Are there any governmental or regulatory initiatives designed to facilitate or encourage the development and use of blockchain technology (for example, a regulatory sandbox)?
While there are no specific initiatives designed to facilitate or encourage the development and use of blockchain, both ASIC and the Australian Transaction Reports and Analysis Centre (AUSTRAC) have established Innovation Hubs designed to assist fintech businesses more broadly in understanding their obligations under Australian law.
The ASIC Innovation Hub is designed to foster innovation that could benefit consumers by helping Australian fintech start-ups navigate the Australian regulatory system. The Innovation Hub provides tailored information and access to informal assistance intended to streamline the AFSL process for innovative fintech start-ups, which could include blockchain-related businesses.
In December 2016, ASIC made certain class orders establishing a fintech licensing exemption and released Regulatory Guide 257, which details ASIC’s framework for fintech businesses to test certain financial services, financial products and credit activities without holding an Australian financial services licence (AFSL) or Australian credit licence by relying on the class orders (referred to as the regulatory sandbox). There are strict eligibility requirements for both the type of businesses that can enter the regulatory sandbox and the products and services that qualify for the licensing exemption. There are restrictions on how many persons can be provided with a financial product or service, and caps on the value of the financial products or services which can be provided. Businesses may only rely conditionally on the relief for 12 months.
The framework relating to ASIC’s regulatory sandbox has been subject to review. The Government has consulted on draft legislation and regulations outlining an enhanced framework that allows businesses to test a wider range of products and services for a longer period of time. ASIC has also released a consultation paper suggesting that no changes to its existing fintech licensing exemption will be made.
Please refer to section 3 above. Various working groups, notably created on the initiative of Paris Europlace (an association of market participants and regulators for the development of the city of Paris as a financial hub), are currently considering ways and means, including the regulatory “sandbox”, to facilitate the development of “digital asset services” and FinTechs generally.
Support for innovation also involves the development of public financial aid, for instance through tax credits designed to encourage technical research.
On the taxation front, initiatives are also being developed to create a favourable tax environment (notably in respect of the taxation of capital gains for token trading).
In September 2019, the German government published a Blockchain strategy (see answer to question 4. above). It emphasises the importance of developing Blockchain based solutions not only in the public sector, but also in the private sector. By the end of 2021, the German government stated, that it will take measures to exploit the opportunities offered by the Blockchain technology and mobilise its potential.
In March 2019, the federal government published a key-issues paper on the regulatory treatment of electronic securities and crypto token. The paper is the first measure to be implemented as part of the Blockchain strategy. The plan is to open German legislation to electronic, dematerialised securities and to publish a draft legislation to regulate the public offering of specific crypto token. The introduction of electronic securities means that the current rule, whereby securities must be represented by physical certificates, will no longer apply across the board. Rules on electronic securities shall be technologically neutral, i.e., it should also be possible to issue electronic securities on a Blockchain. These measures are intended to establish the Blockchain technology in the financial sector.
Furthermore, the government stated, that it will introduce a “round table” on the topic of Blockchain technology and data protection. The “round table” shall offer an exchange format to investigate frequently occurring case constellations and to point out possible solutions.
There is currently no regulatory sandbox in operation in Ireland nor are there any plans to establish one. There is, however, a fintech innovation hub (the Innovation Hub) which has been operated by the CBI since April 2018. The Innovation Hub engages with fintech firms involved in developing and deploying various innovative technologies, including blockchain. It also provides a direct and dedicated point of contact in the CBI for firms engaged in fintech innovation, allowing them to ask questions and engage with the CBI outside of existing formal regulator/firm engagement processes.
The Government and several Irish-based companies have also combined to establish Blockchain Ireland, an initiative led by IDA Ireland’s Blockchain Expert Group, aimed at helping to promote and share information on blockchain in Ireland
On 28 June 2019, Law No. 59/2019 finally introduced a regulatory sandbox in Italy. Its purpose is to allow fintech and insurtech companies to test new business models aimed at pursuing innovative services and products in the financial, credit, insurance markets sectors using new technologies such as blockchain and artificial intelligence. Furthermore, the MEF established a fintech committee whose purpose is to: (a) identify the objectives; (b) define the programmes; (c) implement actions to encourage the development of fintech, also in cooperation with foreign subjects; (d) draft regulatory proposals; and (e) facilitate the relationship between operators and authorities.
To date, the implementing regulations outlining the requirements needed to access this sandbox have yet to be published.
To encourage Fintech innovation, including the development and usage of blockchain technology, the FSA introduced the “Fintech Testing Hub” in September 2017. As part of this initiative, the FSA will set up, on a case-by-case basis, a support team that helps Fintech companies and financial institutions to identify and solve potential legal issues and risks associated with new Fintech schemes.
In addition, in June 2018, the headquarters of Japan’s Economic Revitalization of the Cabinet Secretariat established a cross-governmental one-stop desk for the Regulatory Sandbox Scheme in Japan. This resource, available to Japanese as well as foreign companies, enables applicants (once approved) to carry out, under certain conditions, a demonstration of their projects even if such activities are not yet covered under current laws and regulations. Blockchain technology, together with AI, IoT and big data, are explicitly mentioned in the basic policy of the Regulatory Sandbox Scheme as prospective and suitable areas for exploration and development.
Furthermore, in February 2019, the Ministry of Economy, Trade and Industry (“METI”) held an event entitled “Blockchain Hackathon 2019”, which is generally known as the first step towards social implementation of blockchain technologies in the domains of academic degrees, courses and career certifications, as well as in the recording and storage of research data .
Although there is no “sandbox” per se, the Liechtenstein Financial Market Authority has a department solely dedicated to the fielding of Fintech related inquiries, the majority of which are related to blockchain technology.
According to a recent report by the AFM and DNB, implementation of certain crypto products – and, to a lesser extent, other blockchain solutions -- is sometimes impeded by the current financial regulatory framework. However, within the limits of their mandate, the DNB and AFM play an active and facilitating role through their joint initiatives, the InnovationHub and the regulatory sandbox. Furthermore, the DNB and AFM are sometimes able to facilitate partial authorisations (see below).
In addition to the above-mentioned facilities, the Dutch government is very receptive to fintech – the technology that aims to compete with the traditional processes of financial service delivery. Innovation is a key topic on the Minister of Finance's agenda for the financial sector. Priorities include measures to facilitate market access for fintech businesses, proportionality of regulations, and research on the possibilities of blockchain application for payments and securities (see previous questions).
The InnovationHub supports market parties that seek to implement innovative financial business models, services or products in the market. In addition to offering a single point of access to the regulators (the DNB, AFM and ACM), the InnovationHub enables market parties to understand the relevant regulatory framework.
In the context of the regulatory sandbox, the relevant regulators (the DNB and AFM) will assess whether the applicants and their innovative concepts comply with the underlying purposes of applicable regulations, rather than with the strict letter of the law.
Market parties that, through their services, qualify as a financial undertaking – but which do not wish to engage in all operations governed by a full authorisation, or which are not yet able to meet all eligibility requirements for such an authorisation – have the possibility to obtain a partial authorisation from the regulators. Such an authorisation may be granted on a temporary basis, (but may also have a more permanent nature). These partial authorisations allows businesses, which are testing innovative services and products, to step-by-step develop fully-fledged financial undertakings.
In 2009 the Skolkovo Innovation Center (so called “Russian Silicon Valley”) was created. This Center includes five “clusters” for various spheres, such as IT, Energy, Nuclear Technologies, Biomedicine and Space Technologies. Besides that, the Center serves as a venue for international conferences and forums on blockchain. One of these conferences “Blockchain Life Forum” will be held in October 2019, participants from 70 countries are expected to arrive in Moscow.
The regulatory platform (“sandbox”) was launched by the Central Bank of the Russian Federation in 2018 for introduction of new technologies. It is planned to carry out pilot projects in the following areas: biometrics, distributed ledgers, cryptotechnologies, artificial intelligence, crowdfunding, etc.
Besides that, Russian Government, State Duma and the Ministry of Economic Development and Trade are currently discussing the possibility of launching a new regulatory ‘sandbox’ project. The idea of the authorities is to allow the use of cryptocurrencies for payment purposes in some pilot regions (nowadays Moscow, as well as Kaliningrad and Tatarstan regions are discussed). It is planned to give some fintech companies dealing with distributed ledgers, including blockchain, artificial intelligence, quantum or neurotechnologies a possibility to use cryptocurrencies for the purposes of fundraising as well as buying and selling assets.
In November 2018, the Special Act on Financial Innovation Support (the “Special Act”) introduced Korea’s “regulatory sandbox” policy for the financial sector. Under the Special Act, companies selected by the FSC are exempted from current financial regulations for two years to test new technologies outside the complex regulatory environment.
As of May 2019, of the 18 fintech solutions selected for the regulatory sandbox, three incorporate blockchain technology: Directional, KOSCOM and Kasa Korea. Directional will test a blockchain-based stock lending platform that provides stock lending and borrowing services for individual investors. KOSCOM will test a blockchain-based financial service that computerises and updates the list of shareholders of non-listed small and medium-sized enterprises to support the peer-to-peer and over-the-counter trading of such stocks. Kasa Korea will test a blockchain-based financial services platform that issues and distributes mortgage-backed securities in a form of electronic securities. As for blockchain-based services using cryptocurrency, Korean regulators have not yet announced their positions and no projects involving cryptocurrency have been approved for the FSC’s regulatory sandbox. MOIN, a fintech startup using cryptocurrency to provide global monetary transfer solutions, applied for sandbox participation in February this year, but the Ministry of Science and ICT (“MSIT”) eliminated MOIN from the list of sandbox candidate companies to be evaluated by the relevant FSC panel. The MSIT commented that “further consultations must be conducted with the relevant authorities.”
In 2017, the Swedish government assigned a special committee to investigate the needs for legislative changes in order to eliminate barriers for digital development in the public sector. However, the investigation did not result in any legislative amendments to facilitate the use of blockchain technology.
No regulatory sandbox has yet been introduced in Sweden to encourage the use of blockchain technology. The government, larger financial institutions and private equity firms asked the SFSA to consider the need for a regulatory sandbox in Sweden. The SFSA decided against creating a regulatory sandbox with the argument that innovations in the financial sector are already strong in Sweden and that a regulatory sandbox could adversely affect competition in the market. For the same reason the SFSA decided not to consider any regulatory changes.
Upon instruction by the Swedish government, the SFSA has established a fintech-specific innovation centre with the purpose of creating a designated space where fintech companies can engage in dialogue with the SFSA and receive information on the regulations applicable to their business, thus facilitating fintech companies’ regulatory compliance. The innovation centre is not, however, a regulatory sandbox allowing companies to test their innovations in the market under the SFSA’s supervision. The SFSA believes that the innovation centre has greater potential to succeed than the establishment of a regulatory sandbox.
On 22 March 2019, the Federal Council (the supreme body of the Swiss federal government) presented a preliminary draft of a new Federal Act on the Amendment of Federal laws in light of the Developments regarding Distributed Ledger Technology (DLT), along with an explanatory report. The preliminary draft, which is largely based on a study regarding DLT conducted by the Federal Council in 2018 (see question 6) was subject to public consultation until the end of June 2019. In a next step, a draft will be prepared for deliberation in parliament. The preliminary draft proposes a number of changes to federal laws, in particular the Swiss Code of Obligations ("CO"), the Federal Law on Debt Collection and Bankruptcy ("DEBA"), the Anti-Money Laundering Act and the Financial Market Infrastructure Act ("FMIA"). The key proposed changes include the following:
- Amendments to Swiss civil securities legislation in the CO to introduce a new category of securities in the form of DLT-based uncertificated securities (DLT-Wertrechte).
- Amendments to Swiss insolvency rules in the DEBA to provide for specific segregation rights regarding crypto-based assets in the bankruptcy of a custodian as well as the segregation of (access) data.
- Introduction of a new stand-alone licence type under the FMIA for so-called "DLT Trading Facilities" (DLT-Handelssysteme), i.e. institutions for the multilateral trading in standardised DLT securities. Differing from the licences for traditional trading venues such as stock exchanges and multilateral trading facilities, the DLT Trading Facility licence type is intended to be a unified licence enabling its holder to also provide certain post-trading services normally reserved to other financial market infrastructures, notably central custody/depository services as well as clearing and settlement. Another distinction vis-à-vis traditional trading venues is that the DLT Trading Facility licence type would allow for the admission of private individuals or unregulated legal entities to trading instead of regulated participants only.
It is expected that the draft DLT legislation is bound for an accelerated legislative process with the goal to finalise and enact the amended rules by the end of 2020. However, it remains to be seen whether this will be feasible given the quite fundamental nature of the proposed changes, in particular with regard to the concept of DLT securities. At the time of writing, the results of the public consultation process have not yet been published.
Separately, in January 2019, a new regulatory licence type, the so-called fintech licence, was introduced into the Swiss financial regulatory framework by way of an amendment of the Swiss Banking Act ("BankA"; formally, fintech licence holders are referred to as "persons pursuant to article 1b BankA"). Holders of a fintech licence are allowed to accept and hold (and to solicit the acceptance and holding of) deposits from the public, on a professional basis, for amounts of up to CHF 100 million (higher ceiling amounts can be approved by Swiss Financial Market Supervisory Authority FINMA in the individual case or might be introduced by the Federal Council for general application from time to time). The key limitation of the fintech licence is that holders are not allowed to engage in commercial banking business with maturity transformation. While the licence is available to all kinds of businesses that are required to hold third party funds for extended periods, it was mainly created to enable innovative business models in the financial market, whether on the basis of blockchain technology or not. Its introduction marks the completion of a three-pillar fintech programme initiated by the Swiss Federal Council in November 2016. The two previously implemented pillars referred to (i) the extension of the maximum holding period for third party funds in so-called settlement accounts (i.e. the time period during which such funds do not yet qualify as deposits) from seven days to 60 days and (ii) the establishment of a regulatory sandbox for innovative companies outside of prudential supervision. Both of these measures were put into effect on 1 August 2017.
Discussions about sandboxes have been ongoing for a while at the central bank, the Capital Markets Authority and the Uganda Communications Commission. The central bank has a blockchain working group under the auspices of its Financial Markets Deeping Committee. The Uganda Registration Services Bureau earlier in the year retained a consultant to explore the viability of blockchainizinng the Companies Registry.
There are several initiatives in the UK designed to encourage the development of blockchain technology, concentrated in the financial services sector.
Innovate U.K. is a government-led agency that drives productivity and economic growth by supporting businesses to develop and realise the potential of new ideas. It has invested over £10 million in blockchain projects focused on energy distribution, clean water provision, electoral systems and maximising value from items donated to charity. In 2018, it announced that it was investing a total of £19 million in emerging and enabling technologies, which included blockchain. The government has also created a £20 million GovTech Catalyst Fund to explore technology based solutions for public sector challenges, potentially including the use of DLT.
The FCA began its own innovation project in 2014, which consists of a Regulatory Sandbox, an Innovation Hub and a newly-launched Global Financial Innovation Network (“GFIN”). The Regulatory Sandbox allows businesses to test innovative products, services, business models and delivery mechanisms with real consumers in a controlled environment. The FCA’s Innovation Hub provides a means by which new and established businesses—both regulated and non-regulated—can introduce innovative financial products and services to the market, with support from the FCA on the application of the regulatory framework. The GFIN was launched in January 2019 in collaboration with 38 other financial regulators and creates a new framework for cooperation, promoting information and knowledge sharing on emerging innovation trends, tests, initiatives and policies. It also provides firms with an environment in which to trial cross-border solutions. Finally, the FCA has also recently consulted on whether a cross-sectoral sandbox or similar mechanism is needed to ensure a consistent and efficient approach to emerging technologies.
The BoE has a Fintech Hub, through which it seeks to understand what Fintech means for the stability of the financial system, the safety and soundness of financial firms and its ability to perform its operational and regulatory roles. Between 2016 and 2018, the BoE has supported four DLT focused proofs-of-concept with firms to understand how new technologies are being adopted and how they might relate to its objectives.
More recently, the Information Commissioner’s Office (“ICO”), a public body which upholds information rights in the public interest, launched a sandbox in 2019 to support organisations who are developing products and services that use personal data in innovative and safe ways, including organisations that utilise blockchain.
The US is following its European counterparts with a regulatory sandbox approach to develop blockchain in the financial technology industry. The Consumer Financial Protection Bureau (“CFPB”) and Commodity Futures Trading Commission (“CFTC”) have joined forces to create a regulatory sandbox for fintech companies, similar to those created in the U.K., aimed, amongst others, at cryptocurrencies and other financial technologies based on blockchain (the “Disclosure Sandbox”). This comes following Arizona’s regulatory sandbox initiative also related to cryptocurrency. As these sandboxes are still works-in-progress (Arizona is still seeking applicants and the CFPB is revising the policy following a period of public comment), the legal field has yet to see the outcome of these initiatives but the goal per Mick Mulvaney, then acting director of the CFPB, is to find the regulatory “sweet spot” with respect to regulation to protect investors and instil confidence in the markets, without discouraging people from entering the marketplace in the first place due to overregulation.
The MAS has initiated FinTech development through implementation of a regulatory sandbox (“FinTech Sandbox”). The sandbox encourages FinTech players to experiment with innovative financial products or services under relaxed specific legal and regulatory requirements during the sandbox period. At the end of the duration of the sandbox, the sandbox entity must fully comply with relevant legal and regulatory requirements. Additionally, the MAS has also recently launched a “Sandbox Express”, which allows eligible applicants to commence testing of innovative financial products and services in a pre-defined environment, speeding up the process of market testing. It is notable that whilst the Sandbox Express will be available first for insurance brokers, RMO and remittance businesses, the MAS has expressed an openness towards opening up this scheme to other regulated activities. Notably, the developer/operator of iStox – a platform offering issuance, settlement, custody and secondary trading of digitized securities, was admitted into this sandbox earlier in May 2019.
The Fintech Facilitation Office (FFO), established by the HKMA in 2016, facilitates the development of the Fintech ecosystem in Hong Kong and promotes Hong Kong as a Fintech hub in Asia. In September 2017, the HKMA announced seven initiatives to prepare Hong Kong to move into a “new era of smart banking”, namely: (i) the Faster Payments System (supporting the use of mobile phone numbers or email addresses for payments in Hong Kong dollar and Renminbi anytime and anywhere); (ii) an enhanced Fintech Supervisory Sandbox (originally launched in September 2016); (iii) the promotion of virtual banking; (iv) the ‘banking made easy’ initiative (through a new taskforce set up to work with the banking industry); (v) open application programming interface (API) for the banking industry (a computer programming approach for facilitating exchange of information and executing instructions between different computer systems); (vi) cross-border collaboration with regulators in other jurisdictions; and (vii) enhanced collaboration with the Hong Kong Applied Science and Technology Research Institute, Science Park and Cyberport to promote the introduction of new technology and processes.
The SFC has established a Fintech Advisory Group in order to: (i) obtain information on the latest trends of Fintech; (ii) collect stakeholders' input on specific Fintech themes; (iii) identify the opportunities, risks and regulatory perimeter implications of Fintech; and (iv) broaden the understanding of Fintech as an evolution of the financial services industry. The SFC has also established the SFC Regulatory Sandbox to provide a confined regulatory environment for qualified firms to operate regulated activities under the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (the “SFO”) before Fintech is used on a fuller scale.
The IA has launched various initiatives to promote Insurtech development in Hong Kong, including: (i) the Insurtech Sandbox; (ii) a fast track for applications for authorization of new insurers owning and operating solely digital distribution channels; (iii) the Insurtech Facilitation Team (to enhance the communication with business involved in the development and application of Insurtech in Hong Kong, as well as to promote Hong Kong as an Insurtech hub in Asia); and (iv) the Working Group on Embracing Fintech in Hong Kong under the Future Task Force (focusing on promoting the application of Fintech in the insurance industry).
The HKMA and the SFC are members of the Global Financial Innovation Network, to which firms can apply to conduct cross-border tests of innovative financial products or services.
There is no public list of entities that are subject to Hong Kong’s regulatory sandboxes.