Singapore outlines fintech strategy, releases sandbox guidelines

The Monetary Authority of Singapore (MAS) has outlined its framework for driving the country's fintech industry, focusing on the need to provide a "conducive" regulatory environment and ecosystem to support new technologies.

To support fintech developments, the authority must provide a regulatory regime that aids innovation while ensuring security as well as the infrastructure needed to drive the adoption of new technologies. Speaking at the FinTech Festival 2016 conference Wednesday, MAS Managing Director Ravi Menon further noted that legislation should not be introduced too early or it might hinder innovation, but the regulator still needed to keep pace with industry developments and assess potential risks.

Menon explained that MAS aimed to step in only when new technologies posed real risks or crossed a threshold, adding that regulatory intervention needed to be proportionate to the risk posed.

"Many technologies mitigate existing risks but may create new ones. The regulatory approach must seek to incentivise the risk mitigation aspects while restraining the new risks," he said, pointing to how the regulator had opted for "activity-based" policies governing payments and introduced guidelines to encourage secured cloud computing in the financial services industry.

MAS earlier this year also mooted the idea of a regulatory sandbox that would enable financial institutions to test products under less stringent laws. Menon added that it also provided an environment where experiments could fail "safely and cheaply", within controlled boundaries and without widespread adverse consequences.

In this aspect, the regulator had just finalised its regulatory sandbox guidelines, which he said incorporated industry feedback and was tested against actual sandbox applications.

Released on Wednesday, the document outlined how startups or financial institutions could go about testing fintech products and services that were likely to be regulated by MAS. Applicants would need to be reviewed and approved to proceed with the sandbox.

Elaborating on the need also to facilitate the right infrastructure, Menon said common standards and interoperable systems were essential to enable innovations to quickly scale up. He added that MAS had set aside S$225 million over five years to drive the fintech industry and, earlier this year, established a fintech office with the National Research Foundation to provide a "one-stop" facility to address fintech matters.

He also stressed the need for physical spaces to support collaboration and experimentation, an electronic payments infrastructure, a national "know-your-customer" framework, a blockchain infrastructure to facilitate cross-border inter-bank payments, as well as an open API architecture.

He said MAS, the Singapore Exchange, and eight banks had just kicked off a proof-of-concept initiative to tap blockchain technology for inter-bank payments, including foreign currency transactions.

According to an MAS statement Wednesday, blockchain technology vendor R3 had been roped in to develop a pilot system that could be used to issue and transfer funds between the participating banks, which included Credit Suisse, United Overseas Bank, and OCBC Bank. BCS Information Systems would provide the existing payments gateway to facilitate the blockchain transactions.

"Such a system will be more resilient against stoppages by decentralising and distributing the software that records and validates payments," MAS said. "Participants can depend on the immutable record of transactions at the heart of the blockchain to reduce the cost of long-term record keeping."

The pilot system would allow the participating banks to deposit cash as collateral with the MAS in exchange for MAS-issued digital currency, which could be redeemed later for cash, Menon explained. The banks then would be able to pay each other directly using the digital currency, instead of sending payment instructions through MAS, he added.

To further bring about more efficiencies, he highlighted the need for standard protocols or APIs to define how systems and applications interact with each other. In this aspect, MAS today published a Finance-as-a-Service API Playbook, produced with the Association of Banks in Singapore, to provide guidance on the standardisation and use of APIs, Menon said. These included standards for information security, data exchange, and governance mechanisms.

MAS last week published APIs for 12 datasets, including frequently accessed information on exchange rates and interest rates.

Menon said more financial institutions also were expected to announced their own API initiatives in the next week.

"In an industry facing the headwinds of lower economic growth and heavier regulatory burdens, innovation must be the way to refresh and re-energise the business model," he said.