Fintech is seeing a lot of change, with new business models constantly emerging and old ones being improved. Regulators need to adapt to these innovations, and businesses need to understand how they work in the real world.

This is where regulatory sandboxes come into play. These are used by a wide range of industries—not just fintech—to test products, services, or business models without being subject to the usual regulatory requirements. The purpose is to drive innovation while keeping risks to consumers and the financial system relatively low.

In this article, we’ll examine some common characteristics of regulatory sandboxes, with a focus on the Asia-Pacific (APAC) region, and determine whether it’s worth participating in them.

APAC’s regulatory sandbox

In 2020, there were approximately 73 sandboxes in 57 jurisdictions; APAC had 19 of them. In 2023, there were 20 sandboxes in the SEA-6 region alone (that’s Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam). This indicates significant adoption of this regulatory approach in APAC.

Successful fintechs have previously participated in APAC’s regulatory sandboxes. This includes Singapore-based regulated decentralised security token trading platform, DigiFT, which was granted access to the MAS’ regulatory sandbox to become the first licensed decentralised security token exchange. Another example is BondBlox — the first blockchain-based bond exchange, which also participated in Singapore’s MAS sandbox.

Also Read: Sandboxes and diversification: Why the UAE believes in light-touch regulation for AI development

Here’s a more detailed breakdown of the APAC sandbox landscape:

• On March 12, 2024, the Hong Kong Monetary Authority (HKMA) unveiled the Stablecoin Issuer Sandbox. Participants may include any entity interested in issuing fiat-referenced stablecoins in Hong Kong.
• On March 4, 2024, the State Bank of Vietnam published a draft decree on a regulatory sandbox for the banking sector, including fintech solution providers. Participants may include credit institutions, foreign bank branches, fintech companies, and other organisations. The specific fintech solutions that are allowed to be tested include credit scoring, sharing data via an open application programming interface (Open API), and peer-to-peer lending.
• On February 19, 2024, Indonesia’s passed Regulation Number 3 of 2024, concerning the Implementation of Financial Sector Technology Innovation. Among other things, it contains provisions regarding a sandbox issued by the Indonesian Financial Services Authority (OJK). As such, OJK regulations specify that participants may consist of Financial Services Institutions (FSIs) and/or other parties who intend to carry out activities in the financial sector. The covered areas include settlement of securities transactions, raising capital, investment management, risk management, collecting and/or distributing funds, activities related to digital financial assets, including crypto assets, and other digital financial services activities.
• On April 26, 2024, the Philippines Security Exchange Commission (SEC) issued rules for a strategic sandbox (StratBox) designed to facilitate the testing of innovative financial products and services. The SEC specifies that the “Participant” may be an entity that is “duly registered with the Securities and Exchange Commission and has been assessed as eligible to take part in the SEC Regulatory Sandbox”. The SEC will post sandbox activity guidelines on its website, which will include eligible activities and innovations.

* This list is not exhaustive.

Regulatory sandboxes: Intended purpose

As Darryl Chan, a Deputy Chief Executive of HKMA said, “a sandbox is a box filled with sand that allows children to play and unleash their creativity within a confined space and under a safe environment.” In other words, sandboxes allow businesses to experiment with their new products, services, or business models. This gives them the ability to  test things out in the real world under the supervision of regulatory authorities for a limited period of time.

For instance, the HKMA Stablecoin Issuer Sandbox Arrangement, serves as a channel for both the HKMA and the fintech industry to exchange views on the proposed regulatory regime for stablecoin issuance and facilitate the formulation of fit-for-purpose and risk-based regulatory requirements.

Regulatory sandboxes also help improve a product or service with feedback and speed up integration. Meanwhile, regulatory authorities can identify gaps in regulation.

Here’s how the HKMA and State Bank of Vietnam define the purposes of their regulatory sandboxes:

Support the development of virtual asset ecosystem in Hong Kong; Communicate our supervisory expectations and guidance on compliance to parties and/or entities having genuine interest in and reasonable plan on issuing fiat-referenced stablecoins in Hong Kong, with a view to facilitating the subsequent implementation of the proposed regulatory regime for stablecoin issuers in Hong Kong; Obtain feedback from the sandbox participants on the proposed regulatory requirements to ensure that the regime is fit-for-purpose when implemented; To the extent appropriate, develop and promote good practices in key control areas (e.g. reserves management and stabilisation, governance, user protection, AML/CFT, data transparency, etc.).

To promote innovation and modernisation of the banking sector, thereby realising the goal of financial universalisation for people and enterprises in the direction of transparency, convenience, safety and efficiency at low cost. Create a test environment to assess risks, costs and benefits of Fintech solutions; support the development and development of Fintech solutions in accordance with market needs, legal framework, and management regulations. Limiting risks to customers when participating in using Fintech solutions participating in trials that have not been prescribed in the legal framework and official management regulations. The results of trial implementation of Fintech solutions shall be used as a practical basis for competent state agencies to formulate and complete relevant legal frameworks and management regulations.

Participating in sandboxes does not mean that participants will be automatically granted a license—or that they are officially recognised or endorsed by regulators.

Also Read: Why Singapore is ASEAN’s sandbox for innovation in healthtech

Conditions of participation

To join a sandbox, organisations should pass an assessment—which, among other conditions, includes the following:

• Novelty assessment: Evaluates whether the proposed product or service should include new or emerging technology or uses existing technology in a novel way (e.g., Philippines SEC sandbox, State Bank of Vietnam proposed sandbox, OJK sandbox);
• Usefulness assessment: Evaluates whether the product or service provides benefits, improves services, and adds value to consumers, society, and/or the financial sector ecosystem (e.g., Philippines SEC sandbox, State Bank of Vietnam proposed sandbox, OJK sandbox);
• Viability assessment: Evaluates whether the organisation has the intention and ability to deploy the proposed services or products after successfully exiting the sandbox (e.g., Philippines SEC sandbox, HKMA Stablecoin Issuer Sandbox, State Bank of Vietnam proposed sandbox);
• Real interest and testing possibility assessment: Evaluates whether a testing plan with test scenarios and expected outcomes of sandbox experimentation are clearly defined (e.g., Philippines SEC sandbox, State Bank of Vietnam proposed sandbox, HKMA Stablecoin Issuer Sandbox).

For more detailed entry conditions, see the relevant act/regulations/decree.

Conclusion

The effectiveness of a regulatory sandbox depends on three key factors:

• The extent to which it encourages participation;
• Whether it actually stimulates innovation;
• How transparent they are for those involved. This largely depends on open, ongoing  communication  dialogue between regulators and sandbox participants.

For companies focused on developing a new product or service, but need to test a few hypotheses first, a sandbox can be a good option—but only if the sandbox itself is set up properly. Therefore businesses seeking to participate in a sandbox should closely consider whether the three factors mentioned above are properly facilitated.

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