Nydia Remolina is the Legal Advisor for Innovation, Grupo Bancolombia
Intense competition for technological innovation is informing not only business strategies for participants in financial markets, but also regulatory policy in forward-looking jurisdictions seeking to raise their profile as fintech hubs. Importantly, this is not just a phenomenon impacting US and EU markets, but also markets in South America and Asia.
Keeping score on a regulatory basis is hard. First, one has to define what constitutes being ‘ahead’—since not all regulation or deregulation is, after all, good. So normative concerns have to be fleshed out.
Furthermore, fintech is a deceptively broad category, and within it are an array of varying subsectors. In payment systems, for example, some jurisdictions such as Hong Kong, with its Smart Banking initiative, or Singapore, Europe, and UK with Open Banking, could be seen as regulatory “leaders,” but it will not necessarily mean they have more advanced infrastructures or rules governing cryptoassets or cybersecurity.
All the while, even in a competitive world, building a coherent and robust regulatory policy requires coordination amongst regulators, both domestic and international. Matters such as data privacy and data protection, antitrust/competition, or telecommunications regulations, are becoming more important for fintechs and traditional financial institutions these days, but are by their nature inherently interdisciplinary and cross-border. Getting regulators within a country on the same page can be nearly as difficult as corralling cross-border consensus.
Policy formation, as such, can at times put countries in the lead, if for no other reason that they help establish legal certainty, which is necessary for not only traditional financial institutions, but for fintechs as well. And the contrary can be true as well. In Latin America, for example, a continent inclined to experiment with crypto assets and distributed ledger technology, an absence of a domestic frameworks has caused some exchanges to close their business in some jurisdictions. In the void, fintech associations are participating actively to provide industry guidance and clarity to win back market share.
Jostling for technologists and entrepreneurs and the need for a regulatory frame for specific innovations have incentivize some financial regulators to adopt “sandboxes” (i.e., UK, Hong Kong, Singapore, among others). As has been observed in the computer science world, a sandbox is a testing environment designed for experimenting safely with web or software projects, and the concept was adopted by financial regulators to facilitate innovation. Sandbox approaches aim at encouraging fintech experimentation, especially with technologies that do not fit easily into the current regulatory framework. Sandboxes may also grant temporary regulatory forbearance or alleviation to selected firms.
What a “sandbox” means in practice can, however, depend on the sector and jurisdiction. Even a cursory review indicates that sandboxes can be alternatively denoted as “regulatory sandboxes”, “supervisory sandboxes” and “disclosure sandboxes”, all with very different points of emphasis–and very different regulatory participants.
And they can have both international and domestic points of emphasis. Many sandboxes, while targeting their domestic markets for growth, also have a global orientation, or have been upgraded to incorporate one. For example, authorities from several different jurisdictions, including the UK, US, Singapore, Hong Kong, among others, have announced more than a dozen Memoranda of Understanding as part of sandbox arrangements to encourage the growth of fintech, allowing companies to test new products in multiple countries at a time. The objective is to share policy ideas and make sure they are up-to-date with developments in areas such as artificial intelligence, Big Data and blockchain, the technology that underpins crypto assets.
Latin America, too, is following this trend: financial regulators are implementing or considering the implementation of a sandbox to promote the adoption of financial technologies. Commercial strategy is driving at least in part governmental considerations. And those that have acted quickly are already being hailed according to the Interamerican Development Bank as the most attractive in Latin America.
Mexico, for its part, has seen an opportunity in establishing itself as a first-mover in Latin American fintech. In March 2018, under the Mexican Fintech Law, the Mexican Congress enacted the Mexican Fintech Law which allows financial regulatory authorities to grant temporary exemptions or authorizations to regulated and unregulated to carry out innovative activities. Interestingly, the sandbox was not launched in a vacuum, but is part of a broader set of regulatory reforms tied to fintech innovations: electronic payments, crowdfunding, and virtual assets or cryptocurrencies. The goal behind it was to create a system of supervisory practices to accommodate startups that do not fall into one of these three categories. Its operative procedures are at least ostensibly tailored to kick start the sector with a clear and relatively accommodative regulatory framework: startups reportedly must request permission in advance, refrain from exposing institutions with which they partner to unnecessary risks, and report their results after 30 days if they want to continue developing their idea.
But competition is not the only driver behind the region’s experimental initiatives. Shortly after Mexico, Colombia’s Superintendecy of Finance launched a so-called “supervisory sandbox” in which innovative financial projects, products or services—developed either by financial institutions or unregulated entities—can be tested under a controlled environment with Superintendency’s oversight. The objective of this sandbox is to promote technologies that advance financial inclusion while preserving emerging consumer rights. As such, Colombia’s sandbox reflects not only generic concerns about access to capital, as is often the case in the United States, but also the country’s very immediate aspirations to broaden the scope of access to financial services more generally while at the same time enhancing the integrity of the financial system.
Other jurisdictions are exploring similar steps. Panama’s Congress is currently discussing draft legislation that if approved would create a sandbox granting a trial period for innovations in the financial system. The projects developed in the sandbox would only be able to offer their products to a limited and informed sample of consumers, however. Meanwhile, the Chairman of the Chilean Commission of Financial Markets stated in October 2018 his intention of drafting a regulatory framework related to ¨fintech¨ which would include a regulatory sandbox, but without providing further details on which type of sandbox they had in mind. Similarly, on December 2017, the Chairman of the Brazilian Securities and Exchange Commission announced the possibility of presenting a proposal of a regulatory sandbox for Brazilian fintech industry. However, in the second semester of 2018 the Securities and Exchange Commission published a report stating its operational capacity is not sufficient enough to host a sandbox yet.
Do these efforts evince an imminent race to the bottom? Clearly, given the early stage of fintech regulation, more time will be needed to make a clear assessment of what services have been launched, and the conditions placed for their development. So the jury is out. But what is clear is that the concept of regulatory innovation is spreading, not only from the UK to Europe, but also to Asia and South America. Critically, what this means will be case dependent. Local traditions, politics and regional relations will inform in part the diffusion and application of new administrative trends. However, what cannot be denied is that the idea of sandboxes is gaining traction, and is bound to impact policymaking in the years to come.