Hong Kong Towards a Leading Global FinTech Hub

36 37 Government Support Part I: Examination of Seven Fintech Hubs Meanwhile, New York and San Francisco have had the opposite experience because of the layered political regulatory structure in the US. Having different regulatory frameworks at federal and state levels makes it more difficult to pass bills. For example, in 2018, the DFS turned down OCC’s support for fintech sandboxes as well as OCC’s special purpose national bank charter for fintech companies. 79 The struggle between federal- and state- controlled regulations will continue to present difficulties to fintech companies in the US if this remains unresolved. Except using public funding as a direct financial approach to support fintech activities, the governments also consider non-financial efforts to assist and sustain the potential development of fintech innovation. We will not discuss some common forms of non- financial government support that are considered important and effective tools. Sandbox Environments The presence of sandbox programs provides a safe environment for conducting pilot trials that are essential for getting innovative ideas to the commercialization stage. It is a win-win for governments, regulatory bodies, and sandbox participants. For fintech companies, the regulatory sandbox is a safe, reliable, and minimal cost testing space for their new products and services. For regulators, they can observe whether the relevant regulations would drive or hinder the development of innovation, and help the regulatory regimes make an “evidence-based policy decision”. 80 According to the World Bank, there are a total of 73 regulatory sandboxes across 57 jurisdictions as of November 2020. 81 Since 2016, over 70 fintech-related sandboxes have been created globally. The majority of sandboxes were established in the Asia-Pacific region, followed by Europe, with the US reporting the fewest sandboxes. 82 The GFIN has piloted a six-month cross-border testing program in February 2019 for firms to test their products, services or business models across multiple jurisdictions. 83 The UK was the first country to adopt a fintech regulatory sandbox in late 2015, and has conducted the sandbox for seven cohorts 84 to date. In addition to the benefits already 79. Fintech Future. | New York state stands against fintech sandboxes (Feb 2018). | https://www.fintechfutures. com/2018/08/new-york-state-stands-against-fintech-sandboxes/ Debanked. | Federal Judge Rules New York’s “Win” Against OCC’s Fintech Charter Nullifies The Fintech Charter Concept Entirely (Oct 2019). | https://debanked.com/2019/10/federal-judge-rules-new-yorks-win-against-occs- fintech-charter-should-cancel-the-fintech-charter-concept-entirely/ Crowdfund Insider.| Final Judgement: OCC Loses Fintech Charter Legal Battle as Judge Rules in Favor of New York State Department of Financial Services (Oct 2019). | https://www.crowdfundinsider.com/2019/10/153207- final-judgement-occ-loses-fintech-charter-legal-battle-as-judge-rules-in-favor-of-new-york-state-department-of- financial-services/ Roll Call. | Federal agencies, states compete to be fintech regulator (Jan 2021). | https://www.rollcall. com/2021/01/19/federal-agencies-states-compete-to-be-fintech-regulator/ 80. World Bank Group. | Global Experiences from Regulatory Sandboxes (2020). | https://openknowledge. worldbank.org/bitstream/handle/10986/34789/Global-Experiences-from-Regulatory-Sandboxes. pdf?sequence=1&isAllowed=y 81. The World Bank. | Key Data from Regulatory Sandboxes across the Globe (Nov 2020). | https://www.worldbank. org/en/topic/fintech/brief/key-data-from-regulatory-sandboxes-across-the-globe 82. World Bank Group. | Global Experiences from Regulatory Sandboxes (2020). | https://openknowledge. worldbank.org/bitstream/handle/10986/34789/Global-Experiences-from-Regulatory-Sandboxes. pdf?sequence=1&isAllowed=y 83. Global Financial Innovation Network (GFIN). | The GFIN Cross-Border Testing. | https://www.thegfin.com/ crossborder-testing 84. According to the FCA website last updated on 6 January 2020, the application window for cohort 7 of the regulatory sandbox closed on 31 December 2020 and will open again in 2021. 85. Financial Conduct Authority (FCA). | Regulatory sandbox lessons learned report (Oct 2017). | https://www.fca.org . uk/publication/research-and-data/regulatory-sandbox-lessons-learned-report.pdf 86. Ernst & Young LLP. UK FinTech Census 2019, A snapshot: two years on (2019). | https://assets.ey.com/content/ dam/ey-sites/ey-com/en_uk/topics/banking-and-capital-markets/uk-fintech-census-2019/ey-uk-fintech- census-2019.pdf 87. Bank of International Settlement. | Inside the regulatory sandbox: effects on fintech funding (Nov 2020). | https:// www.bis.org/publ/work901.pdf 88. Digital Sandbox Pilot. | https://www.digitalsandboxpilot.co.uk/ mentioned above, the FCA also wished to have more products tested and introduced to the market. Therefore, it has been working with innovators to ensure that appropriate consumer protection safeguards are built into the new products and services. 85 The UK’s experience with the regulatory sandbox has proven to be successful. As of 2020, more than 375 fintech firms from over 50 countries have applied for the UK’s regulatory sandbox. 86 Startups that participated in the first cohort of the UK’s sandbox received £135mn (US$188mn) in total equity funding. Around 80% of the sandbox participants who successfully tested their products remain in operation. Compared with fintech companies that did not join the sandbox, those who participated in the program raised an average of 15% (or £700,000 or US$972,705) 87 more in funding. In addition to the regulatory sandbox, the FCA collaborated with the City of London Corporation to pilot a “digital sandbox” from November 2020 to February 2021 88 to enhance regulatory support for innovating firms during the COVID-19 pandemic. The Digital Sandbox Pilot involved 28 teams testing their products and is now undergoing an assessment of its effectiveness. Cohort Application end date Number of applications received Number of firms accepted (tested) 1 8 Jul 2016 69 24 (18) 2 19 Jan 2017 77 31 (24) 3 13 Jul 2017 61 18 4 31 Jan 2018 69 29* 5 30 Nov 2018 99 29 6 31 Dec 2019 68 22 Total - 407 153 * Includes 3 firms that were accepted from previous cohorts but did not proceed to test. Source: Financial Conduct Authority (FCA) [ Exhibit 11 ] : The UK Regulatory Sandbox