Regulating FinTech in Asia

In the context of a fast-developing, technology-driven economy, policymakers increasingly regard regulation as an essential element in gaining a competitive edge and establishing themselves as a regional hub for technology-focused businesses. In the context, of fintech, for example, a number of Asian jurisdictions have recently introduced regulatory reforms that aim at filling gaps in existing legislation or resolving uncertainties. Such legal reforms are motivated by the desire to encourage the development of fintech, while also ensuring that vital public interests are adequately protected. This book is a preliminary attempt to map some of these legal developments in an Asian context via a series of case studies focused on key jurisdictions. Here, by way of introduction to the substantive chapters that follow, we briefly review the disruption of incumbents and the new opportunities that have been triggered by the emergence of fintech and summarize the chapters and regulatory reforms that different jurisdictions have introduced. Common themes across all chapters are a recognition of the importance of fintech in the future development of financial services and the importance of more flexible regulatory forms that provide the freedom for all stakeholders to bring new financial technologies to the market.

After the UK launched the first regulatory sandbox regime in 2016, the approach was quickly transplanted to numerous other countries as a means of promoting innovation, improving competition and enhancing financial inclusion. However, it remains unclear whether the approach can effectively achieve the relevant policy goals and thus justify the differential regulatory treatment. This chapter provides a broad overview of the regulatory sandbox regime and examines its potential benefits and problems. The chapter then provides some empirical evidence by analyzing the sandboxes awarded in the UK and Singapore between 2016 and 2018 with the aim of identifying what the businesses awarded the sandboxes are doing, the services they provide and their current regulatory status against the backdrop of the financial technology revolution. These cases provide a basis on which to assess the effectiveness of the regulatory sandbox approach in its infancy stage and provide some reflections for regulators.

This chapter examines the rise of fintech, its regulation, and the particular challenges these present for an international financial center (IFC), specifically an IFC with limited economic breadth. Fintech offers automation opportunities for financial institutions, and such automation will in most cases make banks more competitive and lower their labor needs. The Hong Kong government has actively embraced fintech to ensure competitiveness, and its regulation tracks leading international positions on ICOs, cryptocurrency and electronic payment. However, Hong Kong regulators have not facilitated fintech activities that would stimulate the local economy, such as equity crowdfunding. Automation will generally translate into a reduction of human labor, particularly in mid-level jobs. In a large and varied economy, persons laid off from jobs at banks can seek engagement elsewhere. This is not necessarily true in an IFC with a less diversified economy. Hong Kong presents the highly unusual case of persons in a small IFC who have access to a large and diverse economy in mainland China yet may refuse to seek new positions in the larger workplace for cultural or political reasons. The Hong Kong government has blithely followed a ‘market leads, government facilitates’ philosophy of laissez-faire for decades and thus also has failed to prepare for the social costs of fintech. While such preparation would indeed constitute social planning, an activity generally discouraged in Hong Kong, circumstances dictate that the HKSAR government begin to act socially, rather than merely facilitate the largest businesses.

After reviewing the financial regulatory system and market structure in Korea, this chapter examines the recent development of fintech in the area of banking, capital markets, and payment services. In the banking sector, the main focus is on the development of internet-only banking. Under the strict regulations on the separation of financial capital and industrial capital, technological companies’ entry into the banking business causes serious banking law debates. In capital markets, the application of the fintech model in capital markets such as equity and debt-based crowdfunding and robo-advisors is widely discussed. Easy payment & remittance and crypto-assets are a concern for both legal practitioners and the business sector. The legal character and function of crypto-assets is also a significant issue in Korea. In Korea, institutional efforts to introduce new financial products and services in accordance with the combination of technology and finance are being developed in various fields such as banking and securities. Particularly noteworthy is the introduction of new means of payment. The regulatory sandbox newly introduced by Korea will have an impact on the Korean financial regulatory system, which has traditionally been very conservative. This chapter is based on the law of Korea as of 30 June 2019.

A regulatory sandbox is a safe space in which businesses can test innovative products, services, business models and delivery mechanisms without immediately incurring all the normal regulatory consequences of engaging in the activity in question. The fundamental purpose of the regulatory sandbox is to facilitate the development of fintech, especially the ‘disruptive innovation’ activities of the start-up enterprises. In this sense, the regulatory sandbox is a sub-category of the regulation of fintech. Fintech is technology-enabled financial innovation, synonymous with the term ‘internet finance’ in the Chinese context. A different but related term, the regulatory technology (regtech), in a broad sense refers to a combination of the ‘compliance technology’ by the market players with the ‘regulatory technology’ by the regulators. In nature, the regulatory sandbox is conditional, limited, and controlled deregulation. It was primarily a reaction to the somehow overly burdensome regulatory requirements after the Global Financial Crisis (GFC), thus leaving a ‘lifeline’ for financial innovation and, in particular, fintech. The situation is very different in China, where the major problem for internet finance it not over-regulation but under-regulation. With a vast territory, diversified areas, and numerous institutions, China does not feature a much developed and high concentrated financial market like that of the UK, Singapore, or the HK SAR. Nor does it have an integrated financial regulatory system. And, most importantly, the existing mechanisms in China are capable of performing equivalent or even more functions than the sandbox, which, if copied in China, would be redundant. In short, the regulatory sandbox is admittedly a remarkable innovation in terms of regulatory ideas and approaches conducive to financial innovation, especially fintech. However, with its specific background, exterior conditions, and intrinsic limitations, it is by no means an inevitable choice or universal model for the regulation of fintech. Based on the actual circumstances, it’s not desirable for China to introduce the sandbox, at least for the time being.

In recent years, Thai policymakers have adopted laws aimed at keeping pace with contemporary technological developments. This can be seen from the issuance of a number of legislative measures regulating innovative products and services that cannot be effectively dealt with under existing laws and regulations, including those related to financial services. More specifically, Thailand 4.0 has been presented by the government as a policy to transform Thailand into a more innovation-driven or technology-driven economy. In accordance with the policy, there is an agenda to develop a technology cluster and future industries which are related to digital, Internet of Things (loT), Artificial Intelligence, and embedded technologies. The aim is that by using digital tools and IoT as platforms, it will be possible to enhance productivity, quality, and innovation in various economic activities. This can be considered as an important step for Thailand in responding to the rapid development of innovation and technology in various sectors. This chapter reviews these efforts, with a particular emphasis on fintech, as well as considering supplemental initiatives that might be useful to develop further the fintech ecosystem in Thailand. Finally, the chapter considers recent government efforts to intervene and strengthen industry associations as an example of ‘soft law’ mechanisms in.

In the ‘4th Industrial Revolution,’ the upsurged trend of financial services of non-banking institutions and the intersection of financial services and technology have shaped fintech companies. Such businesses have advantages in technology, deliver financial solutions with modern technologies, and provide customers with a highly accessible and streamlined path to fulfill their financial needs. Vietnam has been considered as a potentially lucrative market for fintech as it has a young and ‘tech-savvy’ population, high mobile phone and internet penetration rates, and relatively low levels of financial inclusion. Although its fintech market is still fledgling, more than 150 companies have joined with increasing transaction volumes and high growth rates. They have provided customers with financial and banking services such as digital payment, crowdfunding, peer-to-peer lending, remittance, blockchain, personal finance management, and information comparison with modern technologies, lower costs, and more straightforward procedures. Also, the country has been making an effort to spur the development of fintech companies by setting up a fintech steering committee, preparing the national financial inclusion strategy, and cautiously seeking the best approach to regulate fintech. This chapter examines the use of fintech to facilitate socio-economic development in Vietnam and considers the appropriate regulatory framework to achieve such a goal.

Fintech has been a buzzword in Japan since 2015. The fintech business model in Japan is similar as in other countries: crowdfunding, cryptocurrency, blockchain, AI, Big Data, and cashless payments. What has been the largest impact of fintech in Japan? At first glance, fintech seems to require a change in the financial regulation framework, but this is not the case. In Japan, traditional financial regulation is piecemeal or trident, with a separate legislative framework for banking, insurance, and securities. This framework is not unreasonable because it is designed to respond to different risks. Of course, some other new financial businesses appeared before fintech, and regulation responded to the new risk. Fintech is not a completely new business but just the unbundling of current financial businesses. Especially, payment became more independent from banking today, thanks to the fintech movement. Therefore, regulation just for payment is required more clearly. Currently, the FSA is planning to create a new category of regulation for it. It seems fintech requires a change in the basic framework of financial law. But both in practice and in theory, a pure payment service has attracted attention before fintech. Therefore, fintech, or any other technological innovation, does not require a complete change of regulation but a clarification of current law.

Japanese law began to regulate transactions on virtual currencies when revisions to the Payment Services Act and revisions to the Act on Prevention of Transfer of Criminal Proceeds were put into effect in April 2017. However, considering the recent hacking incidents and social problems on crypto-assets, the Financial Services Agency in Japan established the ‘Research Group on Virtual Currency Exchange Business, etc.’ in March 2018. Then, legislative efforts mainly based on the report by the Research Group resulted in the revisions of the Payment Services Act, etc. On March 15, 2019, the ‘Bill to Revise the Payment Services Act, etc. in Response to Diversification of Financial Transactions Associated with the Development of Information Communication Technology’ was approved at a Cabinet meeting. On the same day, the bill was submitted to the Diet by the Financial Services Agency. Through the proceedings of the Diet, the Act to Revise the Payment Services Act, etc. was enacted on May 31, 2019, and promulgated on June 7, 2019. By this legislation, which will enter into force soon in 2020, revisions to the Payment Services Act, revisions to the Financial Instruments and Exchange Act, and revisions to the Act on Sales, etc. of Financial Instruments are made in efforts to develop regulation for crypto-asset transactions.

This chapter introduces the problem of horizontal shareholding in the fintech sector in Asia. A great deal of the fintech debate surrounds Grab and Go-Jek, two ridesharing platforms that are aggressively expanding their business geographically and product-wise. To finance the expansion, these firms rely on various investors. These investors do often not limit their interest in these two firms but also become shareholders in firms offering the same products. This form of shareholding, also known as horizontal shareholding, is increasingly characterizing the fintech scene in Asia. This triggers the question on how this phenomenon should be approached from a competition law perspective. Horizontal shareholding indeed facilitates the flow of information between competitors or enables control over the executives of competing firms. The issue is still controversial as there is disagreement on the effects of horizontal shareholding and on how competition law should be applied to the issue. However, there is an understanding that further research is warranted. Part of this research, this chapter argues, should not be on direct price increase due to horizontal shareholding. The international character of the horizontal shareholding in the Asian fintech sector requires a rethinking of the possible anticompetitive effects. This chapter claims that such an effect may be market division. Enforcement may be a difficult issue. However, when a merger occurs in this sector, enforcement authorities should pay close attention to the issue of horizontal shareholding.

The development of new technologies by financial service providers is not new; banks, for instance, have always utilized technology to improve front- and back-office operations. The historical significance of fintech does not derive from the use of technology per se, but the leveraging of the distinct properties of digital technologies by non-traditional actors to offer consumers a better experience of financial services. More specifically, the goal of overcoming ‘friction’ in the user experience is here identified as the core feature driving many recent developments in a fintech context. This chapter explores the implications of such an account for incumbent financial institutions and regulators. From the perspective of incumbents, this new emphasis on the consumer experience requires banks and other financial institutions to organize-for-innovation. New capacities and a shift in mindset are needed to deliver a different kind of user experience, and two effective strategies for incumbents are explored. First, adopting more decentralized forms of organization and governance—what we refer to as ‘decentralized ecosystems’—that are better placed to innovate and overcome friction. Second, adopting a more strategic approach to venturing, i.e., purchasing start-ups from the fintech sector and integrating their innovations into incumbent operations. From a regulatory perspective, this requires a greater willingness on the part of regulators and other policymakers to foster experimentation in financial services. As such, the goal of regulation needs to shift from a traditional focus on managing systemic risk to more dynamic models that seek to facilitate responsible innovation and the delivery of a better-quality user experience. This can be achieved, for example, by state regulators working together—partnering—with incumbents and start-ups in the financial service ecosystems of the future via regulatory sandboxes and other similar schemes. Regulatory developments in Asia and Europe provide some evidence that policymakers recognize the need for such a shift in emphasis. However, doubts remain about whether they have gone far enough in pursuing this goal and that the full benefits of the fintech revolution have been realized.