Taiwan Shines a Light in the Darkness with Fintech Sandbox

Taiwan Shines a Light in the Darkness with Fintech Sandbox
Photo Credit: Depositphotos

What you need to know

The sandbox is a first step towards a more flexible regulatory approach as Taiwan attempts to compete in a global race to attract fintech talent and capital.

If the initiative is to be successful, it will demand lightness of touch and depth of engagement from regulators.

Taiwan has moved one shuffling step closer to being a financial technology (fintech) hub in Asia by creating a regulatory framework for the most innovative companies in the sector to experiment.

Under the Financial Technology Innovation Experimentation Act passed Dec. 29 in the Legislative Yuan, Taiwan will host a regulatory “sandbox” for companies to experiment with new business models that currently do not have a legal framework.

The crux of the sandbox concept is that fintech innovation is moving too fast for legal systems to keep up, so companies require an environment free from the threat of regulatory or legal punishment to maximize their potential. The idea is that regulators will periodically review developments in the sandbox and adjust regulations in order to facilitate innovations that entail the most benefit for business and consumers.

In passing its law, Taiwan joins countries including Australia, Canada Holland, Hong Kong, Malaysia, Singapore, Switzerland, the United Arab Emirates (Abu Dhabi), and the United Kingdom, all of which have similar initiatives already in operation. Japan has expressed interest in moving in the same direction and South Korea has also indicated it intends to follow suit amid a global race to attract talent and capital into the fintech space.

Taiwan is particularly ripe to benefit from a sandbox as it has long suffered from overly cumbersome regulations, and while the country has been relatively tardy in getting to this point – London’s sandbox has been in full swing for more than a year – there is reason to believe Taiwan can establish a meaningful place among the sandbox hubbub, according to Nathan Kaiser, partner at the law firm Eiger and a fellow at the Berkman Klein Center at Harvard, who focuses on fintech in Asia.

“The opportunity is not just domestic: In my view, China has effectively stopped financial innovation for startups and small companies, for many (some quite legitimate) reasons and from many angles,” Kaiser said. “Hong Kong is seriously hampered in the space for similar reasons, though this does not easily show. Singapore, Japan and Korea can cater to Greater China only to a limited extent. There is a serious window for Taiwan, its entrepreneurs and creative minds: from hardware to software to fintech.”

Political push and pull

Taiwan’s sandbox is based on the UK and Singapore, and is notable for including what is currently the world’s longest potential experimentation period, offering businesses with models that demand the amendment of existing laws the chance to renew their tenancy for up to three years. Those who do not meet this requirement can enjoy an initial one year and an extension of no more than six months on application.

Key criteria include that business models must break existing rules or regulations to qualify.

The bill commanded cross-party support, with the final version introducing more elaborate anti-money laundering (AML) controls at the behest of Taiwan's Financial Supervisory Commission (FSC) and Democratic Progress Party (DPP) caucus whip Ker Chien-ming (柯建銘).

Another important concession as the bill moved through parliamentary readings involved reducing the number of industry experts and academics on the sandbox application review committee from a half to one-third.

Ross Darrell Feingold, a consultant in Taipei who has over 20 years experience advising multinational clients on transactions in Taiwan, said that the move was disappointing and illustrated “the conservative approach to regulatory reform that is so frustrating to both old and new economy companies operating in Taiwan.”

Kuomintang legislator Jason Hsu (許毓仁), who vigorously championed the bill among Taiwan’s blockchain and cryptocurrency community and contributed to its drafting, said that he had urged the DPP and FSC to remove as many restrictions as possible. “We are trying to create a sandbox, not a cage,” Hsu said. ”They were thinking about requiring applicants to have a degree in finance, but we scrapped that.”

DPP legislator Karen Yu (余宛如), who was in part responsible for initiating the bill as a member of the Legislative Yuan’s finance committee, told The News Lens that the stricter rules on AML were unlikely to matter because the FSC has final responsibility for drafting the application procedures.

Yu also defended the revision to the composition of the review committee: “In the original version, we proposed that industry or academic experts should form over half the committee, but [caucus whip] Ker said that in London, the committee is 100 percent controlled by [the UK] Financial Conduct Authority [FCA]. “I checked and the reason is because applications involve business secrets, so it’s better if not so many people from outside are involved.”

Likely sandbox applicants

It remains to be seen how the application and review process plays out, but if the UK model proves instructive startup companies will spawn the majority of sandbox participants.

An October 2017 report assessing the impact of the UK FCA’s sandbox showed that more than three-quarters of the firms involved were startups. In reviewing its first year, the report said distributed ledger technology was the most popular tech being tested in its sandbox, primarily by electronic money or payment institutions.

Legislator Yu said that the sandbox should open the door for any genuinely innovative fintech business, provided they abide by the necessary criteria on data protection and AML.

“In the sandbox, [the threat of that fine is removed], so if you are not a bank and you do something that only banks can do, it’s allowed,” Yu said, adding that companies not qualified to offer third-party payments can apply to do so and sidestep the steep capital requirements to enable such operations under normal rules.

Eiger's Kaiser agreed that avoiding the very high capital requirements for third-party payment providers and other banking and financial services would present the primary opportunity for the bill. “The secondary opportunity involves sidestepping the extremely conservative and irrationally dense regulations of the FSC itself, [and] the approval processes for various licenses.”

Legislator Hsu said he hopes the sandbox will attract more international blockchain and cryptocurrency companies to set up in Taiwan. “I’d also hope to see regtech (regulation technology) companies and those experimenting with smart contracts arrive,” he said.

But Feingold downplayed the chances of less established or startups being accepted. “Given the application and reporting burdens, a non-financial services firm seeking sandbox approval will need to be a successful business or a well-funded start up. This will give the review committee comfort to issue approvals regardless of whether or not the applicant is a financial services firm,” he said.

Jaclyn Tsai (蔡玉玲), founder of the law firm Lee, Tsai and Partners and a legal advisor to an industry group involved in shaping the bill, said that if take up in Taiwan tracks that in Singapore, there will be relatively few successful applicants.

“In Singapore, there are about 30 applicants but only two have been accepted,” Tsai said, adding that Taiwan will likely see applicants drawn from both traditional financial institutions suffering from overregulation and the tech startup space, teams interested in initial coin offerings (ICOs) and cryptocurrencies, as well as in the peer-to-peer space. “Companies trialing automated financial advisory services will likely also attempt to enter,” she added.

A bright reception

At the same time as the sandbox bill passed through parliament, legislator Hsu’s office held a public hearing to demonstrate the enthusiasm for the idea among members of Taiwan's blockchain and cryptocurrency community. Addressing industry and academic representatives as well as the regulatory bodies charged with working alongside them in the sandbox, Hsu hailed the bill as "a light in the darkness".

Hip-hop mogul and 17 Media founder Jeffrey Huang (黃立成) provided the star power at the hearing, along with representatives of Taiwanese live-streaming music service KKBox, as well as local banks First Bank and China Trust Commercial Bank.

A number of blockchain companies present at the hearing told The News Lens that the passing of the sandbox bill would affect their plans for the future.

Jack Chu (朱俊嘉), CEO of Singapore-headquartered blockchain company FundersToken, said, “With this bill, we can announce to our investors and clients that we have an office of development team in Taiwan. We can tell talent that everything will be safe – it allows us to have a larger plan in Taiwan. For example, we might hire 100-500 people [here].”

Alice Huang (黃芝翎 ), Managing Director Corporate and Institutional Banking at BlockEx, a blockchain-based digital asset exchange headquartered in London, said her team chose Taipei for its Asia office because it is inexpensive to set up and has a large and affordable pool of talented engineers. “With the sandbox, we are definitely going to [move into] loans and syndicated loans – all these can be digitalized,” Huang said, adding that the sandbox might offer financial institutions the assurance they need to collaborate with BlockEx.

Chris Shen, who through his Mr Block series of events, Facebook livestreams and blogs acts as a focal point for Taiwan’s blockchain community, said that the bill offers both developers and investors involved in blockchain the confidence to invest in Taiwan. “A lot of companies would choose Taiwan because of the lifestyle, and [some] have asked how they can apply for the bill,” Shen said. “I’ve advised the government to put an English version of bill up on the website and to [later] make it clear how to apply.”

In response to questions at the hearing, Taiwan central bank spokesperson Hsieh Fong-ing (謝鳳瑛 ) said that the bank is cautiously positive over the potential of ICOs and distributed ledger technology, and would not oppose development of either, but that there are concerns over transparency and trading history data being shared and published. Hsieh also said the bank is researching the idea of implementing its own virtual currency and is taking in foreign experiences on interbank payments. An FSC representative added that ICO-related fraud remains the commission’s primary concern.

Plotting a fintech future

The task of drawing up the sandbox application procedures now falls to the FSC, who said at the hearing that rules will be released as soon as possible, likely in the second quarter, and that a physical fintech experimentation space on Nanhai Rd in Taipei will open in June.

“The UK experience says you should have a boost to kickstart things, that’s why they are launching the park,” said DPP legislator Yu. “The idea is that if you are really innovative the FSC will help introduce you to investment, including banks.”

If Taiwan is to realize its aspiration to become a regional fintech hub it will require the establishment of a stronger ecosystem, and while Taiwan has the businesses, core competency and technology, it lacks access to venture capital and affordable compliance solutions when compared with regional rivals, according to FundersToken’s Chu. “Investors told me simply: ‘If you are in Singapore we will invest in you and if you are in Taiwan, we won’t – we have no experience in Taiwan and don’t understand the law - it just raises the risk for us to invest there.”

Ross Feingold agreed that the law does not overcome the wider challenges Taiwan faces in order to make fintech part of consumers’ daily user experience. “Fintech, just like other aspects of the tech industry or gig economy, still faces over regulation and a weak ecosystem, neither of which this law changes,” he said. “The central bank continues to maintain a cautious approach to currency exchange liberalization, while even in the sandbox law the FSC maintains a robust regulatory approach to monitoring fintech applications.”

Legislator Hsu acknowledged that the bill is just a beginning without wider support. “The central bank, FSC and Ministry of Finance (MoF) must rethink their roles in the fintech age, especially when tech created around this sector is directly or indirectly challenging the functions of their departments,” he said, adding that the MoF should complement the sandbox by offering tax incentives for fintech companies to enter Taiwan.

As ever, the proof of the pudding will be in the eating. A key takeaway from the Dec. 29 hearing was an apparent reluctance from the FSC to engage in the spirit of the bill – that the sandbox demands the commission work closely with industry to develop new regulations on an ongoing basis. If the initiative is to be successful, it will demand lightness of touch and depth of engagement from regulators.

The ball now lies in their court, and the clock is ticking.

READ NEXT: INTERVIEW: The DPP's Karen Yu on Fintech and Legislative Struggle