The Iranian Association of Islamic Finance held the international webinar on ‘Global Experiences of Sandbox in Capital Markets’ in collaboration with Iran Financial Center on 10 May, 2022.

Opening Remarks by Iran Financial Center

Sandbox, also known as the regulatory test environment, actually consists of a group of experts and a set of review and evaluation procedures that after receiving an innovative idea, creates a controlled environment for starting activities over a temporary and scheduled period.

This environment creates the conditions for issuing a permanent license if the specific success indicators are met and the possibility of regulating and controlling business behavior is recognized. It also connects new business applicants to legal entities.

Nowadays, one of the challenges that innovative and start-up businesses usually face is related to licensing procedures and the lack of proper, written and up-to-date rules that make the time of market entry very long.

Sandbox must be able to reduce the time of market entry and in particular it is for products that are uncertain and there are no specific rules and regulations about them.

These innovative ideas can be in the field of new financial products and services, including markets, instruments, contracts, institutions, systems and other innovative solutions in the field of capital markets that the applicant intends to implement, but due to novelty, lack of previous experience and insufficient knowledge of the consequences of developing ideas, common mechanism and procedures, and existing regulations in the capital market cannot take specific action in the real market for licensing.

So far in Iran, sandbox projects have been implemented in various fields, including banking and monetary fields. Another one is the capital market sandbox including the three main pillars of steering committee, the secretariat and the executive.

Iran Financial Center has also been appointed as the operator of capital market sandbox for two years. In a general view, the Iranian capital market sandbox operator designs and determines the processes and executive procedures required in the pre-test, during test and post-test stages.

The process of attending the Iranian capital market sandbox:

1- Receiving applications

2- Initial evaluation of submitted designs

3- Submitting reports

4- Preparation

5- Test stage
6- Commitment to submitting reports

7- Exit/ transfer

8- Commercial establishment

Those interested in participating in sandbox in Iran can send their plans to این آدرس ایمیل توسط spambots حفاظت می شود. برای دیدن شما نیاز به جاوا اسکریپت دارید

And finally, due to the importance of this issue, it is necessary to review international experiences in the field of test environment. Also the success and failure of sandbox in other countries in different stages of the test environment can help newly established sandboxes on this path.

First presenter
Takeshi Kito, Vice-chair at Fintech Association of Japan & Head of Global Partnerships, Chair of Regtech&Suptech and Capital Markets Committees
He mentioned that Fintech Association of Japan came into existence in 2015 and consists of various committees such as Payment, API & Data Sharing, Lending, Insurance, Capital Markets, Online Factoring, Cyber Security, RegTech & SupTech and Compliance.
Kito pointed out to the international partners of Fintech Association of Japan, which are Bahrain FinTech Bay, Luxembourg House of Financial Technology, Fintech Association of Hong Kong, Singapore FinTech Association, ASEAN Financial Innovation Network, Romanian Fintech Association and so on.
Regarding the Regulatory of Sandbox in Japan, kito said Governance System in Japan is divided into Legal System and Government System. Legal system includes Constitution, Law, Cabinet Order, Ministerial Order, Announcement, Notification which are mainly based on Emperor Civil Law/Statutory Law.
Government System includes Diet (Legislative Branch), Cabinet (Executive Branch) and Judiciary (Judicial Branch). The main mission of Fintech Association of Japan is to fill in the gap between regulatory form and innovative ideas when innovator;s dilemma in governance systems happen.
There are Five Frameworks for Regulatory Reform:
Regulatory Sandbox for Regulatory Reform Based on Demonstrations.
Council for Promotion of Regulatory Reform for Investigation & Deliberation.
System to Remove Gray Zone Areas for Statutory Interpretation.
System of Special Arrangements for New Business Activities: Exceptional Measures.
National Strategic Special Zones for Deregulation.
He touched upon the unique features of Fintech Association of Japan, saying Statutory Law Based, Cross Industrial, Organized by Prime Minister, Always Open and Available to Government Bodies are some of them.
Structure of monitoring plans in sandbox of Japan:
1) Consultation, 2) Submission of application 3) Minister's view on the application 4) Reviews minister's view 5) Notice of approval/ non-approval 6) Reporting.
At the end Vice-chair at Fintech Association of Japan gave some examples about authorized cases in Japan such as justInCase Co. in which Insurance fee are postpaid and calculated based on the total amount of insurance money divided by the number of policyholders.
CRYPTO GARAGE Co. has established a platform for registered crypto exchanges, which enables them to make simultaneous settlements between Crypto and FIAT.
CAULIS Co. has establishes a new framework to prevent openings of fraudulent bank account with identity theft by using electricity consumption data.

Second Presenter
Joann Maryam Enriquez, CEO Investment Account Platform (IAP), Malaysia
The speaker at first talked about Regulatory Sandboxs seeking to encourage innovation and the delivery of financial services by granting regulatory flexibilities for fintech solutions with genuine value proposition to be experimented in a production or live environment.
Such flexibilities will be accompanied by appropriate safeguards to preserve financial stability, integrity of financial transactions, ensure fair business conduct and fair treatment to consumers.
As of March 2022, 108 applications in various sectors.
Then she mentioned Principles behind the Sandbox that is the establishment of the Sandbox Framework and broader efforts to facilitate innovation in financial services are guided by three key principles:
Parity
The Bank strives to create a level playing field for all industry players, regardless if they are incumbents or new entrants in the market.
Proportionality
Regulators are also guided by this principle in designing certain regulations to ensure that requirements appropriately reflect the complexity and risk profile associated with a particular business activity or entity.
Neutrality
Regulatory requirements are designed to achieve its desired policy objective without preference or bias to specific technologies or methods.
Finally she mentioned that in IAP we combine the expertise of the banks, the innovations and agility of technology by adapting new due diligence criteria and a more robust comprehensive digital experience without having to enter the branches and still benefit from the banking network (depositors and investors).

Third Presenter
Dr. Muhammad Iman Sastra Mihajat, Advisor and Consultant, Investor Relations, Middle East and Southeast Asia at Telkom, Indonesia
At first he talked about Financial Technology and Digital Innovation in Indonesia, saying Indonesia is the largest digital economy in the region (South East of Asia) and undoubtedly the next emerging startups hub will be Indonesia in the region.
Indonesia’s internet economy has more than quadrupled to more than $40 billion in 2019 and is well on track to reach $130 billion by 2025.
The runner up is Vietnam with $12 billion in 2019 with a projected $43 billion by 2025. Singapore continues to dominate funding and is the 1st regional base for fintech firms with $2.6B raised since 2015, led by big gains in funding to payments and insurtech startups.
Mihajat went on to say that the number of listed fintech companies in Indonesia under OJK has reached 33 while there are still thousands of unlicensed and licensed fintechs.
Regarding the OJK Regulatory Sandbox in Indonesia the speaker mentioned the following steps have to be passed:
1. Recording and Registration Mechanism: All fintech firms not regulated by other authorities must comply with OJK regulation and followthree key steps: a. Recording: Fintech firms must submit all the documents required to OJK for verification and analysis to decide whether they: (1) meet the criteria as innovators and comply with OJK regulation; (2) are selected to be tested on the regulatory sandbox; and (3) which cluster they are classified in based on the business model mapping. b. Regulatory Sandbox: The regulatory sandbox is conducted using a sampling and prototyping method, where selected fintech from each business model (cluster) is tested. There are five key steps involved: 1) understanding the business model, business process, and governance; 2) choosing the review methodology and scenarios; 3) testing and experimentation; 4) improvement of model; and 5) final evaluation. The review process involves a panel forum of supervisors who will provide opinions whether the fintech’s model is recommended, needs improvement, or is not recommended for registration or operation. The length of the regulatory sandbox process could vary from a few months to 1 year, with the extension of up to 6 monthsif they are required to rectify their business.
c. Registration: Fintech firms that are recommended by the regulatory sandbox must apply to the registration stage 6 months at the latest after getting the recommendation status. 2. Governance, Risk and Compliance: Fintech must develop and adopt good governance, effective risk management, and compliance to all rules and regulations to ensure a safety and sound practice. 3. Monitoring and Surveillance Mechanism: Though regulated and supervised by OJK, fintech must also conduct risk self-assessment. During the regulatory sandbox, they must submit quarterly performance reports; once these are registered, the firm must submit a monthly risk self-assessment report. Fintech firms must also continuously report to customers about the performance of their portfolio.
4. Customer Protection: Fintech firms must apply the following basic principles of customer protection including transparency, fair treatment, reliability, data privacy and security, as well as effective and efficient handling of customers’ complaints.