe for each stage of the process.
Next, Vietnamese regulators should determine the type of sandbox that they want to pursue (either putting the innovators into a cohort or a rolling process) and allocate enough resources to work on the regulatory sandbox.
Lastly, it is preferable to have a mature and functioning entrepreneurial environment to effectively implement them, as the maturity of the market is also one of the most important factors that regulators should take into consideration.
The sandbox will be most beneficial for businesses that have testable products and would like to test the possibility of their business models. Moreover, a more developed fintech ecosystem would help to unlock the potential of a sandbox.