APPLICATION

【Special Feature】What kind of "sandbox" is being played in regulatory sandbox, can financial innovation thrive in Taiwan?

share
【Special Feature】What kind of "sandbox" is being played in regulatory sandbox, can financial innovation thrive in Taiwan?

At the iPhone 6 launch event on September 9, 2014, Apple CEO Tim Cook officially introduced "Apple Pay," which was officially launched in October of the same year. However, in 2016, the Central Bank of Taiwan temporarily postponed the launch of ApplePay citing reasons such as "lower efficiency compared to domestic systems," "difficulties in protecting personal information," "inability of tax authorities to verify transaction details," "high banking service costs," and "not conducive to domestic industry development." It wasn't until 2017 that ApplePay was officially launched. Whether the delay was due to a more conservative attitude or mysterious forces from the massive interest structure behind the scenes, it is evident that Taiwan has a high level of execution in blocking financial innovation.

Nevertheless, in the "Financial and Technology Industry Regulatory Sandbox Experiment" led by the Financial Supervisory Commission, two successful cases finally emerged from the sandbox in March of this year. Since the launch of the regulatory sandbox in May 2018, a total of 14 trial applications have been submitted, with 2 cases successfully exiting the sandbox, including the mobile number loan cooperation between Cathay United Bank and Chunghwa Telecom; and the blockchain wallet collaboration between Bank of Taiwan, AccountLink, and Taiwan Shin Kong Bank, among other fintech-related startup cases. This article will summarize some of the cases accepted by the Taiwan regulatory sandbox, including their applications and trial situations.

Regulatory Sandbox

The term "sandbox" originates from the field of computer security. It refers to an isolated testing environment created during software development to test programs without being affected by the external environment. In the financial sector, the concept of regulatory sandbox was first introduced by the UK government in 2015. The UK Financial Conduct Authority (FCA) defines it as:

A regulatory sandbox is a "safe space" where fintech companies can test their innovative products, marketing, and business models without immediately being bound by regulatory constraints. By reasonably relaxing regulations to reduce friction in the financial innovation process, it aims to achieve a win-win situation of innovation while effectively reducing risk management.

Taiwan's "Financial Technology Innovation Experimentation Act" draft was proposed in January 2017 and completed the third reading on December 29 of the same year, making Taiwan the fifth country with a regulatory sandbox system following the UK, Australia, Singapore, and Hong Kong.

KGI Bank & Chunghwa Telecom

The collaboration between KGI and Chunghwa Telecom on "Using Mobile Telecom Identity Verification for Inclusive Financial Services Fintech Innovation Experiment" was the first startup experiment approved by the Financial Supervisory Commission (FSC), submitted on August 28, 2018, approved in September, and successfully exited the sandbox in July 2019.

Traditional personal loan application procedures are often cumbersome, involving a series of processes before disbursement, including credit limit calculation, application submission, bank inquiries, review, loan approval notification, collateral signing, and disbursement.

The new method involves linking KGI with the user's past Chunghwa Telecom number records (no arrears, no service suspension) to allow users to complete the review and disbursement process online via mobile phone application.

At the time, FSC Chairman Gu Lixiong pointed out two innovations:

1. "100% confirmation" of the applicant's identity through telecom data
2. Building credit rating models for credit cards under NT$250,000 and small loans under NT$500,000 based on payment records, allowing individuals without credit history to access financial services.

It is puzzling that this is almost indistinguishable from what various banks call online loans. Despite confirming identity through a mobile number, some initial information from the mobile subscription still needs to be filled out again, and of course, ID verification needs to be re-uploaded. During the approximately 10-month sandbox experiment, the improvement in financial convenience should have been more apparent. Although there were some minor improvements, was it really necessary to enter the sandbox?

Bagel Pay

This project, formerly known as the blockchain digital wallet "Lucky Pay," was jointly launched by Fubon and MaiCoin Group's account-linking company AMIS, with Taishin Bank also participating and simultaneously developing the new wallet Coffee Pay. It was approved to enter the regulatory sandbox in August last year for a 6-month trial period with the aim of reducing interbank transfer costs and promoting mobile payments.

Bagel Pay's name is derived from the "B" representing Blockchain, and Bagel symbolizes a daily snack, signifying Fubon's determination to integrate the complex blockchain technology into daily life.

Bagel Pay's core technology is supported by AMIS, using its self-developed blockchain new algorithm "Istanbul Byzantine Fault Tolerance" (Istanbul BFT), which has been adopted by J.P. Morgan. However, many articles and press releases online indicate:

Istanbul BFT is a consensus algorithm designed from the perspective of a consortium chain, with a maximum Transaction Per Second (TPS) of 1200, significantly improving Ethereum's message exchange efficiency, providing a faster and more stable infrastructure for the global financial internet."

It is then compared with Bitcoin and Ethereum (with TPS of 7 and 15 respectively), which can be misleading to readers, suggesting that this new consensus algorithm instantly solves the problem of slow transaction speeds of Bitcoin and Ethereum. But is that really the case?

J.P. Morgan's blockchain platform Quorum and AMIS are built on Ethereum's open-source code, creating a consortium chain that operates in a parallel world and does not increase the transaction speed of Ethereum.

However, don't misunderstand; consortium chains are not bad. Many enterprise-level blockchain projects such as Hyperledger, R3, and Quorum emphasize improving distributed ledger technology (DLT) by using nodes, permission systems, consensus mechanisms, etc., making it better at protecting corporate privacy while significantly enhancing data and transaction processing capabilities, making it more suitable for application in current physical industries.

Regarding Bagel Pay, as the blockchain sandbox case reached the maximum total transaction limit of NT$55 million, it exited the sandbox early on March 19. Fubon Bank may further experiment with using blockchain for cross-border remittances, so a second application to enter the sandbox is not ruled out, which will then be applied to actual financial services. A report on the experiment's results is expected to be released soon.

Good Investment

"Instant Fund Swap" is a collaboration between FinTech startup "Good Investment" and Far Eastern International Bank's online bank Bankee. Fund Swap allows users to swap funds with each other, exchanging their own Fund A for the other party's Fund B at an equal value without the need for redemption, thus saving transaction costs.

Historically, fund sales structures have been dominated by banks and life insurance companies, with traditional bank advisors often guiding frequent client transactions due to performance pressure, leading to inappropriate sales practices. Additionally, purchasing funds often incurs a 1.5% to 3% handling fee, and redeeming funds takes 5 to 7 days, resulting in inefficient capital utilization.

Therefore, Good Investment aims to redefine the fund transaction model by offering its members a "monthly subscription" (NT$500) to purchase, redeem, and exchange domestic and foreign funds without handling fees. The sandbox experiment began in December 2019 and will last for a year, embedding it into Far Eastern International Bank's Bankee App via API, which is still in the sandbox.

In the initial stage of the experiment, Far Eastern International Bank will provide the top 30 popular funds for members to exchange and may increase the number of funds based on demand. Both parties will verify and test the feasibility of this business model, and once the service is launched, it will be operated by the Good Investment team.

The team claims that fund exchange data will not be stored in Good Investment's database but will use the Ethereum blockchain for digital asset recording and plan to develop their "public chain platform" in the future.

This is a project in the regulatory sandbox that is more innovative, but the need for frequent trading in investment funds tends to be long-term. Whether there is a real demand for frequent trading and the potential issue of low liquidity for Fund Swap remain to be observed.

The above cases may seem distant, so let's take a look at the street payment service, Jkopay. In January this year, Jkopay attempted to launch the Taiwanese version of Yu'ebao, "Jkopay Custodial Treasure," with a guaranteed annualized return rate of 1.5% and advertised heavily before being approved by the FSC and before the details of the custodial treasure's interfaced fund products and guaranteed return mechanism were known.

Jkopay was immediately halted by the FSC, as officials from the Securities and Futures Bureau stated that the custodial treasure structure violated the Investment Trust and Investment Consulting Act by emphasizing guaranteed returns. If they wanted to proceed, they would have to enter the regulatory sandbox, but even in the sandbox experiment, practices with guaranteed returns are illegal.

Jkopay's violation of the securities laws was the primary issue, but it is evident that Taiwan seems to prefer traditional financial institutions to lead FinTech ventures (as mentioned at the beginning with Taiwan Pay) rather than encouraging disruptive innovation in FinTech by any entrepreneur. Furthermore, assuming Jkopay were to enter the sandbox, with its 1.5 million users, it would quickly surpass the amount limit, rendering the sandbox unable to meet the actual needs of such services, potentially leading to the stillbirth of the custodial treasure.

The government should strive to strike a balance between protecting ordinary consumers and financial startups, but this balance has evidently been off-kilter for a long time. Jkopay may not even be able to obtain a sandbox ticket, so what is the purpose of the regulatory sandbox? Where is the function of legislators when it comes to amending outdated traditional financial regulations?

References