FOLLOWING THE FIRST PART OF OUR SPECIAL TECHNOLOGY SERIES LAST MONTH EXPLORING THE EVOLUTION OF FINTECH, LEO LONG LOOKS AT THE GERMINATION OF THE CONCEPT AROUND THE ASIA-PACIFIC, REVEALING WHICH JURISDICTIONS ARE AHEAD OF THE TECH CURVE
Perhaps there is no other region in the world where the differences between development with respect to fintech and other advanced technology services are so pronounced as in the Asia-Pacific. The region is home to some of the most advanced financial economies – and some of the least developed when it comes to technology.
But the overall picture is encouraging and a look at a cross-section of Asian jurisdictions shows just which markets are embracing the legal challenges endemic to regulating cutting-edge tech and those that may yet be struggling to keep pace.
In the past two years, mainland China has become a heavyweight in global fintech. Shanghai and Beijing were ranked as respectively the first and third to-be technology innovation hubs in the next four years, in addition to Silicon Valley, and Chinese companies such as Ant Financial (No.1), Qudian (No.2), Lufax (No.3), Zhong An (No.5) occupied the top seats of the world’s fintech companies in 2016, according to auditing company KPMG.
“We believe that fintech will make substantial progress in the next three to five years, in the areas of digital asset trading, retail banking, security settlement and clearing, and supply chain finance in China,” says Sofia Yao, a Shenzhen-based partner at Dentons.
The past year witnessed active transactions of these Chinese fintech companies at home and abroad, which include huge deals such as the US$4.5 billion Series B round of financing into Ant Financial Services Group in April 2016 and a US$1 billion investment into JD Finance in January 2016 by investors. After its investment in Thailand’s Ascend Money in October 2016, Jack Ma’s Ant Financial invested into Mynt in the Philippines in February 2017.
Most of these companies focus on mobile payment and lending based on social network or e-commerce platforms. “China is the world’s largest and most developed e-commerce market, which provides a large customer base to penetrate for online payment, especially mobile payment, which accounts for more than half of e-commerce sales in China,” says Wang Shengzhe, a Shanghai-based counsel at Hogan Lovells.
Chinese mobile payment in 2016 tripled to RMB38 trillion (US$5.5 trillion), about 50 times larger than those in the US, and the gap is expected to widen further, according to the Financial Times.
Insurtech is another fast-growing sector in China. “The emergence of insurtech helps the traditional insurance industry reconnect with its customers, rebuilds trust, and utilizes new approaches to underwriting risks and predicting losses,” says Wang.
As to cutting-edge technologies such as blockchain, there is both faith and fear. “Insofar as China is concerned, the legal framework regarding blockchain is undeveloped,” says Roland Sun, a partner at Broad & Bright in Shanghai. Sun has handled some blockchain deals, including the US$23 million Series A financing in JuZhen Financial, which is China’s largest financing in blockchain domain.
“While the Chinese government explicitly encourages the blockchain-based businesses to grow, no specific legislative effort has been made so far, apart from the People’s Bank of China’s (PBoC) plan to issue its digital fiat currency,” says Sun.
In 2013 and 2014, PBoC issued notices that prohibit banks and payment companies from conducting bitcoin business. On the other hand, it established a virtual currency research center and a digital bill trading platform based on blockchain in 2017.
However, under the glamour is the widespread coverage on China’s peer-to-peer lending (P2P lending) frauds. P2P start-up Ezubao’s took US$7.6 billion from investors in a Ponzi scheme exposed in early 2016.
Internet finance including P2P lending has become gradually regulated since 2015, when regulators jointly released relevant laws and rules, including the Guiding Opinions on Promoting the Healthy Development of Internet Finance, which has been regarded as the basic law for internet finance.
Li Yikun, general counsel at Fox Financial Technology (Hong Kong) Group Limited, raises two issues: the fact that the different fintech sectors are regulated separately does no longer match the industry’s development; and the effectiveness of the laws or rules tailored for traditional financial industries has become weaker.
“Although existing regulations have covered domains like third-party payment, internet lending, crowdfunding, internet funds, internet insurance, the regulatory policies have yet to cover new areas like big data, virtual currency, robo-adviser and internet credit systems,” says Li.
In the past two years, Chinese regulators promulgated regulations related to fintech, including Interim Measures for the Administration of Online Lending Information Intermediary Institutions, Cybersecurity Law, and Guideline Opinion on Strengthening the Protection of Financial Consumer’s Rights and Interests.
Yao notes that the laws and regulations show that the regulators care a lot about financial stability and consumer protection while encouraging fintech technology innovations and their adoption in financial industry.
“Overall, Chinese regulators are very positive on fintech and support its development, although they have not yet come up with systematic regulatory arrangements in connection with fintech,” says Yao.
In addition to mainland China, fintech has also been emerging fast in other Asia Pacific markets.
Hong Kong has the highest rate of fintech use, at 29.1%, followed by the US (16.5%), Singapore (14.7%), the UK (14.3%) and Australia (13%), based on an Ernst & Young report.
“Hong Kong is a natural hub for fintech given the significant financial market presence in the jurisdiction, its global reputation, institutional networks, talent pool, and established legal framework,” says Joyce Chan, a Hong Kong-based partner at Clyde & Co. “Its links with mainland China also make Hong Kong well placed to ride the fintech wave, as China is home to several of the world’s four highest-valued fintech companies, including Alipay and Tencent.”
Both the Hong Kong government and the private sector have tried to embrace the development of fintech. In March 2016, the Hong Kong Monetary Authority established a Fintech Facilitation Office, and the city is among the first in Asia to set up a regulatory sandbox.
However, while Singapore’s sandbox is available to any fintech start-up, Hong Kong’s is only available to existing authorized institutions already under the regulation of the Hong Kong Monetary Authority.
“There is a more pressing concern in Hong Kong for fintech start-ups to engage with existing financial institutions compared to other jurisdictions, as this remains the most direct route for access to the regulatory sandbox,” says Mark Jephcott, a partner at Herbert Smith Freehills in Hong Kong.
When it comes to fintech regulation, there are relevant laws in Hong Kong. “There are laws under the Crimes Ordinance and Telecommunications Ordinance, which deal with the crime of hacking and unauthorized access to certain systems,” says Anna Gamvros, a partner at Norton Rose Fulbright in Hong Kong.