Following the rise of cryptocurrencies and Fintech, an increasing number of innovators are pioneering their own versions of these financial systems. Yet, in Singapore’s strict ecosystem with different acts – Payment Services Act (PSA), Securities and Futures Act (SFA), Financial Services and Markets Act (FSMA), etc – it becomes difficult to experiment at the starting stages, before the details are ironed out. As a result, in 2016, the Monetary Authority of Singapore (MAS) introduced the FinTech Regulatory Sandbox to promote innovation in financial services by allowing firms to test new technologies within a defined scope and timeframe, supported by tailored regulatory guidance. Along with professional guidance, MAS relaxes certain legal and regulatory requirements for the duration of the Sandbox, as well as sets up appropriate safeguards to contain the potential consequences of business failure. Through this, businesses are able to save costs, and also have more flexibility in their business operations to experiment and try. Additionally, budding companies are able to safely test the viability of new fintech products using real money and clients. There are 3 types of Sandboxes.
Sandbox Express
For experiments where the risks are low, and are already familiar with the financial market, the Sandbox Express is the best option. It generally lasts for 6 months, and can be quickly approved by the MAS with disclosure requirements and pre-determined rules. These disclosure agreements include disclosing to potential customers the scope and limitations of its activities, as well as the fact that it is operating in a Sandbox for an approved period.
Regular Sandbox
The Regular Sandbox provides more customisation with regards to the relaxation of different legal and regulatory requirements, allowing for more complex business models or products to better balance the risks and benefits of the experiment, increasing the probability of success.
Sandbox Plus
Taking effect on 1 January 2022, MAS has also introduced enhancements to the Sandbox, in hopes of further catalysing innovation and the adoption of FinTech. It provides an all-in-one assistance package in terms of regulatory support and financial assistance, and is better suited for first movers or early adopters of technology innovation.
The requirement for Sandbox Plus is that if the proposed technology is already in use by several financial institutions or Sandbox participants, or if more than two years have passed since it was first implemented, the applicant must demonstrate that it involves a new technology or a novel way of applying the existing one.
If the proposed technology has not yet been applied in financial service, applicants are also eligible to apply for funding under the Financial Sector Technology and Innovation (FTSI) – innovation acceleration track. Applicants may be eligible for funding support under the Financial Sector Technology and Innovation (FSTI) scheme (innovation acceleration track), subject to MAS’s prevailing caps, co-funding levels and eligibility criteria.
End of Sandbox period
Following the conclusion of the Sandbox period, the relaxed legal and regulatory requirements will expire, and the business is then required to meet all applicable legal and regulatory requirements. If both the business and MAS are satisfied with the test outcomes, the business may deploy its product or service on a broader scale. Should the business anticipate that it cannot comply with the existing legal and regulatory requirements upon exiting the Sandbox, they may apply minimally 1 month before the stipulated expiration, for their application to be reviewed on a case-by-case basis.
Successful examples
ADDX, a homegrown private markets platform, has been one of the earliest participants in the Sandbox, having participated in 2018. ADDX was able to live-test its technology during the early stages, while simultaneously mitigating risks commonly associated with blockchain. Through its Sandbox experience, ADDX has also found key investors, allowing it to develop at an even faster rate.
Another example of a company who have grown under Sandbox would be BondEvalue, who developed BondbloX, the world’s first and largest fractional bond exchange. When electronic bond trading was still emerging in the markets in 2016, BondEvalue did not have existing frameworks to work within. MAS’s Sandbox Express option gave BondEvalue the opportunity to rest the scalability of BondbloX within clear boundary conditions. Through the pre-determined testing environment, BondEvalue was able to adopt a plug-and-play approach that gave them a clear path to licensing within a shorter time frame.
Conclusion
Singapore has a strict stance towards the management of Fintech and the financial sector, but also has multiple opportunities for new businesses to develop themselves and grow into prominence. This is represented through the FinTech Regulatory Sandbox, providing businesses with the opportunity to experiment and flourish. Nonetheless, there are still multiple legal frameworks that businesses will have to go through before entering the market.
Thus, a lawyer is essential in providing advice on the setting up of the FinTech business, as well as the compliance with the legal and regulatory requirements set out by MAS. If you have a FinTech business or intend to start one, do contact the Advomi team, where we have a team of qualified lawyers to assist you in your operations.
Disclaimer: This article provides general information and does not constitute legal advice. Please seek professional advice for your specific situation.
