## 1sgpea2019006 ## Source details **Canonical URL:** [1sgpea2019006](https://www.imf.org/-/media/files/publications/cr/2019/1sgpea2019006.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1sgpea2019006.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1sgpea2019006.pdf.json) --- ### Executive summary — fintech promise, MAS response, and medium-term trade-offs - Fintech developments offer far-reaching impact on the Singaporean financial services sector, bringing opportunities and new risks. - Early indications: activity across the financial services landscape has largely helped incumbents deliver services more efficiently rather than disrupt existing business models, though disruption could be imminent. - Fintech introduces new risks for clients, financial institutions (FIs) and the system, and develops rapidly outside traditional regulatory boundaries (e.g., crypto-assets, new payment solutions by non-financial firms). - MAS has so far struck a balance between innovation and safety and soundness, designed and implemented a regulatory sandbox, and is seen regionally as a leading example contributing to policy discussions such as the ethical use of artificial intelligence (AI) and data analytics. - Technology adoption can lower the cost of financial intermediation; the unit cost in Singapore is around 1.5 to 2 percent. - Singapore’s high level of financial development suggests further innovation by FIs may occur slowly; government can support fintech development to overcome coordination failure. - Fintech adoption can affect market structure and potentially induce more risk-taking behavior, posing challenges to maintaining a low-risk profile of the financial sector. MAS faces a dual role: encourage innovation while enhancing stability. ### Key statistics on financial sector structure and inclusion - Bank assets equal about 600 percent of GDP. - Insurance company assets equal 56 percent of GDP. - Asset management industry: assets under management equal 729 percent of GDP (serving mainly foreign investors and investing mostly outside Singapore). - Financial inclusion: over 9 million credit card accounts in Singapore (MAS). - Cross-border lending by local D-SIBs: 25 percent of their lending to non-banks is to China and ASEAN countries (picked up strongly in 2017-18). - D-SIBs and concentration: - In April 2015, MAS designated seven banking groups as domestic systemically important banks (D-SIBs), including three local banking groups (DBS Bank, Oversea-Chinese Banking Corporation, and United Overseas Bank) and four foreign banking groups. - The local D-SIBs represent 30 percent of all financial sector assets but account for about 60 percent of domestic loans to non-banks and over 80 percent of mortgage loans. ### Asset management industry — size and cross-border links - 715 licensed and registered fund managers in Singapore as of end-2017. - Financial institutions’ assets under management (AUM) grew by 15 percent per year in the last five years to reach approximately 701 percent of GDP in 2017. - Some 78 percent of assets under management are sourced from abroad. - 67 percent are invested outside Singapore in the Asia-Pacific region. - Resident collective investment schemes (resident and supervised in Singapore) are significantly smaller at 23 percent of GDP. - Asset managers comprise about 23 percent of all securities financing activity in Singapore, against which banks are the primary counterparty. - Footnote figures: - Based on assets under management of S$3.3 trillion and GDP of S$464.9 billion as of end-2017. - Based on assets under management of ‘authorized’ schemes of S$ 101 billion, and GDP of S$ 447 billion, in 2017. ### Market developments and fintech ecosystem metrics - As of November 2018, Singapore had approximately 564 fintech start-ups and more than 30 innovation labs. - Fintech sub-categories: payments, clearing and settlement; deposits, lending and capital raising; insurance; investment management; crypto-assets; market support. - Payments: highly active; remittance businesses moving online; potential competition from Bigtech (e.g., Alipay, Google Pay). - Deposits/lending: established banks dominate; collaboration (B2B) common; no digital-only fintech banks operating in Singapore. - Footnote: funds raised through SCF offers in Singapore amounted to S$137m in 2017, compared to ~S$390bn in domestic business lending by banks and the US$27bn raised by the global crowdfunding industry. - Insurance: innovation hubs, digital distribution, connected devices, automation. - Investment management: robo-advisers and digital financial planning; digital advice AUA/AUM about S$335 million at end-2018 (about 0.01 percent of total industry AUM). - Market support: cloud services increasingly adopted for non-mission critical applications; Open API / Open Banking considered key. ### Technologies driving innovation - Distributed Ledger Technology (DLT): facilitates value transfer without traditional intermediation or improves intermediary efficiency. - AI/ML/data analytics: advanced analytics for multichannel customer access, tailored services; increasing use for credit limit determination though accuracy and validity unproven. - Cloud: on-demand shared processing resources promoting efficiencies; most FIs not moving core banking systems to cloud yet. - Emerging: Open Banking (Open APIs) enabling third-party developers to build around financial institutions and access data. ### Stylized scenarios and current assessment of impact - Five stylized scenarios: The better bank; The new bank; The distributed bank; The relegated bank; The disintermediated bank. - Current assessment: impact most closely aligned with “the better bank” — modernization and digitization of incumbent players, incumbents partnering with fintechs, new channels/products complementing existing ones. - Risks under “the better bank”: - Execution risk in implementing technology/business-process changes. - Strategic and profitability risks. - Potential increase in operational risk due to cyber-risks and greater reliance on outsourcing. - Supervisory challenges to effectively supervise new technologies and products. - Areas with potential for future disruption: payments sector and SME lending where fintechs and Bigtech (Google, Amazon, Alibaba, Grab) could disrupt established channels. ### Operational and technology-related risks — transmission and supervisory implications - Principal risks from fintech are operational and technology-related; rapid adoption increases execution risk and business/technology risk priorities. - Legacy bank systems (older, slower, less agile) increase inherent risk profiles. - Increasing reliance on third-party service providers and cloud creates concentration and dependency risks, portability and auditability concerns, and potential single-provider systemic exposures. - Cyber risk transmission channels: - Loss of confidence — data theft, prolonged unavailability, loss of data integrity, or large thefts could precipitate creditor runs in extreme cases. - Lack of substitutability — critical ICT systems may be difficult to replace. - Interconnections — technological, organizational and financial interconnections complicate mapping and contagion analysis. - Global cybercrime context: global cybercrime costs businesses close to USD600 billion (up from USD445 billion in 2014). - IMF staff modeling (2018) estimates annual losses to financial institutions from cyber-attacks could reach several hundred billion dollars a year in a worst-case scenario. ### Operational/technology recommendations (timings: I = Immediate, ST = Short Term, MT = Medium Term, C = Continuous) - Conduct more thematic reviews of operational risk heavy activities across the entire banking sector to benchmark leading-edge best practice and communicate benchmarks publicly. Timing: ST - Develop a cyber network map that integrates financial linkages and Information and Communications Technology connections and use it for cyber risk surveillance. Timing: MT - MAS to consider formalizing and clarifying that it may require pre-notification of material outsourcing arrangements where MAS is not satisfied that a bank has managed its outsourcing risk adequately. Timing: MT - Place emphasis, within a risk-based framework, on verification of compliance with risk management and other minimum standards during sandbox experimentation, overlaid with judgement of residual risks to mitigate reputational risk. Timing: MT - Increase supervisory intensity on third-party risk management, including more frequent and intensive supervision and prior notification arrangements where appropriate. Timing: C ### Regulatory sandbox — design, safeguards, experience, and risks - Purpose: allow live experiments with safeguards to contain failure and maintain safety and soundness. - As of July 2018: - Five entities had been admitted to the sandbox. - Of these five, three were licensed and two were exempted from licensing during the sandbox period. - Entry evaluation criteria (seven) include: innovative use of technology, consumer/industry benefit, credible intention/ability to deploy more broadly, clear test scenarios and reporting, defined boundary conditions, assessed/mitigated significant risks, and acceptable exit/transition strategy. - Possible regulatory relaxations during sandbox: minimum paid-up capital, management experience, board composition, track record, relative size. - Requirements retained: confidentiality of customer information, fit and proper criteria, handling of customers’ money and assets, and AML/CFT compliance. - Sandbox Express: expedited entry for perceived low-risk firms with predefined boundary conditions; proposed initial sectors include insurance broking, recognized market operators (RMOs), and remittances. - Risks from sandbox: - Reputational risk to MAS if sandbox firms fail or customers are negatively impacted. - Perception risk if firms in the sandbox are perceived as being granted lower standards. - Typical sandbox entrants have lower management experience, lower capitalization, less risk management experience, and higher business risk. - Recommendation: verify compliance with risk management and minimum standards during experimentation; coordination between fintech specialists and line supervisors is essential; post-exit apply standardized license assessment and risk-based supervision. ### Digital token services — market observations, MAS stance, and PS Act implications - Terminology: MAS uses categories securities, payment, and utility tokens; ICO refers to initial offering of any token type. - ICO activity (Table of Closed ICOs — US$ million): - 2016 — Number of Closed ICOs: 1; Value of funds raised: 6 - 2017 — Number of Closed ICOs: 34; Value of funds raised: 519 - 2018 — Number of Closed ICOs: 147; Value of funds raised: 1,582 - January — 5; 51 - February — 16; 245 - March — 15; 267 - April — 10; 146 - May — 15; 118 - June — 15; 243 - July — 10; 48 - August — 13; 139 - September — 12; 94 - October — 11; 80 - November — 12; 95 - December — 13; 56 - Sources: MAS estimates, ICOBench (self-reported country/domicile; subject to revision). - MAS estimates by end-January 2019 the total volume of Bitcoins traded against Singapore dollar since 2013 had reached around S$9.3 billion, implying monthly trading volumes of less than 1 percent of those on Singapore Exchange (SGX); cumulative net inflows of Singapore dollars for crypto-exchange Bitcoin trades were about S$400 million. - Financial institutions’ exposures to digital tokens are very limited: - End-2018: four fund managers launched funds investing in digital tokens and/or derivatives; these funds’ end-2018 investments in digital tokens were approximately S$5 million; exposures to digital token derivatives stood at S$3 million. - MAS approach to digital tokens: - Focus on enforcing securities legislation compliance, investor warnings, and ML/TF risks. - MAS has listed ICOs on an investor alert list and undertaken consumer outreach via MoneySENSE. - PS Act regulatory implications: - Full PS Act framework expected to come into force by the end of 2019; MAS planned consultations in spring and summer 2019 on regulations and AML/CFT notices. - Securities tokens: SFA and FAA apply where tokens qualify as capital markets products; crypto-exchanges trading securities tokens would be subject to full prudential, investor protection, and market integrity requirements under the SFA. - Payment tokens: persons dealing in or facilitating exchange of digital payment tokens in Singapore must be licensed as payment institutions under the PS Act; PS Act definition of digital payment token specified (i), (ii), (iii). - Custodian wallet services: currently not covered by the PS Act; MAS intends to regulate standalone custodian wallet services in a next legislative phase to align with FATF clarifications. - No investor protection or market integrity provisions apply to digital payment token services under the PS Act; safeguarding/segregation of clients’ digital payment tokens not required by PS Act as currently framed. - PS Act prohibition on solicitation may require some foreign crypto-exchanges to establish a presence and apply for a license in Singapore or stop soliciting clients in Singapore. - Licensing features: permanent place of business or registered office in Singapore, MAS approval of “20 percent controllers” and CEO, reporting and inspection rights, and application of AML/CFT requirements. ### AML/CFT approach and FATF alignment - Singapore has taken an incremental approach to ML/TF risks related to digital tokens; MAS notes ongoing FATF discussions on “virtual assets” and “virtual asset service providers” (VASPs). - The FATF amended AML/CFT standard in October 2018 with new definitions of “virtual assets” and “virtual asset service providers”; FATF Interpretative Note and Guidance targeted for issue by June 2019. - AML/CFT obligations apply to reporting entities irrespective of fiat currency or digital tokens (Section 27A of the MAS Act and related acts). - Key AML/CFT requirements: assessing and mitigating ML/TF risks; customer due diligence measures (including beneficial owners); record-keeping; monitoring and suspicious transaction reporting; implementing UN targeted financial sanctions. - Gaps and recommended adjustments: - Bring standalone custodian wallet service providers within AML/CFT purview. - Ensure AML/CFT framework applies to corporate digital token service providers legally created in Singapore (FATF focus on place of creation). - Issue implementing regulations, notices and guidelines under the PS Act. - Ensure risk-based AML/CFT regulation relies on a sound risk assessment. - Continue following FATF developments related to VASPs and adjust the framework as necessary. - MAS noted some token services (non-convertible utility tokens) are not covered by AML/CFT on the basis of low ML/TF risk; the basis for deeming low risk in all cases is unclear and warrants reassessment. ### Supervisory conclusions and recommendations on digital tokens - Findings: - Financial stability risks from digital token trading and investments seem currently contained. - Singaporean financial institutions and other Singaporean investors have limited digital token investments. - MAS has adopted advanced monitoring approaches and can extend powers to new services, providing flexibility to react to emerging risks. - Supervisory challenge: global scope of crypto-exchange groups, cross-border structures, shared technology, and rapid structural changes by firms. - Reputational risks to MAS may arise from hacks, failures, fraud, or market misconduct associated with Singapore-based crypto-exchanges or affiliates. - Explicit recommendations for MAS: - Further enhance investor education on differing regulatory frameworks and risks across token types. - Prepare to apply a cross-organizational supervisory approach over the expanding crypto-exchange sector. Timing: I - Stand ready to expand MAS’ regulatory reach promptly, if warranted by market and industry developments in digital token services. Timing: ST ### Digital advice (robo-advice) — market size, regulation, and risks - Digitally managed AUA and AUM had reached about S$335 million at end-2018 — about 0.01 percent of total asset management industry AUM. - Digital advice primarily provided by non-bank specialised advisers; two banks (OCBC and UOB) recently launched digital advisory services to targeted client groups. - Products: model portfolios comprising ETFs and index funds; most digital advisers use simple decision-tree based algorithms; some firms developing AI/ML tools. - Licensing and exemptions: - Digital advisers need licensing under the SFA and/or FAA unless already licensed. - Retail fund management license applicants may be exempted from certain corporate track record and minimum AUM requirements subject to safeguards (experience of key management, restrictions on products, compulsory post-authorization audit, fully automated client-facing tool requirement). - Digital advisers can enter MAS’ sandbox for temporary relaxations. - MAS guidelines (October 2018) highlight governance and disclosure requirements for algorithms, technology risk management, AML/CFT for non-face-to-face business, disclosure of algorithms/conflicts, and suitability rules with targeted discretion for fully-automated advice limited to simple collective investment schemes. - Third-party providers: - Third-party developers of digital advice tools need not be licensed if they do not deal directly with investors. - Digital advisers are responsible for due diligence and oversight of third-party providers; MAS holds the client-facing intermediary responsible regardless of whether algorithms are in-house or procured. - Monitoring/supervision: - MAS requires yearly information on digital advisory services (third-party involvement, AUM, fees, clientele, products). - MAS initiated thematic reviews since September 2018 on algorithm governance, technology risk management, suitability, sales and marketing, and portfolio controls. - Risks and recommendations: - Financial stability risks currently insignificant, but AUA/AUM likely to grow; hybrid models (digital plus human adviser) expected to expand. - Growth in third-party digital advice tools may create oversight challenges (oversight of algorithm providers, white-labeling blurring regulated/responsible entity boundaries). - Recommendation: Continue monitoring potential risks related to the use of third-party digital advice tools and adjust regulations if warranted. - Recommendation: Reconsider whether discretion on client information collection in suitability assessments sufficiently protects clients from unsuitable advice. ### Crowdfunding (selected highlights) - Securities-based crowdfunding still nascent in Singapore. - Funds raised through securities-based crowdfunding amounted to S$137 million in 2017 (S$68 million via lending-based offers), compared to approximately S$390 billion in domestic business lending by banks. - Crowdfunding operators required to hold a capital markets services license under the SFA for equity- and lending-based crowdfunding. - Issuers must prepare and register a prospectus unless exemptions apply (small personal offers less than S$5 million within 12 months; private placements no more than 50 persons within 12 months; offers to institutional or accredited investors). - MAS monitors operators via financial returns and data, investor complaints, on-site visits, and requires default information within three business days of issuer default. ### Summary of main policy recommendations (extracted and consolidated) - Conduct more thematic reviews of operational risk heavy activities across the entire banking sector and publicly communicate benchmarks. Timing: ST - Develop a cyber network map that integrates financial and ICT interconnections for cyber risk surveillance. Timing: MT - Consider formalizing MAS’ ability to require pre-notification of material outsourcing arrangements where outsourcing risk management is inadequate. Timing: MT - Emphasize verification of compliance with risk management and minimum standards during sandbox experimentation to mitigate reputational risk. Timing: MT - Prepare for and apply a cross-organizational supervisory approach over the expanding crypto-exchange sector. Timing: I - Stand ready to expand MAS’ regulatory reach promptly for digital token services if market developments warrant. Timing: ST - Ensure the AML/CFT framework applies to custodian wallet service providers and all corporate digital token service providers legally created in Singapore, in line with FATF clarifications. Timing: ST - Continue monitoring potential risks related to the use of third-party digital advice tools and adjust regulations if warranted. Timing: C *Source: 1sgpea2019006.* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 5 ### EXECUTIVE SUMMARY ### Fintech promise and risks - Fintech developments offer far-reaching impact on the Singaporean financial services sector, bringing opportunities and new risks. - Early indications: activity across the financial services landscape has largely helped incumbents deliver services more efficiently rather than disrupt existing business models, though disruption could be imminent. - Fintech introduces new risks for clients, financial institutions (FIs) and the system, and develops rapidly outside traditional regulatory boundaries (e.g., crypto-assets, new payment solutions by non-financial firms). ### MAS response and international positioning - The Monetary Authority of Singapore (MAS) has so far struck a balance between innovation and safety and soundness. - MAS is seen regionally as a leading example, contributing to policy discussions such as the ethical use of artificial intelligence (AI) and data analytics. - MAS designed and implemented a regulatory sandbox. - In the absence of internationally-agreed standards, regulators globally face challenges and must continuously refine regulations and supervision. ### Medium-term efficiency-stability trade-off - Technology adoption can lower the cost of financial intermediation; the unit cost in Singapore is around 1.5 to 2 percent. - Singapore’s high level of financial development means further innovation by FIs may occur slowly; government can support fintech development. - Fintech adoption can affect market structure and potentially induce more risk-taking behavior, posing challenges to maintaining a low-risk profile of the financial sector. - MAS faces a dual role: encourage innovation while enhancing stability. ### Adoption by financial institutions - FIs are swiftly digitizing and modernizing systems, products and business models. - Incumbent FIs leverage market knowledge and higher investment capacities to adopt enabling technologies: cloud computing, big data, AI, and distributed ledger technology (DLT). - Established players mostly partner with fintech firms to digitize and modernize operations. ### Main risks and supervisory implications - The principal risks from fintech are operational and technology-related risks. - Rapid adoption of technology increases execution risk and business/technology risk priorities. - Legacy bank systems (older, slower, less agile) increase inherent risk profiles. - Increasing reliance on third-party service providers is evident. - Operational and technology-related risks warrant heightened supervisory intensity. - Cyber and third-party risk management need ongoing attention. - MAS should consider formalizing and clarifying that it may require pre-notification of material outsourcing arrangements where MAS is not satisfied a bank has managed outsourcing risk adequately. - Regulatory sandbox risks: - Potential for reputational risk from live experimentation; balance needed between experimentation benefits and mitigating downside risks. - Digital token services: - Financial stability risks from digital token trading appear limited, but the number of Singapore-based crypto-exchanges may increase after the Payment Services Act (PS Act). - The PS Act enhances MAS’ powers over crypto-exchanges trading digital payment tokens, focusing on financial integrity; it does not provide MAS with the same prudential, investor protection or market integrity powers as applied to crypto-exchanges trading securities tokens. - Crypto-exchanges often operate through global affiliated entities and can quickly change structures in response to regulation; any hack or incident may create reputational risk for MAS. - AML/CFT approach: - MAS’ approach to digital tokens is broadly in line with the current Financial Action Task Force (FATF) standard. - AML/CFT requirements apply to reporting entities regardless of fiat currency or digital tokens. - All providers of services in digital securities and payment tokens will shortly be subject to MAS’ AML/CFT purview, except standalone custodian wallet providers, which Singapore intends to cover in the next legislative phase. - Singapore’s approach requires some further adjustments in light of ongoing FATF discussions, which Singapore is committed to undertake. ### Key statistics on financial sector structure and inclusion - Bank assets equal about 600 percent of GDP. - Insurance company assets equal 56 percent of GDP. - Asset management industry: assets under management equal 729 percent of GDP (serving mainly foreign investors and investing mostly outside Singapore). - Financial inclusion is very high; for example, there are over 9 million credit card accounts in Singapore (MAS). - Cross-border lending by local D-SIBs: 25 percent of their lending to non-banks is to China and ASEAN countries (picked up strongly in 2017-18). - D-SIBs and concentration: - In April 2015, MAS designated seven banking groups as domestic systemically important banks (D-SIBs), including three local banking groups (DBS Bank, Oversea-Chinese Banking Corporation, and United Overseas Bank) and four foreign banking groups. - The local D-SIBs represent 30 percent of all financial sector assets but account for about 60 percent of domestic loans to non-banks and over 80 percent of mortgage loans. ### Main recommendations on fintech (Table 1) - Conduct more thematic reviews of operational risk heavy activities across the entire banking sector with a view to benchmarking leading-edge best practice and communicating this benchmarking publicly – to the benefit of the industry and to the benefit of consistency of communication by supervisors on the same risk across different significant activities. Timing: ST - Develop a cyber network map that takes into account both financial linkages and Information and Communications Technology connections and use it for cyber risk surveillance. Timing: MT - MAS to consider formalizing and clarifying that it may require pre-notification of material outsourcing arrangements where MAS is not satisfied that a bank has managed its outsourcing risk adequately. Timing: MT - Within a risk-based framework, place emphasis on verification of compliance with risk management and other minimum standards, overlaid with a judgement of the residual risks posed, during the experimentation phase in the sandbox to mitigate potential reputational risk. Timing: MT - Prepare to apply a cross-organizational supervisory approach over the expanding crypto-exchange sector to effectively address risks specific to the sector. Timing: I - Stand ready to expand MAS’ regulatory reach promptly, if warranted by market and industry developments in digital token services. Timing: ST - Ensure that the AML/CFT framework applies to custodian wallet service providers and all corporate digital token service providers legally created in Singapore, as recommended by the ongoing clarification of the FATF standards. Timing: ST - Continue monitoring potential risks related to the use of third-party digital advice tools and adjust regulations, if warranted. Timing: C *Source: EXECUTIVE SUMMARY (1sgpea2019006).* ### 8. The asset management industry channels funds from around the world to the region. ### 8. The asset management industry channels funds from around the world to the region. ### Asset management industry: size and cross-border links - 715 licensed and registered fund managers in Singapore as of end-2017. - Financial institutions’ assets under management (AUM) grew by 15 percent per year in the last five years to reach approximately 701 percent of GDP in 2017. - Some 78 percent of assets under management are sourced from abroad. - 67 percent are invested outside Singapore in the Asia-Pacific region. - Resident collective investment schemes (resident and supervised in Singapore) are significantly smaller at 23 percent of GDP. - Asset managers comprise about 23 percent of all securities financing activity in Singapore, against which banks are the primary counterparty. - In addition to GIC and Temasek, seven large foreign public investors maintain offices in Singapore. - Footnote figures: - Based on assets under management of S$3.3 trillion and GDP of S$464.9 billion as of end-2017. - Based on assets under management of ‘authorized’ schemes of S$ 101 billion, and GDP of S$ 447 billion, in 2017. ### Market developments and trends in fintech - As of November 2018, Singapore had approximately 564 fintech start-ups and more than 30 innovation labs. - Fintech developments classified into six sub-categories: payments, clearing and settlement; deposits, lending and capital raising; insurance; investment management; crypto-assets; market support. - Payments, clearing and settlement: - Highly active fintech developments; new entrants compete with incumbent payment service providers. - Remittance businesses evolving from physical storefronts to online. - Competition from Bigtech (e.g., Alipay, Google Pay) is possible; movement in regional markets toward platform-based financial services. - Deposits, lending and capital raising: - Established banks continue to dominate; fintech developments largely through collaboration (B2B). - Alternative sources of financing are nascent. - Banks approach fintech as opportunity for partnerships and innovation labs; currently no digital-only fintech banks operating in Singapore. - Footnote example: funds raised through SCF offers in Singapore amounted to S$137m in 2017, compared to ~S$390bn in domestic business lending by banks and the US$27bn raised by the global crowdfunding industry. - Insurance: - Insurers setting up innovation hubs; start-ups targeting digital distribution, connected devices for granular data collection, and automation/digitalization of manual processes. - Investment management: - Significant use of fintech through digital advisers (robo-advisers) offering model portfolios comprising ETFs and indexed funds; digital financial planning solutions provided. - Crypto-assets: - Market small but growing; several crypto-exchanges and crypto-derivatives exchanges in Singapore. - CIS or funds offered to retail investors in Singapore can only invest in securities tokens meeting Code on CIS requirements for transferable securities, not other digital tokens. - Market support: - Cloud services increasingly adopted (office productivity, CRM, treasury management); most FIs not moving core banking systems to cloud yet, though one domestic bank has made significant progress toward a private cloud solution. - Open banking (Open API) is a key consideration for third-party service providers. ### Box 1 — Five factors crucial to fintech success (summary) - Government support: Smart Nation Agenda enabling innovation. - Conducive regulatory framework: MAS active both regulator and collaborator. - Developed markets: Singapore as preferred ASEAN location for proof-of-concept and scale-up. - Availability of capital: MAS support via the S$225 million Financial Sector Technology and Innovation (FSTI) funding scheme; IPOS fintech Fast Track Initiative to shorten patent application time. - Talent: Investments in skills (TechSkills Accelerator, framework to enhance polytechnics’ curricula); estimated by Singapore Fintech Association: some 3,000 trained fintech professionals and a further 7,500 students currently in training. ### Technologies driving innovation (Box 3) - DLT: Facilitates value transfer without traditional intermediation or improves intermediary efficiency (reduced settlement times, improved transparency, eliminate data duplication). - AI/ML/data analytics: Advanced analytics for multichannel customer access, self-service, tailored services; increasing use for credit limit determination though accuracy and validity unproven. - Cloud: On-demand shared processing resources promoting efficiencies; banks experimenting mainly for non-mission critical applications. - Emerging: Open Banking (Open APIs) enabling third-party developers to build around financial institutions and access data. ### Forward-looking scenarios and likely impact - Five stylized scenarios for fintech developments (Box 2): - The better bank. - The new bank. - The distributed bank. - The relegated bank. - The disintermediated bank. - Current assessment: - Impact of fintech most closely aligned with “the better bank” scenario: modernization and digitization of incumbent players, incumbents partnering with fintechs, new channels/products complementing existing ones. - Incumbents adopting enabling technologies (cloud, big data, AI, DLT) to enhance products, services, and operations. - Risks under the “better bank” scenario: - Execution risk in implementing technology and business-process changes. - Strategic and profitability risks. - Potential increase in operational risk due to cyber-risks and greater reliance on outsourcing. - Supervisory challenges to effectively supervise new technologies and products. - Areas with potential for future disruption: - Payments sector and SME lending where fintechs and Bigtech (Google, Amazon, Alibaba, Grab) could disrupt established channels. - Medium-term implication: fintech can significantly affect financial stability through changes in market structure. ### Institutional setting and regulatory approach - MAS is an integrated risk-based regulator responsible for approximately 1,200 institutions (banking, finance companies, insurance companies and brokers, holders of capital markets services licenses, financial advisers’ licenses, and licensed trust companies). - MAS operates a single agency model: central bank, integrated financial supervisor, and financial sector developer. - MAS’ principal objective: “foster a sound and reputable financial center” (section 4 of the MAS Act). - Functions: integrated supervision of financial services and financial stability surveillance. ### Recent regulatory initiatives and supervisory innovations - MAS has adopted fintech in supervisory processes and invested in internal capabilities: - SupTech: investments in systems, people and processes to improve regulatory reporting and analytics. - Data analytics and AI: MAS leads in guidance for responsible and ethical use by financial institutions. - Global collaboration: MAS signs MoUs with a wide range of regulators. - Monitoring: extended surveillance and market intelligence to include emerging lines of business and technologies (e.g., securities crowdfunding and crypto-assets). - Regulatory sandbox launched in 2016 to enable live testing of innovative financial products/services in a controlled environment with temporary, risk-proportionate relaxation of certain regulatory or licensing requirements. *Source: 1sgpea2019006 - 8. The asset management industry channels funds from around the world to the region.* ### 18. Financial innovation can influence the market structure of financial sector. The market ### 18. Financial innovation can influence the market structure of financial sector. The market ### Financial innovation and market structure — overview - Market structure of financial services includes: number and size of incumbent financial institutions, pricing power, barriers of entry and exit, and access to new technologies; demand factors include degree of financial inclusion and price elasticity of demand for financial services. - Several technologies can reshape supply and demand for financial services: smartphone penetration enabling convenient mobile banking, APIs as standard for data sharing enabling third-party innovation, and cloud computing for scalable, flexible, cost-effective operations. ### MAS’ Regulatory Sandbox (Box 4) - Purpose: allow live experiments within boundaries to enable financial institutions and fintech players to experiment in production environment with safeguards to contain failure and maintain safety and soundness. - Scope: relies on existing MAS-administered regulations; platform for both regulated and unregulated firms; majority of admitted entities adopt B2C offerings. - As of July 2018: - Five entities had been admitted to the sandbox. - Of these five, three were licensed and two were exempted from licensing during the sandbox period. - Entry evaluation criteria (seven): - The proposed financial service includes new or emerging technology or uses existing technology in an innovative way. - The proposed financial service addresses a problem or brings benefits to consumers or the industry. - The applicant has the intention and ability to deploy the proposed financial service in Singapore on a broader scale after exiting the sandbox. - The test scenarios and expected outcomes of the sandbox experimentation are clearly defined, and the sandbox entity reports to MAS on the test progress based on an agreed schedule. - The appropriate boundary conditions are clearly defined. - Significant risks arising from the proposed financial service are assessed and mitigated. - An acceptable exit and transition strategy is clearly defined. - Possible regulatory relaxations during sandbox (examples): - Minimum paid-up capital - Management experience - Board composition - Track record - Relative size - Requirements MAS intends to maintain include confidentiality of customer information, fit and proper criteria (particularly honesty and integrity), handling of customers’ money and assets by intermediaries, and AML/CFT compliance. ### Fintech, competition, and financial stability - Fintech development can change competition between fintech and incumbents and among financial institutions; relationship between competition and financial stability is non-linear. - Moral hazard arises with few dominant players or excessive competition: implicit or explicit government guarantees can encourage risk-taking by institutions with low franchise values. - Fintech can influence systemic risk through market-structure effects. ### Direct competition and Bigtech entry (paras 20–21) - Direct competition: - Fintech firms without legacy systems may compete directly with incumbents (e.g., fintech credit and P2P lending seen as direct competitors to bank lending). - Direct competition can enhance efficiency but may erode incumbents’ profitability; incumbents with heavy legacy systems and less tech expertise may be driven to greater risk-taking when franchise value falls. - Bigtech firms: - Bigtech entry could fundamentally alter market structure, business models, and risks due to established customer relationships, networks, and data enabling low-cost financial services. - In some jurisdictions Bigtech partner with incumbents and provide complementary services (Table 3 illustrates examples such as Alibaba, Tencent partnering to offer credit, payments, insurance, wealth management). - Fintech’s financial stability concerns currently small in many countries due to small size, but could rapidly change with Bigtech entry. ### Collaboration between fintech and incumbents (para 23) - Outcomes depend on how collaboration changes market structure: - Fintech as pure solution-providers to banks: improve bank efficiency and profitability without changing market structure. - Fintech providing complementary services and rapidly acquiring a large retail base: incumbents compete for business with fintech, intensifying competition among incumbents, lowering franchise values and potentially increasing risk-taking. - Current collaborations have largely enabled incumbents to improve efficiency; however, dependencies on fintech services could raise systemic concerns if they significantly change market structure. ### Singapore-specific market structure and metrics (paras 24–27) - Role of financial sector: - Total assets of banks and insurance companies have reached over 600 percent of GDP in Singapore. - Total quantity of intermediated assets (Philippon definition) reached 700 percent of GDP. - Total cost and unit cost of financial intermediation: - Total cost of financial intermediation in Singapore is around 10 to 12 percent of GDP. - Unit cost of financial intermediation in Singapore has been around 1.5 to 2 percent for the past decade — similar to the United States and slightly lower than a sample of peer ASEAN countries. - Philippon (2015) estimates the unit cost for the United States has been around 2 percent for the past century. - Drivers of cost reduction via fintech: - Digitized solutions and smartphone-based applications reduce new customer acquisition costs. - Big data analytics improve credit-risk assessment. - Robo-advisers reduce labor costs and human errors. - New technologies and big data can reduce information asymmetries and improve risk management capacity. - Incumbent emphasis: - Singaporean banks have increasingly emphasized technology and financial innovation (e.g., more technology-related terms and strategies in annual reports). ### Role of government and MAS in Singapore (paras 28–30) - Market environment: - In highly developed and inclusive financial systems, further innovation may occur slowly; entry barriers and limited demand response can lead incumbents to delay costly technology adoption (coordination failure). - Government can play a role to support fintech development and technology adoption. - Efficiency-stability tradeoff: - New technologies can lower intermediation costs but may create winners-take-all dynamics and increase systemic risk in the medium term. - Legacy institutions lacking tech expertise may increase risk-taking ex ante due to limited liability and potential upside from successful technology adoption, shifting downside to debtholders and raising systemic risk. - MAS approach: - MAS supports fintech development (grants to startups, encouraging collaboration) while monitoring systemic risk from new business models and technologies. - MAS set up the Fintech and Innovation Group in 2015 with responsibility for regulatory policies and development strategies related to fintech in Singapore. - Policy challenge: strike the right balance between encouraging innovation and maintaining a low-risk profile for the financial system. ### Stylized model insights — medium-term efficiency-stability tradeoff (Box 5) - Setup: - N incumbent banks allocate between a risky asset and a riskless asset; monitoring risky asset involves unit cost ߛ under current technology. - One-time innovation opportunity costs ܥ and lowers unit monitoring cost to ߛ ஼ (ߛ ஼ <ߛ). - Coordination failure: - When price elasticity of demand for financial services is low and innovation cost ܥ is high, incumbents may jointly delay innovation in equilibrium; government can support innovation (e.g., lowering innovation cost) if socially optimal. - Inclusion effect: - When incumbents innovate, risky asset allocation in equilibrium ݍ ஼ ∗ is greater than without innovation (ݍ ஼ ∗ > ݍ൐ ∗), indicating better financial inclusion. - Uncertainty and risk-taking: - Introducing uncertainty in actual efficiency of innovation (monitoring cost drawn from uniform distribution) and given limited liability and government guarantees, sufficiently high uncertainty ߳ increases equilibrium allocation to risky asset (ݍ ఢ ∗ > ݍ ஼ ∗). - Intuition: uncertainty raises probability of losing to competitors and potential bank failure; with limited liability, banks increase ex-ante risk appetite, raising systemic risk before technology uncertainty resolves. - Policy implication: government needs to monitor incumbents’ technology adoption and risk-taking behavior. *International Monetary Fund — Singapore section, chapter content unit 18.* ### 31. One of the leading success factors for Singaporean FIs is the capacity to innovate. ### 1sgpea2019006 - 31. One of the leading success factors for Singaporean FIs is the capacity to innovate. ### Innovation and digitization - Incumbent FIs are quickly moving toward digitization and modernizing their product offerings. - Forefront of technology strategy: digitization of the front-end platforms for customer-centric interface for a more seamless experience. - Complicating factor: legacy systems with older, slower and less agile middle and back-end systems (e.g., mainframes). ### Operational and technology-related risks - Many risks to Singapore’s FIs from innovation relate to operational and technology-related risks. - Fintech developments have spurred a rapid adoption of technology; direct competition from new fintech entrants is muted, but established financial institutions are competing heavily to retain market share and protect margins. - Benefits of greater adoption of technology: improved efficiency, cost savings and potentially improved security. - Operational risks highlighted: - change management, - more and faster new product approvals, - increased reliance on outsourcing, - heightened exposure to cyber risks. - Execution risks to implement new strategies and manage business and technology risks are increasingly top risk priorities. - Increasing use and reliance on third-party service providers evident in the sector. - Transition from legacy environments to new digital platforms likely to accelerate, potentially increasing cyber-security risk and raising supervisory capability issues. ### Regulatory response and MAS actions - MAS has revised regulations covering aspects of operational risk and recognizes information technology risk as a significant and growing threat, evidenced by: - additional guidance issued on outsourcing and technology risk management; - organizational change creating the “Technology Risk and Payments Department”. - A consultation paper for banks’ outsourcing has been issued for comment. - Key feature of new outsourcing guideline: expand the definition of material outsourcing to include data, likely capturing more outsourced service providers. - MAS updated Outsourcing Guidelines to reflect emerging risks of third-party cloud outsourcing and moved to an ex post notification approach for outsourcing arrangements concluded by banks. - MAS’ approach: ensure incumbents’ due diligence is satisfactory and has undertaken a thematic review of outsourced service providers to identify concentration risks and potential over reliance on certain providers. ### Outsourcing and third-party risk management - FIs are increasingly relying on third-party service providers and cloud-based services. - Cloud benefits: meeting evolving customer expectations, greater innovation, security and cost efficiencies. - New cloud risks: concentration and dependency risk, portability, the lock in effect, and the inability to audit. - MAS’ technology standards do not prohibit migration to cloud; many FIs migrated non-mission critical systems to the cloud, but no banks have yet moved their critical systems (e.g., core banking platforms). - Concerns with ex post notification of outsourcing: - absence of pre-notification of outsourcing of critical control functions is less desirable where compliance is not robust; - may hamper timely supervisory response given the time lines for on-site inspections. - Recommendation: MAS should consider formalizing and clarifying that it may require pre-notification of material outsourcing arrangements where MAS is not satisfied that a bank has managed its outsourcing risk adequately. - Highest supervisory priority: third-party risk management, including continual improvement of controls for change management, product approval processes and third-party risk management. ### Cyber risks and systemic transmission channels - Global context cited: global cybercrime costs businesses close to USD600 billion, up from USD445 billion in 2014. - IMF staff modeling exercise (2018) estimates that annual losses to financial institutions from cyber-attacks could reach several hundred billion dollars a year in a worst-case scenario, eroding bank profits and potentially threatening financial stability. - Proliferation of cloud services has given rise to significant concentration risks dominated by a few global providers. - Disruption to payment, clearing, or settlement systems or theft of confidential information can result in widespread spillovers and threaten financial stability. - Three key transmission channels through which cyber risk can impact financial stability: - Loss of confidence — wide-reaching data theft, prolonged unavailability of services, loss of data integrity, or large thefts of funds could cause a broader loss of confidence that under extreme scenarios could precipitate creditor runs; - Lack of substitutability — essential financial services use ICT systems that may be extremely difficult to replace with alternatives in case of disruptions; services often have no alternatives; - Interconnections — ICT systems are deeply interconnected in technological, organizational and financial ways that are challenging to fully and accurately map; isolated systems have proved vulnerable. - Cyber mapping: an approach to assess interconnectedness by developing an analytical framework to map cyber vulnerabilities, identify the relevant cyber network, transmission channels, potential cyber risks, concentrations and common dependencies. - Mapping process begins at a macro or system-wide level and narrows to firm-specific analysis; integrates cyber and financial maps to study effects of concentrations and interconnections on contagion. - MAS has undertaken considerable work on understanding FIs’ technology maps including third-party service providers. - Recommendation: MAS should develop a cyber network map that integrates technology and financial interconnections and continue monitoring cybersecurity risks from third-party service providers. Stress tests showed banks’ vulnerability from this source, which MAS should enhance monitoring. ### Recommendations (operational, technology, supervisory) - Conduct more thematic reviews of operational risk heavy activities across the entire banking sector to benchmark leading-edge best practice and communicate this benchmarking publicly. - Develop a full picture of the supervised firms and their ICT systems by mapping financial and technology connections across the sector to help identify potential systemic risks from interconnectedness and concentrations in third-party service providers. - MAS should consider formalizing and clarifying that it may require pre-notification of material outsourcing arrangements where MAS is not satisfied that a bank is managing its outsourcing risk adequately. - Operational and technology-related risks deserve heightened supervisory attention especially in the area of supervision of third-party service providers; MAS should consider increasing the frequency and intensity of supervision including through prior notification arrangements. ### Regulatory sandbox: design, safeguards, and supervisory practice - Sandbox stages: application, evaluation and experimentation phase. - Application: MAS assesses innovation criteria and that the firm will ultimately need a license; assessment led by MAS’ fintech specialists (FTIG). - Evaluation: inputs from line supervision departments determine safeguards to mitigate risk and limit impact in case of failure. - Experimentation: fintech firms gain access to a live environment to test products within well-defined parameters (e.g., customer and value limits); firms are subject to regular reporting requirements; experimentation ends with an exit where MAS applies a standardized license assessment. - MAS relaxes certain regulatory/licensing requirements during experimentation to remove disincentives and encourage innovation; examples of relaxations: minimum base capital requirements, arrangements in relation to compliance, governance, internal audit and personal indemnity insurance. - Safeguards: risk assessment at entry, boundary conditions to minimize negative impacts and externalities, measures include enhanced disclosures, transaction limits, limits on number of customers, etc. - Sandbox Express (consulted): expedite entry for firms perceived as low-risk through predefined sandboxes for certain regulated activities (initially insurance broking, recognized market operators (RMOs), and remittances). - Sandbox Express applicants subject to assessment on fitness and propriety and technological innovativeness; boundary conditions proposed to ensure low risk. - Entities not meeting requirements must apply under regular sandbox regime. - MAS may exempt some Sandbox Express entities from licensing; others may not be subject to on-site supervision during sandbox period. - Sandbox Express entities required to submit a progress report to MAS every two months and provide specific disclosures to their clients. - Exit from sandbox: MAS applies a standardized risk assessment treating the firm as any firm seeking a regular license; safeguards implemented during sandbox are removed at exit. - MAS formalized processes after initial “learning by doing”; FTIG assesses business and technology while line supervision departments assess other risks; roles and responsibilities formalized to avoid conflicts of interest. - AML/CFT requirements in sandbox: - MAS requires all applicants to apply AML/CFT policies that comply with MAS AML/CFT rules and follows up with face-to-face discussions. - Guidance provided where necessary; in at least one instance, applicants required to undergo AML/CFT training before sandbox entry. - Implementation of AML/CFT requirements is discussed regularly during experimentation; frequency varies from monthly to quarterly. - Lack of or insufficient implementation of AML/CFT requirements can lead to termination of sandbox. - MAS continues engagement on AML/CFT after firms obtain regular licenses, including possible onsite inspections. - High-level principles to guide sandbox supervision (selected): - Licensing: subject sandbox entities wishing to transit to a full licence to the same end-to-end licensing process as non-sandbox entities; adopt case-by-case approach. - Customer disclosure: enhanced customer disclosure needed; firms should disclose that services are provided in sandbox and implications for consumers. - Assessing entry: apply appropriate safeguards; verify compliance with risk management and minimum standards while in the sandbox; assess capabilities to comply with regulatory requirements. - Assessment: coordination between technical specialists and line supervisors; clear formalization of roles and responsibilities. - Post sandbox: once licensed, conduct risk-based supervision comprising both on-site and off-site supervision. - Technology: closely assess technology and operational risks, including cyber risk. *Source: 1sgpea2019006* ### 52. MAS has implemented a sandbox approach that has several demonstrated benefits. ### 1sgpea2019006 - 52. MAS has implemented a sandbox approach that has several demonstrated benefits. ### MAS sandbox: benefits and internal effects - MAS has positioned itself to embrace the benefits of fintech, supporting a broader government strategy to promote innovation in the economy. - By communicating a clear and transparent approach, MAS has provided certainty regarding regulatory treatment and the fintech ecosystem is thriving in Singapore with positive impacts for the economy, consumers and the financial system at large. - Internally, closer relationship with technology firms allows supervisors to increase their knowledge of how technology is impacting financial services. - The sandbox has helped MAS identify aspects of the regulatory framework that may need to be reviewed in light of fintech developments. ### Risks from the sandbox - New risks include reputational risk to MAS if sandbox firms fail or customers are negatively impacted (e.g., through disruptions caused by operational and technology-related risks or failure of the firm’s business model or the firm itself). - Perception risk arises if firms in the sandbox are perceived as being granted lower standards than other regulated entities. - Typical characteristics of fintech firms entering the sandbox that increase risks: - lower levels of management experience; - lower levels of financial resources and lower capitalization; - less experience in risk management; - higher business risk (many are start-ups). - Boundary conditions mitigate risks to some extent, but heightened supervisory intensity may be needed during each stage of the sandbox period compared to a normal supervisory stance. ### Recommendation on sandbox oversight - Within a risk-based framework, place emphasis on verification of compliance with risk management and other minimum standards, overlaid with a judgement of the residual risks posed during the experimentation phase in the sandbox to mitigate potential reputational risk. ### Digital Token Services — terminology and scope - This note uses MAS terminology: digital token categories are securities, payment, and utility tokens. - Hybrid token types exist; focus is on the three main types as potential investment instruments. - The term initial coin offering (ICO) refers to an initial offering of any type of token, including securities token. - “Crypto-exchanges” refers to any trading service providers in digital tokens, whether operating a matching platform or trading as counterparty (or both). ### ICO activity and MAS market observations - Singapore ranks among the top four jurisdictions in the world in terms of number and value of launched or closed ICOs (2016–2018), per varying methodologies and self-reporting. - Anecdotal evidence suggests ICO activity is increasingly transitioning from utility tokens to securities tokens. - MAS has not registered any prospectus for securities token ICOs to retail investors in Singapore; securities token ICOs may rely on prospectus exemptions (small offers, private placements, offers to institutional or accredited investors). - Several crypto-exchanges operate in or provide services accessible to Singapore; all currently trade only payment tokens and/or utility tokens, none enables trading in security tokens by Singaporean investors. - Some exchanges provide wallet services storing clients’ private keys; Singapore hosts crypto-derivatives exchanges and some spot exchanges plan to start crypto-derivatives trading in Singapore. - MAS gathers data using: (i) crypto-exchanges’ APIs; (ii) transaction information from public crypto-blockchains; (iii) aggregating information from online ICO portals. Information gathered particularly on trading between Singapore dollar and Bitcoin. ### MAS estimates of trading volumes and investor holdings - MAS estimates that by end-January 2019 the total volume of Bitcoins traded against Singapore dollar since 2013 had reached around S$9.3 billion, which implies monthly trading volumes of less than 1 percent of those on Singapore Exchange (SGX). - Cumulative net inflows of Singapore dollars for crypto-exchange Bitcoin trades were about S$400 million according to MAS’ estimates. - Singaporean household assets were S$2.2 trillion as at Q3 2018. ### Table 5: Number and Value of Closed Singapore ICOs (US$ million) - 2016 — Number of Closed ICOs: 1; Value of funds raised: 6 - 2017 — Number of Closed ICOs: 34; Value of funds raised: 519 - 2018, of which — Number of Closed ICOs: 147; Value of funds raised: 1,582 - January — Number of Closed ICOs: 5; Value of funds raised: 51 - February — Number of Closed ICOs: 16; Value of funds raised: 245 - March — Number of Closed ICOs: 15; Value of funds raised: 267 - April — Number of Closed ICOs: 10; Value of funds raised: 146 - May — Number of Closed ICOs: 15; Value of funds raised: 118 - June — Number of Closed ICOs: 15; Value of funds raised: 243 - July — Number of Closed ICOs: 10; Value of funds raised: 48 - August — Number of Closed ICOs: 13; Value of funds raised: 139 - September — Number of Closed ICOs: 12; Value of funds raised: 94 - October — Number of Closed ICOs: 11; Value of funds raised: 80 - November — Number of Closed ICOs: 12; Value of funds raised: 95 - December — Number of Closed ICOs: 13; Value of funds raised: 56 - Sources: MAS estimates, ICOBench - Note: References to Singapore in the ICOBench data may refer to the self-reported (i) country of operations or (ii) domicile of the offering vehicle. These numbers are subject to revision by issuers and are a rough proxy. ### Financial institutions’ exposures - MAS reports Singaporean financial institutions’ exposures to digital tokens are very limited. - They do not currently engage in proprietary trading of digital tokens or their derivatives. - At end-2018, four fund managers launched funds investing in digital tokens and/or their derivatives, targeted at accredited or institutional investors. - These funds’ end-2018 investments in digital tokens were approximately S$5 million. - Their exposures to digital token derivatives stood at S$3 million. ### MAS regulatory approach to digital tokens - Focus areas: enforcing compliance with securities legislation, warning investors on risks, addressing money laundering/terrorist financing (ML/TF) risks. - MAS has warned ICO issuers and crypto-exchanges about the need to comply with Singaporean securities legislation. - MAS has issued advisories and undertaken consumer outreach via MoneySENSE; has listed ICOs on its investor alert list if they could be misperceived as approved by MAS. - MAS plans to continue public education and to limit its regulatory ambit publicly; ML/TF risks are a key part of the approach (see Box 6 in source). ### Regulatory implications of the PS Act — scope expansion - The passing of the PS Act will expand MAS’ regulatory and supervisory reach. The changes differ by token type. Securities tokens - The Securities and Futures Act (SFA) and Financial Advisers Act (FAA) apply to digital tokens that qualify as capital markets products. - MAS’ Guide to Digital Token Offerings (updated November 2018) confirms MAS may regulate offers or issues of digital tokens if tokens are capital markets products under the SFA. - Regulatory requirements for securities tokens and their offerors/intermediaries are the same as for traditional securities; SFA applies to derivatives with securities tokens as underlying instruments. - Licensing for securities token services depends on service type: - Operating a primary platform generally requires a capital markets services license unless exempted. - Providing financial advice on a securities token requires licensing as a financial advisor or being an exempt financial adviser. - Operating a trading platform for securities tokens requires approval as an approved exchange, recognition as an RMO, or holding a capital markets services license, unless exempted. - MAS is well equipped to supervise crypto-exchanges organizing securities token trading; full prudential, investor protection, market integrity and financial integrity requirements would apply. - Key regulatory requirements for crypto-exchanges include fair, orderly and transparent trading; segregation of client assets; outsourcing; technology risk management; conflict of interest management and conduct of business requirements for those trading on own account. - Crypto-exchanges licensed under the SFA would be subject to AML/CFT requirements in MAS’ AML/CFT notices. - SFA Section 339 provides extraterritorial powers over foreign crypto-exchanges with substantial and reasonably foreseeable effect in Singapore; MAS has not applied this provision to foreign crypto-exchanges so far. - Market participants report increasing interest in securities token offerings and exchanges trading securities tokens in Singapore; clarity of securities definition cited as an attraction. - Future RMO applicants may benefit from Sandbox Express. Payment tokens - Under the PS Act, Singapore-based crypto-exchanges trading digital payment tokens must apply for a payment institution license. - PS Act definition of digital payment token: a digital representation of value that (i) is not denominated in any fiat currency, (ii) is accepted by the public as a medium of exchange to pay for goods or services or discharge a debt, and (iii) can be transferred, stored or traded electronically. - Persons carrying on a business of dealing in or facilitating the exchange of digital payment tokens (between fiat and token or between tokens) in Singapore must be licensed as payment institutions (digital payment token service providers). - Other services such as custodian wallet services are currently not covered by the PS Act and can be continued in an unregulated entity; MAS intends to regulate standalone custodian wallet services in a next legislative phase to align with FATF clarifications. - The PS Act’s prohibition against solicitation may oblige some foreign crypto-exchanges to establish a presence and apply for a license in Singapore or stop soliciting clients in Singapore. - Solicitation refers to offers or invitations to provide to the public in Singapore any type of payment service (including digital payment token service) or issuance of advertisements containing such offers; permitted only for licensed or exempted payment institutions. - MAS will define regulatory considerations for whether an offer/invitation/advertisement is made to the public in Singapore; one relevant consideration is whether the offer is for dealing in or facilitating exchange of digital payment tokens in exchange for Singapore dollars. - At least some foreign crypto-exchanges will likely need to establish a presence in Singapore and apply for a payment institution license. - Licensing and supervisory features for payment institutions: - Must be licensed by MAS; have a permanent place of business or registered office in Singapore with at least one person present during times specified by MAS. - MAS must approve the “20 percent controllers” and the chief executive officer (or equivalent) of each payment institution. - Payment institutions are subject to reporting requirements and obligations to provide information to MAS; MAS has rights to request information and conduct inspections/investigations under the PS Act. - All payment institutions are subject to the same AML/CFT requirements as other MAS-supervised entities (see Box 6). - No investor protection or market integrity provisions apply to digital payment token services under the PS Act: - No requirements for safeguarding or segregating clients’ digital payment tokens. *Source: 1sgpea2019006 - 52. MAS has implemented a sandbox approach that has several demonstrated benefits.* ### 72. The full regulatory framework under the PS Act is expected to come into force by the ### 1sgpea2019006 - 72. The full regulatory framework under the PS Act is expected to come into force by the ### PS Act regulatory timeline and scope - The full regulatory framework under the PS Act is expected to come into force by the end of 2019. - MAS intends to consult on all the regulations and the AML/CFT notice in spring 2019 and on the other notices during summer 2019. - Guidelines will likely be published for consultation later in the year. - MAS has publicly stated its intention to undertake the necessary legislative adjustments to bring its approach in line with the latest FATF standards. - Section 23 of the PS Act would enable MAS to extend the requirements for safeguarding customer money to digital payment token service providers through MAS regulation. - If applied, digital payment token service providers that qualify as major payment institutions would be required to apply the safeguarding requirements to customer fiat currencies, but not to their payment tokens. - A “20 percent controller” means a person who, alone or together with his associates (a) holds not less than 20 percent of the total number of issued shares in the payment institutions; or (b) is in a position to control voting power of not less than 20 percent in it. ### Other tokens and derivatives on digital tokens - Utility tokens and other token types that cannot be categorized as securities or payment tokens are currently not regulated by MAS. - Regulation of derivatives on digital tokens currently covers derivatives on underlying things as defined in the SFA (SFA Section 2(1)): - An underlying thing includes a unit in a collective investment scheme, a commodity, a financial instrument (including securities), and the credit of any person. - Derivatives on payment or utility tokens not representing such underlying things are currently not subject to MAS’ regulation. - MAS has the discretion to extend the application of the SFA to utility tokens and other derivatives on payment and utility tokens by expanding definitions (e.g., capital markets product, derivatives contract, or underlying thing) through MAS regulations. - To date, MAS has not considered applying the SFA beyond its current scope. ### Application of AML/CFT requirements to digital token service providers (summary) - Singapore has taken an incremental approach to address ML/TF risks related to digital tokens, noting ongoing FATF discussions on “virtual assets” and “virtual asset service providers.” - MAS has warned consumers of ICO risks and communicated in its March 2014 media release that while “virtual currencies” per se were not regulated, intermediaries in virtual currencies would be regulated for ML/TF risks. - AML/CFT obligations apply to financial institutions operating in Singapore irrespective of whether transactions involve fiat currencies or digital tokens (in line with Section 27A of the MAS Act and related acts). - AML/CFT requirements include: - assessing and mitigating ML/TF risks; - applying customer due diligence measures (including with respect to beneficial owners); - maintaining records; - monitoring transactions and reporting suspicious transactions to the Suspicious Transaction Reporting Office; - implementing United Nations’ targeted financial sanctions related to TF and proliferation financing. - Presence of digital tokens may prompt additional due diligence due to higher risks from the anonymous nature of digital tokens. - MAS has powers to supervise, monitor, and sanction financial institutions for AML/CFT non-compliance. - The AML/CFT framework already applies to digital securities token service providers, and will become fully operational with respect to those dealing in or facilitating the exchange of digital payment tokens (either fiat to digital, digital to fiat or digital to digital) by the end of 2019 (when the PS Act framework will be fully operational). - MAS’ regulatory hold applies to persons carrying out a business of providing digital payment token services in Singapore, but: - It does not necessarily include corporate entities merely created in Singapore as requested by the FATF standard. - Standalone custodian wallet service providers are currently not subject to AML/CFT requirements and monitoring. - MAS noted wallet services in Singapore appear to be provided by crypto-exchanges rather than on a standalone basis; MAS plans to include custodian wallet service providers in its regulatory fold as part of the next phase of legislative changes, in light of the new FATF standard. - Service providers of non-tradeable and non-transferable tokens that cannot be used for payment or investment purposes (non-convertible utility tokens) are not covered by the AML/CFT framework, as authorities consider such tokens to present low ML/TF risks; the basis for deeming risks low in all cases is unclear. - Further adjustments are needed to fully implement the new FATF standard on VASPs, including: - bringing standalone custodian wallet service providers within AML/CFT requirements; - regulating corporate digital token service providers legally created in Singapore for AML/CFT purposes (as per the FATF focus on place of creation); - monitoring ongoing FATF discussions (notably in the context of wire transfers) which may require further changes; - reassessing exclusion of providers related to non-convertible utility tokens to confirm the exclusion is justified. ### Key FATF-related dates and facts cited - The FATF amended the AML/CFT standard in October 2018 with new definitions of “virtual assets” and “virtual asset service providers” (VASPs). - Further FATF work will result in an Interpretative Note and Guidance targeted for issue by June 2019. - MAS references: Section 27A and Section 27B of the MAS Act; Section 39(1) of the Corruption, Drug Trafficking and other Serious Crimes (Confiscation of Benefits) Act; and the MAS Notices on the Prevention of Money Laundering and Countering the Financing of Terrorism (AML/CFT Notices). - FATF/APG 2016 evaluation findings (summarized in source): - Singapore rated fully compliant with FATF Recommendations R. 10-13, 15-18, and 21 and 27. - Largely compliant with R. 14, 19 and 20. - Largely compliant with R. 6 and 7. - Largely compliant with R. 26. ### Conclusions and supervisory recommendations (digital tokens) - Findings: - Financial stability risks from digital token trading and investments seem currently contained. - Singaporean financial institutions and other Singaporean investors have limited digital token investments. - MAS has adopted advanced monitoring approaches to identify changes in trading patterns and investor exposures, particularly regarding trading between Singapore dollar and the most liquid payment tokens. - MAS’ approach to securities token services aligns with practices elsewhere, though securities definitions differ across jurisdictions. - MAS’ full securities regulatory powers apply to crypto-exchanges trading securities tokens; MAS has not yet tested the securities regulatory framework in practice for securities token services given technology, trading models, and safekeeping differences. - Services in utility tokens are not regulated; only AML/CFT regulation will apply to digital payment token services under the PS Act. - MAS’ regulatory ambit over crypto-derivatives is limited to derivatives on securities tokens and derivatives on tokens representing an underlying thing as defined in the SFA, which is narrower than some other regulators’ approaches. - The number of crypto-exchanges under MAS supervision is likely to be relatively high after the PS Act entry into force, potentially increasing trading volumes in Singapore and emergence of crypto-exchanges trading securities tokens; unregulated activities in utility tokens, wallets, and crypto-derivatives may also increase. - Supervisory challenge is compounded by the global scope of crypto-exchange groups, cross-border structures, shared technology, and rapid structural changes by firms. - Reputational risks to MAS may arise from hacks, failures, fraud, or market misconduct associated with Singapore-based crypto-exchanges or affiliated crypto-derivatives exchanges despite limited regulatory reach for certain token types. - MAS’ ability to extend powers to new services provides flexibility to react to emerging risks more quickly than many regulators. - Effective supervision using current powers is fundamental, with important gatekeeping at licensing stage; expedited processes should be carefully considered given novel risks. - Responsibilities for supervision are spread across MAS departments, requiring cross-organizational cooperation. - MAS has a good basis for building effective supervision given its broad cross-sectoral mandate and technological expertise. - Explicit recommendations for MAS: - Further enhances its investor education efforts to highlight risks to investors arising from differing regulatory frameworks for various types of digital token. - Prepares to apply a cross-organizational supervisory approach over the expanding crypto-exchange sector to effectively address risks specific to the sector. - Stands ready to expand MAS’ regulatory reach promptly, if warranted by market and industry developments in digital token services. ### AML/CFT specific recommendations (summary) - Commendation for efforts to mitigate ML/TF risks and enactment of the PS Act to bring digital payment token service providers into MAS’ regulatory fold. - Encouraged actions: - Bring standalone custodian wallet service providers within MAS’ AML/CFT purview. - Ensure AML/CFT framework applies to corporate digital token service providers created in Singapore. - Issue implementing regulations, notices and guidelines under the PS Act. - Ensure the risk-based approach to AML/CFT regulation of providers of services related to digital tokens relies on a sound risk assessment. - Continue following FATF developments related to VASPs and adjust the AML/CFT framework as necessary. ### Digital advice (introductory points) - Definitions and scope: - “Digital advice” refers to firms providing digital advisory services directly to clients (also called automated advice or robo-advice in some contexts); MAS’ terminology “digital advice” is used. - MAS defines digital advisers as financial institutions that provide advice on investment products through direct access by clients to automated, algorithm-based tools (client-facing tools), with limited or no human interaction — i.e., B2C digital advisers. - The term digital advice excludes tools that do not provide advice on specific investments (e.g., tools assisting financial planning). - Third-party providers: - MAS’ definition of digital advisers does not cover third-party providers that supply digital advisory technology and related services for use by digital advisers (often called B2B or B2B2C). - This note refers to such firms as third-party providers. - Financial institutions in Singapore can use third-party providers’ digital advice tools on a white-labeling or tailored basis, provided they subject third-party providers to appropriate due diligence and assess outsourcing risks. - Third-party providers are often non-regulated firms to which financial institutions outsource development and maintenance of client-facing digital advisory tools. *Source: 1sgpea2019006 - 72. The full regulatory framework under the PS Act is expected to come into force by the (extracted content).* ### 89. The value of assets under management (AUM) and assets under advice (AUA) by ### 89. The value of assets under management (AUM) and assets under advice (AUA) by ### Market size and providers - Digitally managed AUA and AUM had reached about S$335 million at end-2018. - This is about 0.01 percent of the total asset management industry AUM. - Digital advice in Singapore is currently provided primarily by non-bank specialized advisers. - Two banks (OCBC and UOB) have recently launched digital advisory services to targeted client groups. - Some banks use digital advisory tools to support human advisers; there is no data on the extent of such use. ### Products and technology used by digital advisers - Digital advisers typically offer model portfolios comprising exchange-traded funds and low-cost diversified investment products such as index funds. - Most digital advisers use relatively simple decision-tree based algorithms. - Some firms are developing tools that utilize artificial intelligence and machine learning. ### Licensing, regulatory entry, and exemptions - Digital advisers need to be licensed under the SFA and/or FAA, unless they are already licensed financial institutions. - Firms seeking to provide digital advice must be licensed for fund management or dealing in capital markets products under the SFA and/or providing financial advisory services under the FAA. The type of license depends on the digital adviser’s business model. - An already licensed firm does not need to notify MAS if it only starts providing its already licensed services in digital format without adding any new services; in practice, firms approach MAS in advance before implementing significant business-model changes. - Digital advisers applying for a retail fund management license can be exempted from certain corporate track record and minimum AUM requirements, subject to additional safeguards: - Experience of key management staff. - Restrictions on the products offered for investment. - Compulsory post-authorization audit by an independent third party. - Requirement for a fully automated client-facing tool to avoid undue influence from an individual. - Digital advisers can apply for entry into MAS’ regulatory sandbox and, if approved, benefit from temporary relaxation of some licensing criteria. - Banks, insurers, and other financial institutions can provide portfolio management and advisory services, including digital advice, under their financial institution licenses and are required to submit a notification to MAS if they wish to expand into new regulated activities. Notification provides relevant regulatory status as exempt financial advisers or exempt capital markets services entities. - Exempt firms are subject to the same business conduct requirements as firms licensed under the SFA or FAA. ### MAS guidelines on digital advisory services (October 2018) - Guidelines provide guidance on licensing, AML/CFT, disclosure of information, and suitability assessments. - Elements highlighted as particularly relevant for digital advice: - Algorithms: Comprehensive requirements on governance and supervision by the Board and senior management and on information about algorithms to be disclosed to clients. - Technology risk management: Digital advisers should adhere to MAS’ notices and guidelines on technology risk management and perform a gap analysis prior to launch and when changes are made. - AML/CFT: Need to address risks associated with non-face-to-face business relations; guidance refers to MAS’ Circular on use of MyInfo and customer due diligence measures for non-face-to-face business relations. - Disclosure: Focus on information to be provided to clients or prospective clients on algorithms and conflicts of interest. - Suitability: Subject to specific conditions, some digital advisers are exempted from collecting full information on the client’s financial circumstances and instead required only to collect information on the client’s financial objectives and risk tolerance. This applies only to fully-automated advice (no human adviser intervention) and where advice is limited to simple collective investment schemes (i.e., excluded investment products (EIPs)). If a digital adviser provides services in specified investment products (SIPs), it is required to collect full information on clients and assess knowledge and experience, and appropriately warn them and/or offer to provide advice. - Advertisements and marketing: Given the need for a suitability assessment before recommending any model portfolio, digital advisers should not advertise specific model portfolios. ### Third-party providers and outsourcing - Guidelines state third-party providers that develop and maintain digital advice tools do not need to be licensed if they do not deal directly with investors. - Digital advisers must subject third-party providers to appropriate due diligence to assess outsourcing risks. - MAS holds the client-facing intermediary responsible for the provision of digital advice, regardless of whether the algorithm or tool is developed in-house or procured from a third party. - No specific requirements apply if a third party only provides a tool used by human advisers; however, if a third party has access to customer information, its use will typically be considered material outsourcing under MAS’ Guidelines on Outsourcing. ### Monitoring and supervisory actions - MAS designed a new questionnaire requiring financial institutions to submit yearly information on their digital advisory services, covering third-party involvement in algorithm development, AUM, fee structure, clientele, and classes of products invested in. - Monitoring currently includes regular dialogue with other central banks and regulators and engagement with industry players. - MAS started thematic reviews on digital advisers in September 2018 examining algorithm governance, technology risk management, suitability (including knock-out questions), sales and marketing practices, and controls over portfolio rebalancing and monitoring. MAS will send letters to reviewed advisers and assess need for further guidance after reviews. ### Financial stability, market outlook, and risks - Financial stability risks arising from digital advice are insignificant at the moment, but the market is continuously developing. - AUA/AUM are likely to continue to grow and potentially at an accelerating pace. - Globally, the hybrid model (digital advice complemented by access to a human adviser) has the most significant growth potential. - Digital advisory tools are expected to be increasingly provided by third-party providers rather than built in-house to enhance cost effectiveness. - Anticipated growth in third-party digital advice tools may open risks including: - Inability of the digital adviser to sufficiently oversee the third party that develops, owns or manages the algorithmic code or software. - White-labeling may blur the line between the regulated entity and the service provider, raising questions about when a third-party provider should be required to be licensed for investment advice. - MAS is well positioned, given its leading role in fintech and proximity to innovative local providers, to enhance its understanding of business models and tools that incorporate local regulatory requirements; interaction with global providers could inform trends in other jurisdictions. ### International comparison and policy considerations - MAS has allowed certain discretion on the information digital advisers are required to collect in suitability assessments, subject to conditions. This approach differs from some other jurisdictions: - European Union: digital advisers are subject to the same suitability assessment requirements as traditional advisers and portfolio managers (knowledge and experience, financial situation, investment objectives). - United Kingdom: the Financial Conduct Authority reminded that automated investment services must meet the same regulatory standards as traditional discretionary or advisory services. ### Recommendations - MAS should: - Continue monitoring potential risks related to the use of third-party digital advice tools and adjust regulations, if warranted. - Reconsider whether the discretion on the collection of information permitted for certain digital advisers in their suitability assessments sufficiently protects clients from unsuitable advice. ### Appendix I — Crowdfunding (selected highlights) - Securities-based crowdfunding (equity-based and lending-based) is still nascent in Singapore. - Funds raised through securities-based crowdfunding amounted to S$137 million in 2017, of which S$68 million were raised through lending-based offers, compared to approximately S$390 billion in domestic business lending by banks. - Crowdfunding operators do not provide credit using their own balance sheets (their affiliated entities may do so); operators act as conduits and use proprietary frameworks for credit risk assessments, considering quantitative and qualitative criteria; some extend assessments to directors if loans are secured by personal guarantees. - Information collected by crowdfunding platform operators on corporate borrowers includes: - General information: business model, number of years of business, number of employees, information on directors. - Financial information: bank statements, financial reports, tax filings and returns. - Credit history/profile: average number of days taken to pay creditors, payment history, and credit profile reports (where available). - Incumbent financial institutions have started to cooperate with crowdfunding operators (examples cited in the source). - Operators facilitating equity- and lending-based crowdfunding are required to hold a capital markets services license under the SFA; lending-based crowdfunding falls under the SFA because invitations to lend money are deemed offers of debentures. - Peer-to-peer lending to individuals falls under the Moneylenders Act administered by the Ministry of Law; no peer-to-peer lending platforms are operating in Singapore at the moment. - Invoice financing through a platform is unregulated unless structured as a security with invoices as collateral, in which case it is lending-based crowdfunding. - Issuers are required to prepare and register a prospectus with MAS unless exemptions apply (exemptions include: small personal offers less than S$5 million within 12 months; private placements no more than 50 persons within 12 months; offers to institutional or accredited investors). - MAS has issued FAQs, guidelines, and a circular (August 2018) with expectations on issuer due diligence, default management, business cessation, and additional investor disclosures. - MAS monitors crowdfunding operators via reviews of financial returns and data, investor complaints, on-site visits, and collects data on funds raised and issuer defaults; platform operators must provide default information within three business days of an issuer default. *SINGAPORE — INTERNATIONAL MONETARY FUND (selected paragraphs 89–102; Appendix I).* ### Appendix II. Overview of the Five Scenarios and the Role Players ### Appendix II. Overview of the Five Scenarios and the Role Players ### Scenarios and role players - Scenarios: - Better bank - New bank - Distributed bank - Relegated bank - Disintermediated bank - Service provider (product and risk management) / Customer interface mapping (as presented): - Better bank: Incumbents revamp legacy with a modern digital client interface - New bank: New banks build for digital and an enhanced digital customer experience - Distributed bank: Incumbents; Fintech; Bigtech — Digital customer interface - Relegated bank: Incumbents; Fintech; Bigtech — Digital customer interface - Disintermediated bank: Aggregators of financial services built by fintech/bigtech; Fintech providing full service e.g., DLT, P2P; Bigtech providing full service e.g., DLT, P2P - Customers: Digital *Appendix II. Overview of the Five Scenarios and the Role Players — content unit.* ### Appendix III. Comparison of Regulatory Sandboxes in Selected Jurisdictions ### General overview - Many jurisdictions around the world use a sandbox regime; specific constructs vary widely. - Motivations for sandboxes: accommodate evolving fintech landscape; stimulate economic growth and modernize the financial system; address financial inclusion and improve competition. - The table highlights different practices of selected regulators related to financial innovation. ### Country-by-country summaries (selected entries) - Australia - Application process: No formal application, but a participant is required to provide a written notice and several documents - Who can apply: B2B entities, especially early-stage financial institutions - Admission criteria: Must have no more than 100 retail clients with a total client exposure under AUD 5 million, comply with consumer protection requirements, have adequate compensation arrangements, and external and internal dispute resolution procedures - Number of participants: 6 up to date - Length of the program: 12 months - Process and benefits: Possibility to test the product/service immediately by avoiding high threshold of training and qualification management requirements - Graduation: All exemptions expire, and companies are expected to apply for a license - Hong Kong SAR - Application process: Send the query to HKMA via email or through Fintech Supervisory Chatroom - Who can apply: Firms already licensed by the regulator. Start-ups must obtain a relevant license or partner with an already licensed institution - Admission criteria: Firms that are "fit and proper, utilize innovative technologies and are able to demonstrate a genuine commitment to carry on regulated activities using fintech". Firms also must demonstrate: 1) boundary (scope of the trial, timing, termination agreements); 2) customer protection measures; 3) risk management controls; 4) readiness and monitoring - Number of participants: 40 pilot trials - Length of the program: Not Specified - Process and benefits: Relaxed requirements for testing and pilot projects but still need to have adequate investor protection in place and up to the regulators' discretion to limit the number of customers if needed - Graduation: Companies that comply with supervisory requirements at the end of the trial can launch their services - Indonesia - Application process: Three step application process: 1) presentation and document submission; 2) document review; 3) if approved, submit a scenario of sandbox participation, exit plans, targets, boundaries, and reporting mechanism - Who can apply: All registered financial technology operators, mainly from the payment systems category - Admission criteria: Worthiness and reliability of the system, implementation of consumer protection, risk management and prudential guidelines, overall compliance - Number of participants: 49 up to date - Length of the program: 6 months - Process and benefits: Possibility to test a product or a new business model without regulatory constraints while simultaneously benefitting from close supervision by the Bank of Indonesia - Graduation: Even if after the sandbox the entity gets a successful status, that does not guarantee license of approval. Separate license must be obtained. There is legal obscurity related to what happens to companies that get “unsuccessful” status upon completion. - Malaysia - Application process: Electronic form submission - Who can apply: Any entity, except for already regulated activities under the purview of the securities commission Malaysia (i.e., fund management, peer-to-peer lending, equity crowd funding) - Admission criteria: Functionality of the product, its innovative value, resources, test-plan, business plan post-exit and managerial expertise - Number of participants: 7 so far - Length of the program: 12 months - Process and benefits: It is an expectation of the program that the participants will facilitate a double-sided exchange that will make the regulatory process more agile - Graduation: Companies that comply with supervisory requirements at the end of the trial can launch their services - Taiwan Province of China - Application process: An application form and an extensive innovation experiment plan - Who can apply: Any entity/person intending to provide financial services and falling in jurisdiction of the Financial Supervisory Commission (FSC) - Admission criteria: Innovative value, potential to increase efficiency of the financial services, potential risks and risk management procedures, appropriate compensation coverage in case of failure etc. - Number of participants: 40 (as of August 2018) - Length of the program: 12 months - Process and benefits: Regulatory exemptions and an ability to request the FSC's help in liaising with other government agencies if the scope of the business falls outside of the FSC's regulatory perimeter - Graduation: Exit mechanism must be described in the innovation experiment plan. If the experiment is a success it can either be modified to fit into the regulatory framework that already exists, or the authorities can amend existing laws and regulations - Thailand - Application process: An application form and a complete set of supporting documents with a special emphasis on consumer protection - Who can apply: An already licensed firm (can be an FI, a fintech company, or a technology company) with a product offering within the financial sector - Admission criteria: BoT emphasizes that the products or services must be innovative involving new technology not already available in Thailand or enhancing the efficiency of already existing products or services. Also, the regulator will look at how beneficial the offering is for the financial ecosystem at large - Number of participants: Not specified in the excerpt - Length of the program: Not more than 12 months but varies by application - Process and benefits: Ability to test services/ products in a live but limited environment with some regulatory flexibilities on a case-by-case basis - Graduation: If the test results are successful the entity must apply for permission, akin to a license application. If goals are not met, the applicant must stop the service notifying the consumers and providing them with an exit plan, a transition plan out of the sandbox, and a resolution process - United Kingdom - Application process: On a cohort basis - Who can apply: Open to any firm that will be carrying out (directly or indirectly via supporting any other firm) regulated financial services activities - Admission criteria: An applicant needs to meet default FCA standards and eligibility criteria along with showing that they plan to deliver innovation with a genuine need to test it within the sandbox - Number of participants: 89 companies since launch in 2016 - Length of the program: 6 months - Process and benefits: Offers participants restricted authorization, individual guidance, informal steers, waivers and no enforcement action letters. Each sandbox participant gets a case officer who becomes their primary point of contact throughout the program. Safeguards are placed individually to help mitigate potential harm, e.g., extra capital requirements, systems penetration testing etc. - Graduation: An entity must submit a final report summarizing the experience before graduating from the sandbox - Bahrain - Application process: Online application supported by a cover letter, a number of documents for the filing requirement, and an application fee - Who can apply: Both existing CBB licensees (financial institutions with FinTech initiatives) and other companies (technology, or telecom companies, or any other professional service company intending to provide services in the financial sector) - Admission criteria: Following criteria apply: innovation, customer benefit, technical testing for existing solutions, and readiness for regulatory testing (plans and consumer protection safeguards) - Number of participants: 14 as of August 2018 - Length of the program: Up to 9 months - Process and benefits: CBB specifically notes that It is prohibited to use the term 'licensed' during the Regulatory Sandbox testing period, or otherwise hold themselves out to be a licensee in Bahrain, unless they hold the appropriate license from the CBB. Authorized Regulatory Sandbox participants must notify the CBB before the issuance of any media publication/report and must obtain the CBB's prior written approval. The entity must submit a monthly progress report to the CBB reporting on several key criteria. - Graduation: Participants must submit a detailed final report prepared by a reputed third party pre-approved by CBB. CBB limits the number of volunteer customers up to 100. The amounts and transaction limits are to be decided by the CBB on a case-by-case basis. - Arizona, USA - Application process: An online form and an application fee - Who can apply: Both existing Arizona licensees and non-licensed businesses may apply. Securities trading, insurance products, or services that provide solely deposit-taking functions are not eligible to enter the Sandbox - Admission criteria: Applications are evaluated holistically to determine the ability to conduct a test that does not place undue risk on consumers. In reviewing the applications, the following factors may be considered: capitalization; insurance or bonds and their terms; compliance or legal support; accounting practices; cash on hand; and the number and expertise of active advisors and key personnel - Number of participants: 3 up to date - Length of the program: 2 years - Process and benefits: Sandbox incorporates multiple oversight systems. Participants may be required to provide periodic updates that would be established upon an applicant's entry into the Sandbox. Updates will be fashioned to provide information about a test's progress and compliance with the Sandbox terms and restrictions - Graduation: Upon completion Sandbox participants either must stop offering the product or obtain any applicable licenses, at which point it is relatively easy to get a similar license from 16 other states that standardized the key elements of the licensing process *Appendix III. Comparison of Regulatory Sandboxes in Selected Jurisdictions — compiled by Anastasiia Morozova, Research Assistant, IMF.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1sgpea2019006.pdf_