Development of Regulatory Sandbox in Indonesia

Transcription

1 Development of Regulatory Sandbox in Indonesia Master s Thesis LL.M. International Business Law 2017 Written By Putra Sean Oswald ANR Supervisor : Prof. Dr. Erik P.M. Vermeulen Defense Date :

2 Abstract Disruptive innovation is common issue nowadays. It establish a serious challenge to the government as a regulator to create a regulatory framework without stopping the innovation. Innovation offers effectiveness and efficiency that accommodate market needs. Sometimes intermediaries are not needed to create more effective and more efficient system. Incumbent market players are also struggling with such disruption, and they need to upgrade their system to keep up with the innovative business way to survive from disruption. Regulatory sandbox is one of the regulator s method to keep the growth of innovation while making a set of rules that could protect the market. Creation of specific guidelines is an additional point to sandbox scheme where it will give more detail about how the scheme works. However, the creation of regulatory sandbox guidelines depends on each different market with different market behavior. Indonesia, one of the emerging country that has a developing innovation ecosystem creates regulatory sandbox to contain all of the disruptive innovation to foster innovation and create protection for the market still needs proper guidelines for their regulatory sandbox scheme. With data gathered from the market and innovator, Indonesia could create suitable guidelines that will assist not only for the regulatory issue but also to foster innovation growth.

3 Table of Contents Abstract... 2 Table of Contents... 3 List of Tables and Figures... 4 CHAPTER I... 5 Introduction Background Contribution Methodology Research Questions CHAPTER II Regulation and Innovation Overview Challenge Uniformity of Regulation Compliance Issue Market and Competition CHAPTER III Regulatory Sandbox Overview List of Countries Regulatory Sandbox Guidelines CHAPTER IV Developing a Regulatory Sandbox in Indonesia Development of Fintech and Startups in Indonesia Fintech and Startups in Indonesia Regulator s Reaction of Innovation Suggestion CHAPTER V Conclusion Bibliography... 64

4 List of Tables and Figures Table 1 Table 2 Table 3 Table 4 Table 5 Table 6 Table 7 Figure 1 Figure 2 Figure 3 Figure 4 Figure 5 Equity crowdfunding pros and cons Pros and Cons of P2P lending Benefit and Challenge of Blockchain Country with Regulatory Sandbox world startup ecosystem ranking Overview of London s startups ecosystem FCA s Regulatory Sandbox Application criteria Global Venture Capital Investments in Fintech Startups Regulatory or compliance issue in Fintech Indonesia's Fintech player Indonesia's Fintech Player Profile by Sector Popular non-bank Fintech service in Indonesia

5 CHAPTER I Introduction 1.1. Background Technology is emerging in all over the world nowadays. It can be shown by our dependency on technology that grows bigger each day becoming our daily needs. Innovation is the keyword for tech maker; they constantly seek to improve and innovate every aspect of life including the financial sector where it is shown by a lot of innovative and tech-based product that is competing with the incumbent or current product. The new product can easily get into the market by offering more efficient and modern way that will be accepted and will fulfill the market s need nowadays. In today s world, the economy grows rapidly, while offering new method and innovation. Technology is one of the key players that bring the economy into next level. Startups and Fintech companies come as an answer to market s needs of modern and efficient product and services. Diversification and innovation of business form are the results of the emerged development of technology. What is Fintech? Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century. Originally, the term applied to technology applied to the back-end of established consumer and trade financial institutions. Since the end of the first decade of the 21st century, the term has expanded to include any technological innovation in the financial sector, including innovations in financial literacy and education, retail banking, investment and even crypto-currencies like bitcoin. 1 What is Startup? 1 Fintech' (Investopedia, 2017) < accessed 6 April 2017.

6 A company that is just starting to develop, usually small and financed and operated by founders or one individual. It is offer a service or product that is not being offered in the market or being offered in an inferior manner. 2 Startups is a form of company that offers a new and innovative product. Startups could grow in a positive economic ecosystem with the support from the government as regulators and a modern market that is ready for innovation and steadily become a global phenomenon where there is a lot of countries has already regulated it to keep up with the global trend, especially in Asia. Regulatory sandbox is a space created to contain an early phase of startup companies or incumbent financial institutions to prepare their innovation and completing every aspect that needed to enter the market. On the same note, it is also a space that consists of rules that are made for innovators to test their new product or business in a real market or real environment and being given special treatment for not following some or all legal requirements, such as 3 : Limitations (on number of clients, risk exposure); Time-limited testing Set of predefined exemptions Testing under regulator s supervision The regulatory sandbox is intended to be a safe space where companies can test different financial services innovations in a live environment with consumer protection in place but without the full burden of regulation 4. Safe space means that innovation could be tested and will give an exemption to regulation if they are disruptive and they could also enter the market in sandbox phase. In short, their purpose is 2 Amy Fontinelle, 'What Exactly Is A Startup?' (Investopedia, 2017) < accessed 10 April Pavel Shoust, Regulators And Fintech: Influence Is Mutual? (1st edn, Russian Electronic Money Association 2017) < pdf> accessed 5 April 'Innovation Via The Regulatory Sandbox' (Financier Worldwide, 2017) < accessed 5 April 2017

7 to minimize legal uncertainty, improve access to investment, and create rules for new products and business models 5 Regulatory Sandbox was firstly introduced by FCA (Financial Conduct Authority) which consists of a conduct regulator of financial services firms and financial markets in the United Kingdom. The goal is to test innovative products, services, business models and delivery mechanisms in a live environment. 6 FCA could be seen as a pioneer in making regulatory sandbox which followed by other country such as Australia, Hong Kong, Singapore, Malaysia, Indonesia, etc. Each country has a different approach, criteria, and guidelines for managing or regulating each of the startups and Fintech companies in their jurisdiction. Regulatory sandbox is a preparatory phase that is important to ensure the quality and innovation of financial services or product offered by startups and fintech companies. The questions that may arise is what is the benefit of it. The potential advantages of a regulatory sandbox could be significant from: 1. Reduced time-to-market at a lower cost Delays created by regulatory issue will discourage innovators. Time-to-market can be increased by about a third in this way, about 8% of product lifetime revenue Better access to finance Financial innovation relies on investment or equity funding. Regulatory uncertainty could affect Fintech firms in raising funds and could achieve low valuations. Evidence from other industries suggests about 15% may reduce costs due to regulatory uncertainty 8 ; it is harder to estimate the number of firms that fail to achieve any funding at all. 5 'Regulatory Sandboxes: A Practice For Innovation That Is Trending Worldwide' (ETHNews.com, 2017) < accessed 24 April 'Regulatory Sandbox' (FCA, 2017) < accessed 6 April Ariel Dora Stern, 'Innovation Under Regulatory Uncertainty: Evidence From Medical Technology' (2017) 145 Journal of Public Economics < Areas/Strategy/papers/JMP_Stern_Jan_2014.pdf> accessed 6 June In The Face Of Uncertainty: A Challenging Future For Biopharmaceutical Innovation (1st edn, Deloitte Development LLC 2014) < accessed 5 June 2017.

8 3. More innovative products reaching the market Due to regulatory uncertainty, some innovations are abandoned at an early stage and never tested. As the sandbox framework enables firms to manage regulatory risks during the testing 9. There are three main elements of Regulatory Sandbox 10 : 1. Bespoke guidance and monitoring during the test phase; 2. An indication of the way in which regulation will be enforced; 3. Exemptions from specific regulatory requirements. Regulatory sandbox was created to make innovation more suitable and well accepted by both market and regulator, but there is a several obstacles in the implementation of the regulatory sandbox. The current regulations of some country may not comply or fit with the new product or innovation, and there should be safeguards to ensure that customers will not get a disadvantages or loss because of the failure. While the startups or Fintech companies are being tested inside the sandbox, The result would be an experimental situation which would be out of our control. It may comply with the regulations and ready to enter the market, while there is also the possibility that it would not comply with the regulations or could not work properly. While being experimented inside the regulatory sandbox, there are guidelines to ensure the experiment process it is going well and the output could satisfy all the parties involved. As an example, MAS (Monetary Authority of Singapore) on 16 November 2016 published its regulatory sandbox guidelines to enable experimentation or creative solutions that utilize technology innovatively to deliver financial products or services. The guidelines will gather feedback from the public consultation while developing the concept of how the regulatory sandbox will work Regulatory Sandbox (1st edn, Financial Conduct Authority 2015) < accessed 9 April 'Innovating For Innovation: The Rise Of The Regulatory Sandbox - The Young Foundation' (The Young Foundation, 2017) < accessed 10 April Reading Room, 'MAS Issues "Regulatory Sandbox" Guidelines For Fintech Experiments' (Mas.gov.sg, 2017) < Guidelines-for-FinTech-Experiments.aspx> accessed 10 April 2017.

9 This reveals that there must exist a detailed and specific guideline that is suitable for the particular country. Each country has their own specific regulatory sandbox guidelines that is appropriate with their condition since market and economic situation differ in every country. The guideline is an essential element to maintaining a good experiment and giving clarity to startups that will experiment their product or business in the sandbox. The Bank Indonesia (BI) FinTech Office was inaugurated in November The Office has broad objectives related to the development of a competitive, technology-based ecosystem in Indonesia and assisting BI to follow Fintech developments. Including an establishment of regulatory sandbox to support Fintech actors and to provide a means of collaboration between industry participants and regulators. BI may authorize or not allowing Fintech activities, subject to their particular conditions 12. Also, Indonesia's financial services authority (OJK) has issued its first regulations relating to financial technology,, companies running peer to peer (P2P) lending services 13. It shows that the government and regulator would like to anticipate the increase of investment in Fintech and startup sector that is predicted to be a hot investment commodity in the future Contribution In this thesis, we intended to provide analysis regarding the establishment of regulatory sandbox guidelines in Indonesia. There is a need for specific and proper guidelines for the regulatory sandbox in Indonesia, so there can be an effective answer in place, for the regulator to experiment new and innovative products or businesses. We aim to propose a method for Indonesia to elaborate competitive and suitable regulatory sandbox guidelines for Indonesia and becoming a startup-favorable country. 12 Ros Grady, 'Fintech And Regulatory Sandboxes An International Overview Ros Grady' (Rosgrady.com, 2017) < accessed 11 April 'Indonesia Introduces New Regulations For Fintech Startups' (Out-law.com, 2017) < accessed 11 April 2017.

10 1.3. Methodology We will identify countries with strong startups ecosystem by searching for highly concentrated startup areas and developed well also their feedback on the framework and comparative studies about regulatory sandbox guidelines regarding experiment of startups and fin-tech companies in Asia Europe Australia. We will also analyze the preparatory process of making a regulatory sandbox guidelines and identifying best practices in preparation of regulatory sandbox guidelines in developed countries and find criteria that applicable to Indonesia s regulatory sandbox guidelines Research Questions To address and explain the issue about regulatory sandbox guidelines, this thesis will try to answer these research questions: 1. What are the criteria of well-design regulatory sandbox guidelines? 2. What are the elements that should be considered for making guidelines for regulatory sandbox? 3. What are suggestions for the preparatory phase in a guideline-making process that could be implemented to the regulatory sandbox in Indonesia?

11 CHAPTER II Regulation and Innovation 2.1. Overview Fintech and startups are leading innovation nowadays, while Artificial Intelligence, Big Data, and Blockchain will be relevant in the near future. In order to be able to develop alongside such a fast-paced innovation, countries should be able to build a supportive Fintech Financial Technology is a term for a technology applied to the end user or consumer and also financial institutions 14. It is one of disruptive innovation in the 21 st century that facilitate consumer and giving access to more simple and easiness in the financial sector. Beside Fintech, there are other examples of the innovative businesses or product that emerge today and will be relevant in the near future such as: - Equity crowdfunding Process that involves people or the crowd to invest in an unlisted company that still in the early stage in exchanges for the company s shares 15 Crowdfunding is an innovative way to gain capital. It raises capital from a large number of individuals (crowd) as a source of financing 16. Such innovation offers efficiency in financing for the company and involving the people to become an investor in more simple way. But there are pros and cons regarding this type of financing. For example in the USA, Security and Exchange Commission (SEC) already regulate such financing model, so there is a legal protection for both companies while in another country, it is not regulated yet, so there are such risks if the financing is failed or become a fraud. 14 'Fintech' (Investopedia, 2017) < accessed 19 May 'What Is Equity Crowdfunding? Equity Crowdfunding UK' (Syndicateroom.com, 2017) < accessed 21 May Investopedia Staff, 'Crowdfunding' (Investopedia, 2017) < accessed 26 May 2017.

12 Table 8 Equity crowdfunding pros and cons 17 Pros Debt-free way to raise capital Ability to get more funds than through a loan Gain brand recognition and free marketing for your company No credit checks, collateral or personal guarantee required Ability to raise more money due to larger number of investors or accredited investors Good for idea stage businesses with high growth potential Crowdfunding investments may be pooled into a single investment, streamlining paperwork Cons Giving up pieces of ownership in your business Will be required to provide audited financial documents to investors Some crowdfunding request a high fees money from traditional venture capital sources later on - Peer to peer lending (P2P lending) Method of debt financing or loan without intermediaries such as bank or financial institution, allows individual to get or give a loan directly to the individual which is riskier 18. Also known as social lending due its scheme that connecting two people who would like to do a debt financing without any intermediaries 17 'What Is Equity Crowdfunding?' (ValuePenguin, 2017) < accessed 26 May Investopedia Staff, 'Peer-To-Peer Lending (P2P)' (Investopedia, 2017) < accessed 21 May 2017.

13 Table 9 Pros and Cons of P2P lending 19 Pros Cons Access to higher returns Risky since it's not covered by Risk diversification financial guarantee as bank did Choice choose who you want to lend Interest is not tax-free to Cash may not be lent immediately Personal saving allowance Time constraints wide range loan Access to the money or loan in short choices (some of them are notice complicated) and managing diverse portfolio could be time-consuming - Insurtech Combination of insurance and technology inspired by Fintech designed to increase efficiency and accuracy of data from the current insurance sector model 20. Innovation in the form of insurtech contains one of three fundamental points 21, there are: - Speed/efficiency - Customer centricity - Insurance or policy management Insurtech companies aim to 22 : Offering an easiness of purchasing a product and obtaining cover Enable customers to manage their policies from a centralized location Focus on the customer in the central position, by considering their attitudes, behaviors, and personal needs 19 'What Are The Pros And Cons Of Peer To Peer Lending?' (BondMason, 2017) < accessed 30 May Andrew Beattie, 'Insurtech' (Investopedia, 2017) < accessed 21 May 'Analyst Interview: Insurtech And Customer Services: Lessons For The Incumbents Globaldata Plc' (GlobalData Plc, 2017) < accessed 30 May Ibid.

14 Insurtech might be one of the innovations that could replace the old style insurance or collaborate with the incumbents. Collaboration between current or incumbent insurers and insurtech will offer more technical understanding of the insurance specifically to consumer s service expectations. - Artificial Intelligence Computer science in the form of intelligent machine, aiming to perform jobs usually done by people 23. Innovation offers efficiency and effectiveness. AI was created to help works, and at some point, it could replace human in doing some works. For example, IBM s AI ROSS - an artificial intelligence that could do legal research, write a legal memo, and answer questions in the legal sector is disrupting the legal industry in the USA. ROSS is a big help offering efficiency in research time and could gather a suitable data needed for specific cases in hand. It allows for economy of time, which is translated into the fact that researchers may focus on other projects instead of focusing their attention on these matters, and also, it reduces the margin for human error. In the future, ROSS could disrupt the entry-level lawyer job since ROSS can do basic job that entry level legal professional could do but more efficient and effective. There is a higher possibility of AI to be used as a co-worker in various sector. While on the other hand, there is also a possibility that AI could increase unemployment level since if the technology could do the human job so they could easily replace it. - Blockchain A digital database consists of blocks that provide a secure way of making and recording transactions. Each block added or modified will be registered and verified 'Fintech Trends: Artificial Intelligence Finleap Blog' (finleap, 2017) < accessed 21 May Katherine Purvis, 'Blockchain: What Is It And What Does It Mean For Development?' (the Guardian, 2017) < accessed 21 May 2017.

15 Blockchain uses digital code and storage which is a transparent and shared database and protected from any revision 25. Blockchain operated with several mechanisms or key feature such as 26 : - Distributed Database - Peer-to-Peer Transmission - Transparency with Pseudonymity - Irreversibility of Records - Computational Logic Table 10 Benefit and Challenge of Blockchain 27 Benefit 1. Disintermediation & trustless exchange no intermediaries and reducing counterparty risk 2. Empowered users users are in control of all their information and transactions. 3. High-quality data data is complete, consistent, timely, accurate, and widely available. 4. Durability, reliability, and longevity use of decentralized networks, blockchain is better to withstand malicious attacks. 5. Process integrity transactions will be executed exactly as the protocol commands (use of a digital code) 6. Transparency and immutability publicly viewable by all parties and all transactions are immutable Challenge 1. New technology There are a lot of aspects that should be improved (transaction speed, verification process, data limits) to make blockchain applicable 2. Uncertain regulatory status Blockchain and Bitcoin face a hurdle in adoption by pre-existing financial institutions if its government regulation status remains unsettled. 3. Large energy consumption Bitcoin blockchain network s miners are attempting 450 thousand trillion solutions per second in efforts to validate transactions. 4. Control, security, and privacy cyber security concerns should be addressed for the public to entrust their data to a blockchain 5. Integration issue Blockchain offer solutions that require 25 'The Truth About Blockchain' (Harvard Business Review, 2017) < accessed 30 May Ibid. 27 'Blockchain Technology: 9 Benefits & 7 Challenges Deloitte' (Deloitte Nederland, 2017) < challenges.html> accessed 30 May 2017.

16 7. Ecosystem simplification using a single public ledger 8. Faster transactions With technology and digital code, transaction times could be reduced to minutes and processed 24/7 9. Lower transaction costs low transaction fees with no intermediaries and overhead costs significant changes to existing systems. Companies must strategize the transition for integration 6. Cultural adoption Decentralized network which requires the buy-in of its users and operators 7. Cost low transaction and time cost but the high capital cost This method will increase efficiency and effectiveness, which results in a possible solution for the future, blockchain could be a solution in the near future. Regarding all the challenges arise from the application of blockchain, there would be addressed along with blockchain development. Figure 6 Global Venture Capital Investments in Fintech Startups 'What Is The Best Regulatory Response To Fintech? Erik P.M. Vermeulen Medium' (Medium, 2017) < accessed 21 May 2017.

17 Innovation through Fintech startups has been developing since 2007 and reach its peak in 2015 while in 2016, investment is slowing down but not significantly. In the Future, Fintech will be relevant and will be strong sector as it can be seen by investment trend in Fintech sector is increasing. Fintech is just the beginning of the innovative business and might develop a new form of business. The trend of investment to fintech may slow down, but it will not stop. It shows that the market is more receptive to technology and to adopt it as a solution to answer present needs. Innovation creates a diverse and unique new business form and product that will suit and accepted by the market. Innovation is disrupting not only the market but also to the legal system. How the regulator reacts to such disruption is important to determine the growth of innovation while providing a secure business form to the market. Nowadays, people tend to use technology. The market is disrupted by fintech, and such innovation will not stop. Banking, transportation, media, retail are some of the examples of a sector that impacted by the innovation. Focus on the banking sector, Fintech could be able to replace the intermediaries if this innovation is accepted well in the market. It is not impossible that in the future there will be no Bank or any other intermediaries or traditional financial institutions that are less efficient compared to what is offered by fintech. On the other hand, Fintech could provide solutions for banks that could speed up the internal innovation and transform processes of existing financial services players from traditional to the technology-based sector, offer the usage of Big Data and help banks or financial institutions to survive in a long-term 29. Fintech and startups are created to facilitate the consumer to get better access to financial services by eliminating intermediaries or establishing less-complicated intermediaries compare to current intermediaries. The bank is one of the conventional examples of intermediaries; the customers depend on the bank or any other financial institution as their intermediaries. More intermediaries mean more cost should be spent, which become a problem nowadays since 29 (2017) < accessed 23 May 2017.

18 people nowadays always looking for efficiency, fast and less complicated system that could give them ease in doing business in the financial sector. Innovation like Fintech and Startups is a product of a 21 st century, and we already use them. Cellphone application or app-based innovation is one of the simple things of innovation, in which we could do most of the things in through our phone. Innovation offers a new form of businesses offer an efficiency, while on the other hand, it has a possibility of not complying with the current or existing regulation. The question that may arise is, how the law keeps up with the innovation and whether it is necessary to regulate the innovation. Innovation offers a new and fresh idea in the business sector, it reflects on the market needs. Efficiency without intermediaries is one of the examples provided by innovation. In example is a bank. Peer to peer lending platform is disrupting the bank, imagine people do not have to use the bank as intermediaries to get a loan, they could just access the platform to get a loan directly from the investor or angel list. No bank means it could be efficient without any fee for the intermediaries and more short time to access the loan without a lengthy procedure that is offered by the bank. Nurturing the innovation is the main point. Room for innovation to grow should be provided by the government to maintain the relevancy and keep updated with the technology innovation nowadays. Traditional regulation will not comply with innovation and could become an obstacle for innovation. If we consider Airbnb and Uber, both of them are a platform that disrupts a hotel and transportation industry. In some countries, both of them are banned or given an exemption due to its innovation. It depends on the market response and the regulator that will decide the innovation will stay operating or not. Rather than staying in a hotel, some people prefer Airbnb which offer a lower price and easiness in their booking system. It is disrupting the concept of traditional hotel and consumer.

19 Airbnb is the same case as Uber; customer tends to use this new model of a taxi rather than a regular taxi. Uber offers a lot of benefit to the customer such as a discount, sharing ride, and easy access by using an app-based that can be accessed through a cell phone. Various types of payment with credit card or cash could be combined with a promotional code that gives the customer an extra discount also providing more advantage to Uber to attract the market. Uber and Airbnb are two of many examples of how innovation could disrupt the market and the regulator. The regulator is behind the innovation as it could be shown by regulation to govern Uber and Airbnb is regulated after such innovation enters the market and well accepted. Innovation and technology are developing every day and regulation should keep updated with it to make sure that innovation would comply with the specific regulation that will not stop the development of innovation and protect the market. Being innovative is crucial in today s world. However, we also need to focus on regulation. Safety and protection for the consumer and another conventional business form that already existed should be noteworthy. Some of the ways to contain and keeping up with the innovation is to study the innovation. Regulatory sandbox is a perfect example, where regulator will test the innovative business form before entering the market. It also gives protection and facilitate the innovation to comply with the regulation. So, it is a perfect tool to accommodate the innovation and protecting the market. The regulator should also analyze the innovation based on the fact and data so they could predict when the innovation will be a trend and relevant in the market. Regulator s work is become more challenging and should be less traditional. The regulator could not just wait the innovation hit the market and make a regulation after that because it will be too late since innovation is always growing and developing while regulation runs up behind them. The regulator should be proactive, dynamic, and responsive to keep up the innovation that always develops and grow 'Artificial Intelligence, Fintech, Big Data Or, What Happens When Technology Is Faster Than The Law?' (Medium, 2017) < accessed 19 May 2017.

20 The regulator in making a rule or designing a law should be more active to keep updated to the innovation. Also, they should be dynamic and responsive in dealing with the innovation since innovation is always developing and always changing. It means that regulator should provide response correctly in making a regulation or give some exemption to it. The market is ready for new business or product from the result of innovation. The market wants efficiency and practical way in the business or new product. The problem now is whether the regulator is ready for innovation or not. In the short term, a disruptive innovation may not be able to replace incumbents player in the market whether the large or small scale businesses, but since the innovation is always developing, the replacement is a matter of time if the incumbents do not keep themselves updated with the innovation or applying more efficient and effective system in their businesses 31. Since the market is changing with the effect of innovation that offers more easy and efficient system. Several things explain why innovation in business could replace traditional business model 32 : Cheaper models including online only provision, also the potential for banks to reduce their cost by getting better at multi-channel delivery. Technology changing the role of human experts machines will outperform humans at most tasks New markets and functions serving previously unserved consumers. Easier payments it will enable online donations which will be beneficial to charities, fundraising, and other good causes. Regulatory tech and bank in a box Improve banking sector efficiency by applying technology. 31 'Disruptive Innovation In Financial Markets' (FCA, 2017) < accessed 24 May Ibid

21 Big data - big data is affecting not only on marketing and pricing but also on credit risk assessment and insurance underwriting. With Big Data, all of those things could be done efficiently Challenge Technology and innovation are moving rapidly that it is a fact that regulator is always behind the innovation. Regulator s problem is how to keep up with the technological innovation so they could regulate the innovation without limiting the growth of innovation. The government in each country has a different challenge depending on the innovation and their each market. For example, in Australia, the innovation more focus on, and the regulator is more focused on regulating the financial sector (Fintech) since Australia s ecosystem is more developed than Indonesia. While Indonesia s ecosystem is younger and there is more room for development in the future. Both of the countries have established regulatory sandbox but with different guidelines and criteria for innovative business or product that could be tested in the regulatory sandbox. The situation is different, so it needs a different approach. The challenge for the regulator is to assess and maintain a good innovation ecosystem while creating a suitable regulation for the protection of the market and nurturing innovation growth. One of the obstacles for Fintech is the entry barriers. The lack of reliable financial data could make Fintech work well since they could not get a complete data that only accessible by some financial institutions or government Andra Sonea, 'Innovation The Regulatory Sandbox Way' (The Asian Banker, 2017) < accessed 24 May 2017.

22 Uniformity of Regulation Cooperation between countries regarding innovation such as Fintech, Big Data, Blockchain, artificial intelligence is needed. The technology is spreading and emerging in the whole world with a fast pace so international regulation or standards of innovation may be one of the option to maintain the uniformity and legal certainty for innovation development. Different jurisdiction of each country could be a significant obstacle for the regulator. Innovation might know no boundaries when they spread. It could become viral in the whole world, and compliance with each regulation in different countries might strangle the development of innovation. The point is to keep the innovation growing but still under control which means that regulator will supervise the innovation and create regulation that could manage the innovation. On the other hand, the market plays the main role in innovation that could decide whether it is accepted or not in the market. If the innovation is accepted well by the market, the regulator should protect the market with making a regulation Compliance Issue Uniformity of regulation is needed in governing innovation. There is a certain limitation of uniformity of regulation which the general terms. Only general terms of the rule that could uniformly regulated. Each country has a different innovation ecosystem that has its character and different market. Each ecosystem should be regulated in a specified regulation that could accommodate the needs of the market. For example, United Kingdom has a developed innovation ecosystem and more advanced system. Regulating innovation in the United Kingdom is different from developing an innovation ecosystem in places such as Indonesia. Regulation could exempt or ban such innovation if it does not comply with the existing regulation or there is a possibility to bring negative impact to the market. The priority in creating a regulatory framework for innovation for is to protect the market and maintain a stable ecosystem for business or investment.

23 Figure 7 regulatory or compliance issue in Fintech 34 Data is a serious issue that should be addressed by the regulator. Most of the innovation is technology based innovation, so data is the key and valuable assets of the Fintech companies. Data is the assets in Fintech sector. Physical data form such as contract, agreement, deed, etc. (hardware or hardcopy) could be stored in a safe place like safe deposit box. Non-physical data or softcopy has a different safety issue; the data will be stored in an online platform or online safe deposit. There is a possibility of fraud, or such data will be stolen bin the online platform. Fintech companies has a responsibility to maintain the safety of the data of their business, customer and their assets or stakeholders. Failure to comply with data protection regulation could resulted in financial and reputational terms of Fintech companies 35. Technology and innovation are moving rapidly that it is a fact that regulator is always behind the innovation. Regulator challenge is how to keep up with the technological innovation so they could regulate the innovation without limiting the growth of innovation. The regulator in each country has a different challenge depends on the innovation and the market in each of the countries. 34 Roger Kiem and others, Fintech M&A: From Threat To Opportunity (1st edn, White & Case LLP 2016) < accessed 2 May Ibid

24 For example, in Australia, the innovation more focus on, and the regulator is more focus on regulating the financial sector (Fintech) since Australia s ecosystem is more developed than Indonesia. While Indonesia s ecosystem is younger and there is more room for development in the future, currently Indonesia is still in early phase of developing the startup and fintech ecosystem. Both of the countries has established regulatory sandbox but with different guidelines and criteria for innovative business or product that could be tested in the regulatory sandbox. The situation is different, so it needs a different approach. The challenge for the regulator is to assess and maintain a good innovation ecosystem while making a suitable regulation for the protecting the market and keep innovation grows. How regulator can keep updated in the future with such disruptive innovation may be the main question that should be addressed as soon as possible. The regulator should establish a solid concept that could stay relevant to accommodate such disruptive innovation. Regulating a law or regulation in the future should be done with three principles 36 : - Data Driven Regulation Data will be a key point for the regulator. With data, the regulator could check the trend and could even make a hypothesis or prediction based on the previous year data of the users and the company size of when such innovation will become a trend and relevant to the market. The regulator could also collect the data from the investment data and could distinguish which innovative business or startups that may disrupt the market and which of the innovative business that unlikely to enter the market. - Regulatory Experimentation Principle-based approach; The regulatory approach might not be an effective way to approach the innovation. The nature of innovation that is always developing could not be bound by the strict approach of regulatory. At the same time, there should be more dynamic and flexible regulation or policies that could keep up with innovation. With the principle based approach, the regulator 36 'Artificial Intelligence, Fintech, Big Data Or, What Happens When Technology Is Faster Than The Law?' (Medium, 2017) < accessed 19 May 2017.

25 could become more open to facilitate to make room for innovation to grow without killing the innovation. - Regulatory Experimentation Regulatory Sandbox. 37 Regulatory sandbox as an experimental lab for innovative business models, ideas, or products is created to contain all the innovation to make sure the innovation could comply with the regulation and how they work and impact on the market. Regulatory sandbox approach is the efficient and effective type of approach. The innovation will test the product or new business model in the real market. Exemption from the regulation and public involvement is the interesting things in this concept. Innovation could be tested, and the regulator will assess the outcome of the test. The regulator must be creative to regulate the innovation so they could keep growing and the market is protected. While regulator makes a suitable regulation for innovation, the regulator could also study the innovation through the regulatory sandbox, how the innovation works and the impact on the market. Innovation is built on efficiency and practical that every people need nowadays. Regulation should be able to cover the innovation, and that is not an easy job since innovation is always fast and sometimes unpredictable. The market also plays a major role in supply-and-demand, when the market needs innovation, business and technology would facilitate response to such demand as an opportunity. Government and regulator should be able to foresee the market trend and come up with a rules or regulations to keep the market protected while also give support to the innovation. An innovative product such as regulation technology is invented to overcome company s regulatory issue. Regulation technology company could be defined as a company which uses technology such as a cloud computing, big data, and blockchain, provide a solution to help companies in all sectors of the business activity to ensure the compliance with the regulation Ibid 38 '10 Keys To Understand What Regtech Is All About - BBVA NEWS' (NEWS BBVA, 2017) < accessed 21 May 2017.

26 Regtech is an emerging community of tech companies that solve challenges that arise from a technology-driven economy through automation. The rise in digital products has increased incidences of a data breach, cyber hacks, money laundering and other fraudulent activities. With the use of big data and machine learning technology, regtech reduces risk to company s compliance departments by offering data on money laundering activities conducted online; activities which a traditional compliance team may not be privy to due to the increase of underground marketplaces online. Regtech tools seek to monitor transactions that take place online in real time to identify issues or irregularities in the digital payment sphere 39. RegTech represents more than just an efficiency tool and rather is a pivotal change leading to a paradigm shift in regulation." RegTech has the potential to continually monitor capacity, "provide close to real-time insights through deep learning and artificial intelligence filters," and "identify problems in advance rather than simply taking enforcement action after the fact. 40 Regulation Technology offers more efficient and effective measures for business and financial sector in the regulatory issue. Compliance with regulation is important for companies and with regulation technology. Technology will help companies make better use of their resources, manage the data and become integrated with regulations 41. Regulation technology is advantageous for innovation since regtech is tech-based so it could follow the fast pace of innovation. Regtech makes existing systems and data to produce regulatory data and reporting in a cost-effective, flexible and efficient in time Osi Momoh, 'Regtech' (Investopedia, 2017) < accessed 21 May 'Forbes Welcome' (Forbes.com, 2017) < accessed 22 May Daryl Wilkinson, 'Regtech Innovation: Securing Compliance In A Disruptive Market' (2016) < accessed 22 May '21 Hottest Regtech Startups That Are Defining The Industry' (Lets Talk Payments, 2017) < accessed 23 May 2017.

27 Regulation technology companies offer to a financial institution or another company that would like to improve efficiency and effectiveness in corporate governance, compliance and many another sector such as 43 : - Legislation/regulation gap analysis tools - Regulatory reporting tools - Compliance universe tools - Activity monitoring tools - Health check tools - Training tools - Management information tools - Risk data warehouses - Transaction reporting tools - Case management tools As we could see all the form of a type of regulation technology companies, it is clear that regtech companies have many forms and services offered. All of the services are generally to improve and help not only financial institutions but any other businesses that need improvement on efficiency and effectiveness in doing their business in connection with regulation. There are four main features of Regulation Technology 44 : - Agility - Data will be organized and processed through ETL (Extract, Transfer Load) technologies. - Speed - Data could be managed and generated fast with the use of technology. - Integration - short timeframes to get a solution and to process the data. - Analytics - Intelligent technology and Big Data will extract and collect all the information to be analyzed, relevancy of data is high because based on the data. 43 Regtech Is The New Fintech How Agile Regulatory Technology Is Helping Firms Better Understand And Manage Their Risks (1st edn, Deloitte 2016) < _new_fintech.pdf> accessed 22 May Ibid

28 With all of the characteristics that regulation technology has, it is clear that regulation technology might be a solution for innovation. Innovative business or product need to comply with existing regulation, and regtech could be a perfect option. The financial institution might just hire a regulation technology company to ensure their compliance and increasing efficiency rather than doing it in the traditional way which will cost more time and resources. Regulation technology company job is to help financial institutions to comply with the regulation, not focused on retooling the regulators 45. It means that regulation technology companies have limited use as compliance tools. It might develop in the future and regtech could be useful also for regulator to be used for regulating a regulation by enhancing the efficiency and effectiveness of the regulator in the regulation making process Government and regulator should be able to make use of the regtech so they could keep up with the innovation. Following the success of the regulation technology, regulatory sandbox as an experimental space is an example that government is trying to regulate the innovation with innovative way. Here are some example of regtech companies 46 : Quarule Risk control and compliance certification technology company. Trulioo Online electronic identity verification provider. Vizor Financial supervision software company. 45 'Regtech Is For Regulators Too, Particularly In Emerging Markets' (Medium, 2017) < 875be5c24a5b> accessed 22 May 'What Is Regtech? - Definition From Whatis.Com' (SearchCompliance, 2017) < accessed 22 May 2017.

29 Market and Competition Innovation brings a disruption to the market and becomes a strong competitor for the incumbent business form. If we see it positively, such competition might create a good impact on the market. The market will be provided with more options with their advantage and disadvantage. In competition, there should be an asymmetry of data for both innovative businesses for such as regtech, Fintech, or startups. There should be a balance of treatment between the conventional business form and the creative business form. Creating a regulation that will not strangle the innovation could be a solution to prepare the innovation to compete in the market with a proper protection to the market. Ensuring a fair competition between incumbent and innovative businesses like fintech or startups is a priority for the regulator to maintain a competitive market. For example, Bank as incumbent market intermediaries should compete with Fintech. The bank should keep up with the innovation by embracing and applying innovation to their system to improve their efficiency and effectiveness so the bank could compete with Fintech company. Banks could lose around percent of their revenues to fintech companies through shrinking margins if they do not keep up with such innovation offered by fintech companies 47. The regulator has to pay attention to any possibilities to ensuring fair competition and maybe creating a possible collaboration for both incumbent and innovation, so instead of competition; such collaboration could offer better services to the market. 47 Daniel Drummer and others, Fintech Challenges And Opportunities How Digitization Is Transforming The Financial Sector (1st edn, ) < accessed 28 May 2017.

30 CHAPTER III Regulatory Sandbox 3.1. Overview Regulatory Sandbox comes as an answer for innovation in the business sector. Regulatory sandbox is an experimental space for new innovative product or business is a product before launch to the market. The regulator would like to take precaution and ensure the new product or business is complying with the regulation and could fit or accepted in the market. Regulatory sandbox becomes a global trend nowadays since there is a lot of countries that are already experiencing a disruptive innovation to their market. Countries all over the world deal with disruptive innovation in business sector and response to such disruption by creating a regulatory sandbox. FinTech Sandbox Table 11 Country with Regulatory Sandbox Name Country Date Financial Conduct Authority (United Kingdom) (Proposed in November 2015) May 2016 Regulatory sandbox Bank Indonesia (Indonesia) September 2016 Regulatory Sandbox FinTech Supervisory Sandbox OSC LaunchPad FinTech Regulatory Sandbox FinTech Regulatory Sandbox FinTech Regulatory Laboratory Regulatory sandbox Bank of Thailand (Thailand) Hong Kong Monetary Authority (Hong Kong) Ontario Securities Commission (Canada) Bank Negara Malaysia (Malaysia) Monetary Authority of Singapore (Singapore) Abu Dhabi Global Market (United Arab Emirates) Australian Securities and Investments Commission (Australia) September 2016 September 2016 October 2016 October 2016 November 2016 November 2016 December 2016

31 Regulatory sandbox is the first phase that should be entered by a new innovative product or business that would like to enter the market. FCA is the first who created regulatory sandbox scheme and its guidelines. The regulatory sandbox initiative is part of the FCA s Project Innovate, which began in October 2014, to encourage innovation in the interests of consumers and to promote competition through innovation 48. FCA wants to make an ideal and complete regulatory sandbox with its guidelines. It means that to ensure the effectiveness of regulatory sandbox to work as a laboratory for innovation, a country or regulator have to establish a specific guideline for the regulatory sandbox that will fit with the system and the innovation ecosystem in their own country. The interesting part is how FCA create specific guidelines that fit the Fintech ecosystem in the United Kingdom. It is also adopted by Singapore which just launched regulatory sandbox guidelines on 16 November 2016 to encourage and enable experimentation of solutions that utilize technology innovatively to deliver financial products or services. The guidelines incorporate feedback from the public consultation as well as learning points from actual sandbox applications. 49 Public also involved in the guidelines making since they are the target and also startups or new businesses. Nobody comes, regulators conceive with an idea to make a synergy with all of the parties which involved. The idea of Regulatory Sandbox creation in each country are the same, is to contain and become a safe place for developing an innovative business or product, but how they come up with the regulatory sandbox and what they prioritize the innovation is different from one another. Regulatory Sandbox is a safe space intended to be experimental. The underline and the motivation to assure legal certainty to the innovation. Innovation is going fast, and regulations sometimes could not keep up with the pace of the innovation. 48 Charlotte Hill, Inside The FCA S Regulatory Sandbox (1st edn, Portfolio Media, Inc 2016) < /media/files/corporate/publications/2016/09/inside_the_fcas_-regulatory_sandbox.pdf> accessed 24 April Reading Room, 'MAS Issues "Regulatory Sandbox" Guidelines For Fintech Experiments' (Mas.gov.sg, 2017) < Guidelines-for-FinTech-Experiments.aspx> accessed 17 April 2017.

32 To make specific guidelines or ideal regulatory sandbox, UK and Singapore as the first and second country to propose a regulatory sandbox involves public or the designated user of the regulatory sandbox to give input or feedback for the sandbox so the regulator could make guidelines that will fit and accommodate the needs of the user. The important point in the regulatory sandbox is the individual (specific), limited time and limited scope. Individual or specific means each of new product and business will be asses specifically and individually since each of the innovation has a different function and impact on the market. With this specialization case per case approach, it will make each of the innovation that put on test in the sandbox suit and could overcome their problem in the market. Limited time and limited scope mean that the regulatory sandbox safe-space could help new product or business in a certain limit of time (maybe one or two months) just to get the right picture and identified the problem and obstacle that may arise from the innovation itself. Safe-space does not mean that innovative product or businesses could test without any boundaries or limitation. Compliance with the rules is a must, while if the innovation is not complying some of the rules, there might be a possibility that government may give an exemption. Why regulatory sandbox? The regulator in defining the innovation or keep updated should understand the possible issue that may happen caused by the innovation. Testing the innovation in a regulatory sandbox is the best and the only relevant option to regulate the innovation in the short term. The regulator will supervise and analyzing how such innovation works and the impact on the market while drafting regulation. The outcome of the sandbox is compliance of innovation to the regulation and regulator could identify such innovation to be able to use such information in making a suitable regulation. While for the long term, the regulator should improve their data collecting and should be able to foresee the innovation so they could make a suitable regulation. Regulatory sandbox may be seen as a breakthrough by the regulator to approach the innovation and interact with them in close range. Being progressive and proactive also

33 important for the regulator to regulate and keep up with the innovation that keeps updated and creating a new innovative business form that sometimes creates a legal uncertainty List of Countries Regulatory sandbox concept is growing rapidly in the whole world, starts from Financial Conduct Authority of United Kingdom as a pioneer, it spreads and applied by countries in the world to keep updated with the innovation. Several countries are already creating and developing regulatory sandbox to accommodate innovation and focus on preparing for a new form of innovative business such as Fintech or startups. Here are the list of countries that already apply regulatory sandbox and we would like to show some of the important countries that contributed to the development of regulatory sandbox United Kingdom United Kingdom is the first who create regulatory sandbox through FCA. Regulatory sandbox purpose is to foster innovation by lowering administrative barriers and costs for testing innovative products and services while protecting the market from the risks that may arise from such innovation 50 There are two type of sandboxes according to FCA: - Virtual Sandbox A regulatory sandbox which is available to authorized and unauthorized firms. - Sandbox Umbrella A separate entity or company which is authorized and supervised by the FCA and this sandbox allow unauthorized innovators to operate under such separate company. 50 UK innovation, 'UK 'Regulatory Sandbox' To Foster Fintech Innovation White & Case LLP International Law Firm, Global Law Practice' (Whitecase.com, 2017) < accessed 24 May 2017.

34 The FCA states that virtual sandbox will offer data provided by other private firms or even FCA data. The sandbox needs to abide by governance rules. The sandbox will need to be continuously developed and maintained 51. The United Kingdom has a strong background in their startups ecosystem because of government support and initiative. In 2011, David Cameron (Prime Minister of United Kingdom ) started an initiative called StartUp Britain, to back up a private-sector and helping people set up businesses. Start Up Britain is being supported by firms including AXA, Barclays, Intel, Blackberry, Experian, Google, Virgin Media Microsoft, McKinsey & Co and O2. 52 By the support and help from the government, United Kingdom could accelerate faster to become a perfect ecosystem for startups and innovation. The government gives a big attention for the development of the startups, and it helps the industry to grow rapidly until now. On 2017, London is in the third position as a best startups ecosystems in the world after Silicon Valley and New York City Andra Sonea, 'Innovation The Regulatory Sandbox Way' (The Asian Banker, 2017) < accessed 24 May 'David Cameron: Now Is Time To Start Business - BBC News' (BBC News, 2017) < accessed 3 May 'Tech In Asia - Connecting Asia's Startup Ecosystem' (Techinasia.com, 2017) < accessed 3 May 2017.

35 Table 5 world startup ecosystem 54 The world startup ecosystem ranking put London in the third place in 2017 with 4.8 growth index. The result shows how the ecosystem is innovation-friendly and the government is being supportive towards it. London is the oasis of the startups as it shown by the startups company and the supportive ecosystem. In 2016, London has more than 4000 startup companies, more than 70 co-working spaces, digital jobs with expected increase by in next ten years, more than 36 startup incubator and accelerators. London also has the Europe s largest Fin-tech incubator (Level and Europe s first property tech accelerator (Pi Labs - pilabs.co.uk). London s startups sector also has spent 98 million in venture capital financing in the first six months of All the accommodation and the ecosystem is perfect for startups and innovation to grow in London. It starts with government support in 2011, and now London is one of the top tiers for 54 'The 2017 Global Startup Ecosystem Report' (URENIO Watch, 2017) < global-startup-ecosystem-report/> accessed 24 May 'London Startup Guide What You Need To Know [Infographic]' (RiseHigh Blog, 2017) < accessed 24 April 2017.

36 the startups ecosystem in the world. It is also predicted that the growth level will keep high since innovation is also accelerating in a tremendous way of business or product. As the best startups ecosystem in Europe and the third in the world, the development of London is one of the proof that government and regulator are acting as a main role in it. David Cameron, Prime Minister of United Kingdom, start the initiative, and the system grows rapidly after. It means that support and back up from the government or regulator could develop the ecosystem. Plus High concentration of capital Melting pot of people from all over the world, generating very innovative ideas Global transport hub: Great transport connections with just about anywhere in the world Economic and cultural bridge between the US and Europe Vibrant community with numerous networking events and conferences Local government support for the "Tech City" Diverse talent pool from all over the world; easy access to European talent pool Entrepreneurial culture & appreciation for people who take risks One of the most exciting places to live in Table 12 Overview of London s startups ecosystem 56 London Startups Ecosystem Minus Talent (especially tech) drained by big companies Outrageous cost of living Long commute Competition everywhere In Table 2, it explains that London has many advantages to startups and innovation, London has the ecosystem and the resource (investment and talent) to support the innovation. While on 56 'Why London Startup Ecosystem Might Be The Best In The World' (Netguru.co, 2017) < accessed 21 May 2017.

37 the other hand, the high cost of living and since the ecosystem is comfortable for innovation, the competition in the ecosystem is high Singapore Singapore is one of the business-friendly environment in the world. Singapore is also the best startups ecosystem in Southeast Asia. Rising as the best, Singapore is struggling at the beginning, and they could make it. Singapore has limited natural resources or any commodity that they could sell so what they can do is innovation through the macro economy. Singapore growth depends on the investment and business sector. Geography of Singapore also made them a transit country, which means a lot of people from different countries and continent go to Singapore. Singapore s location may be not a significant factor in their success, but it is an evitable fact that giving Singapore big advantages. Singapore becomes a giant in the macroeconomic sector in South East Asia through a long process. There are three factors why Singapore is one of the best business ecosystems in the world 57 : 1. A hospitable environment One of the easiest countries in the world to do business. New companies can be set up in hours. The law is transparent and intellectual property is well protected. 2. Serious government skin in the game In 2008, under the National Framework for Innovation and Enterprise (NFIE), the government launched the Early Stage Venture Investment Fund program. The initiative, allowed five venture capital companies to receive funds from the government. It means that government have given a serious boost to start-ups in Singapore 3. The extensive use of soft power to address hidden barriers to entrepreneurialism. Singapore s government make a move by pushing innovation and promoting it to become a culture in Singapore. 57 'How Singapore Became An Entrepreneurial Hub' (Harvard Business Review, 2017) < accessed 8 May 2017.

38 In 2017 Global Startup Ecosystem Ranking released by Startup Genome, Singapore is at 12 th rank. Singapore is in the top ranking for talent due to its high performance in access to quality talent and cost which means the cost is lower for the business. Also, the startup founders based in Singapore is the youngest in the world, with the median age of With all of the infrastructure, government backup, and geographical advantage, Singapore will rise as one of the ideal ecosystems for the innovation in the world and one of the best in Asia Hong Kong Hong Kong is widely known for its ease of doing business, sound legal environment, and advantageous geographical location. Located near the mainland of China which is one of the most emerged countries with the strong economy and also a new power in innovation. Hong Kong is an advantageous factor that would support them to become a great business hub such as: A free trade and investment policy Low and simple taxation International lifestyle Close Proximity to markets in Asia Highly skilled worker or talent 59 All of the characteristics of Hong Kong made the country attractive to the investor; it can be shown by more than 3800 overseas companies with have chosen Hong Kong as the place for their regional headquarters or offices. 60 Hong Kong has several key strengths, they are Fintech and Internet of Things (IoT). Internet of things is a big network that connects a device which is also connecting the people to the internet such as cell phones See table 1 59 'Doing Business And Investing In Hong Kong' (Hketolondon.gov.hk, 2017) < accessed 18 May 'Doing Business And Investing In Hong Kong' (Hketolondon.gov.hk, 2017) < accessed 18 May 'Forbes Welcome' (Forbes.com, 2017) < accessed 18 May 2017.

39 Hong Kong 2 key strengths are: 1. One of the most important international financial centers in the world. It provide Fintech startups access to top decision makers who are representative of global B2B customer needs, and deep industry expertise informing the development of new business models that address global B2B and B2C customer needs. 2. The proximity of China s Pearl River Delta, including Shenzhen, with its globally competitive (if not leading) hardware prototyping and manufacturing capabilities, provides a strategic growth opportunity for Hong Kong s Internet of Things and wearables startups. 62 Hong Kong is a modern city and one of the business hub in the world. The ecosystem also supports and used to the high paced business system. There are some key feature or role that Hong Kong play as a business hub 63 : 1. Service economy: Innovation is likely to accelerate in many services, within the service sector itself as well as through the servitization of the manufacturing industry. 2. A Super Connector to the World: Hong Kong is well-positioned to play the role of a Super Connector in linking ideas, capital, talents, production facilities, and markets. 3. As a Test Market: Hong Kong is an ideal place for market validation for both B2C and B2B businesses. In regulatory sandbox regulation, Hong Kong sandbox regime is only open to institutions authorized under the Banking Ordinance under the supervision of the Hong Kong Monetary Authority, such as licensed banks, restricted license banks, and deposit-taking companies. As such, non-authorized institutions will need to partner with authorized institutions to trial their Fintech offerings 'The Hong Kong Startup Ecosystem Report Reinventing Hong Kong Into An Innovation Powerhouse Startup Genome' (Startupgenome.com, 2017) < accessed 8 May 'Report: Hong Kong Is 5Th Fastest Growing Startup Ecosystem; Ranks 25Th In The World - Startupshk' (StartupsHK, 2017) < accessed 8 May 'Overview Of Regulatory Sandbox Regimes In Australia, Hong Kong, Malaysia, Singapore, And The UK' (Oxford Law Faculty, 2017) < accessed 8 May 2017.

40 Malaysia Malaysia has a strategic location in South East Asia with GDP Ranking of 27 th in the world and second highest growth in ASEAN with 6 percent. Both government and private sector are supportive to the growth of Malaysian Startups as it shown by the development of startups and technology-based business is growing rapidly. Malaysia s startups focus on tech areas in mobile, e-commerce, cloud and big data segments. Malaysia s Government is proactive to support startup business by providing an accommodating infrastructure (internet access, visa, tax norms) that main factor is a strong boost for their startups and Fintech ecosystem 65. Malaysia s location that is near to Singapore also give them a big advantage. Singapore is very advanced and one of the best startup ecosystem in Asia and maybe in the world. It creates easy access to talent, funding, and any other resources to boost startup ecosystem. Malaysia s government is helping to develop and backing up startups and e-commerce by launching several projects and make a special institution that helps startups and e-commerce such as: Selangor Information Technology and E-Commerce Council (SITEC), focusing on e- commerce Malaysian Global Innovation and Creativity (MaGIC), focusing on startups Malaysia s Government through their central bank, Bank Negara Malaysia (BNM) issued the regulatory sandbox on October 2016 after a month of the release of a consultation paper to the public in July By the feedback of the paper, they will make a regulatory sandbox framework and rule that will accommodate the needs of the user or business that will enter the regulatory sandbox. The eligibility criteria of Regulatory Sandbox in Malaysia is to clarify the focus of innovations that the sandbox aims to support. The innovation should fulfill some criteria such as 66 : 65 Alex Kong, 'The State Of Fintech In Malaysia Alex Kong - TNG Wallet Yostartups' (YoStartups, 2017) < accessed 10 May Bank Negara Malaysia, 'Financial Technology Regulatory Sandbox Framework' (2016) < accessed 12 May 2017.

41 i. improve the accessibility, efficiency, security, and quality of financial services; ii. iii. enhance the efficiency and effectiveness of Malaysian financial institutions management of risks; or address gaps in or open up new opportunities for financing or investments in the Malaysian economy Australia Startups in Australia is located mostly in two biggest cities which is Sydney (New South Wales) and Melbourne (Victoria). Sydney is one of the startups ecosystems in the world, with the rank of 17 th position in the world 67. Malcolm Turnbull, Prime Minister of Australia, make policies to help innovation growth in Australia in 2015 such as tax incentive for startups investors, signing three free trade agreements, and establishing a regulatory regime for crowdfunding regime 68. With a supportive government, Australia s startup ecosystem is growing and interesting to a foreign investor. While on the other hand, Australia has several startups which growth are so fast and funded by the government such as: Expert360 - The online marketplace for top-tier independent consultants Canva - Graphic designs startups Bomb d - Social media based on photo like snapchat According to government's policies, a regulatory sandbox in Australia more focus on Fintech because their financial service is their strength. Australia s government introduced a special framework for Crowd-Sourced Equity Funding (CSEF) on 3 December Crowdfunding has a potential to extend to debt funding, and Australia s Government will consult on the proposed framework. 67 See table 1 68 'National Innovation And Science Agenda Report' (National Innovation and Science Agenda, 2017) < accessed 19 May 'Australia S Fintech Priorities' (Fintech.treasury.gov.au, 2017) < accessed 19 May 2017.

42 The development of Australia s regulatory sandbox is under Australian Securities and Investment Commission (ASIC) which will address all startups and fintech. ASIC and Australia s government will give a waiver or exemption for a limited time (6 months). The exemption would only apply to: (i) (ii) Giving financial advice about listed or quoted Australian Securities, simple managed investment schemes and deposit products; or arranging for other persons to deal with these products. Existing AFS licensees are not eligible to rely on the exemption Regulatory Sandbox Guidelines Financial Conduct Authority of United Kingdom as the first one to proposed and actually make a regulatory sandbox also make specific guidelines. Singapore through Monetary Authority of Singapore (MAS) also created specific guidelines to ensure the regulatory sandbox is effective as a safe space to test innovation. Guidelines explain the principle of the regulatory sandbox and provide guidance on how the process of the innovation will be tested also provide all information needed by the applicant. Each country has a different approach and way in making guidelines for the sandbox. It depends on the condition of the market and what kind of innovation should be regulated. While the creation of regulatory sandbox is a breakthrough and innovative reaction from the regulator, a regulatory sandbox needs to be continuously developed and maintained following the innovation 'Overview Of Regulatory Sandbox Regimes In Australia, Hong Kong, Malaysia, Singapore, And The UK' (Oxford Law Faculty, 2017) < accessed 18 May Andrea Sonia, 'Innovation The Regulatory Sandbox Way' (2016) < accessed 24 May 2017.

43 Financial Conduct Authority regulatory sandbox guidelines United Kingdom Financial Conduct Authority is the first institutions who launched regulatory sandbox in the United Kingdom. The main purpose is to facilitate the competition by supporting disruptive innovation to be able to compete in the market. UK s Fintech sector generates about 20 billion in revenue annually, with a total market of 3.6 billion in Fintech 72. The Fintech market in the United Kingdom is an advanced market, so it requires an advanced regulation to keep up. Regulatory sandbox also could be defined as an innovative approach designed by the regulator to handle the innovation in the market. There are three clear advantage for innovation to test its business form or product in FCA s regulatory sandbox 73 such as: - Efficiency in time innovative business form or product will be assisted by FCA during sandbox period so they could enter the market faster. - Improving outcome innovation will be improved in regards to the outcome, such as increasing the range of their product or services. - Safety for consumer Improving the innovation safety towards the market, so such innovation will not cause harm to the market. FCA also create specific criteria and guidelines for sandboxes innovation candidate, to make a clear distinction of which innovation that could be tested. Before running the regulatory sandbox, FCA stated that there are two potential options for the output of regulatory sandbox such as 74 : - New Regulated Activity Enabling FCA to create a new sandbox regime that is more flexible and could allow for a streamlined authorization process and potentially less regulatory requirements to comply with when testing. A disadvantage of this option is such firms still need to become authorized before being able to test. 72 Landscaping UK Fintech (1st edn, UK Trade & Investment 2014) < ch.pdf> accessed 5 June 'Regulatory Sandbox A New Form Of Policymaking Inline Policy' (Inlinepolicy.com, 2017) < accessed 24 May Regulatory Sandbox (1st edn, Financial Conduct Authority 2015) < accessed 9 April 2017.

44 - Amending the waiver test: The FCA s power to issue waivers is limited in relation to requirements which come from EU legislation. In the application of regulatory sandbox, FCA creates certain criteria of which innovation that could be tested in the regulatory sandbox. Table 13 FCA Regulatory Sandbox Application criteria 75 Criteria Is the firm in scope? Is it genuine innovation? Is there a consumer benefit? Is there a need for a sandbox? Is the firm ready for testing? Key questions Is the firm looking to deliver innovation which is either regulated business or supports regulated business in the UK financial services market? Is the innovation ground-breaking or constitute a significantly different offering in the marketplace? Does the innovation offer a good prospect of identifiable benefit to consumers (either directly or via heightened competition)? Does the business have a genuine need to test the innovation on real customers and in the FCA sandbox? Is the business ready to test their innovation in a live environment? Monetary Authority of Singapore regulatory sandbox guidelines - Singapore Singapore as one of the innovation hub in Southeast Asia is the first country in Southeast Asia that used the regulatory sandbox. The ecosystem of Singapore that is very open to investment and supportive government towards innovation made it possible. 75 'Regulatory Sandbox' (FCA, 2017) < accessed 29 May 2017.

45 MAS regulatory sandbox guidelines will improve the clarity, flexibility, and transparency in the following ways 76 : - Improved clarity - The guidelines will explain about examples and elaborations to illustrate regulator s expectations on the sandbox; - Greater flexibility - The guidelines refined to allow greater flexibility such as relaxation of some evaluation criteria for firms looking to enter a sandbox and providing room for adjustments during experimentation as firms learn from market responses; - Increased transparency - Regulator will work closely with sandbox applicants in the evaluation and experimentation process. All the result and the report will be filed and published by the regulator. MAS also use consultation paper for the regulatory sandbox. The consultation paper is being spread over the potential regulatory sandbox user to help MAS creating a suitable regulatory sandbox and the guidelines that will work effectively and fit for the market. The feedback from the potential applicant or user will be addressed and will be incorporated to regulatory sandbox if appropriate 77. The evaluation criteria made by MAS for the user of the regulatory sandbox are 78 : - Use technology in innovative way - Clearly-defined exit and transition strategy - Significant risks assessed and mitigated - Clearly-defined boundary conditions - Clearly defined test scenarios and expected outcomes - Deploy in Singapore on a broader scale - Bring benefits to consumers and/or industry 76 Reading Room, 'MAS Issues "Regulatory Sandbox" Guidelines For Fintech Experiments' (Mas.gov.sg, 2017) < Guidelines-for-FinTech-Experiments.aspx> accessed 24 May Monetary Authority of Singapore, 'Response To Feedback Received Fintech Regulatory Sandbox Guidelines' (Monetary Authority of Singapore 2017). 78 Monetary Authority of Singapore, 'MAS Regulatory Sandbox Evaluation Criteria' < accessed 30 May 2017.

46 Hong Kong Monetary Authority regulatory sandbox guidelines Hong Kong Fintech Supervisory Sandbox (FSS) is created to facilitate the trials for Fintech and other technology initiatives of authorized institutions (AI) before they are officially launched to the market 79. Hong Kong has a three-tier system of deposit-taking institutions, collectively called authorized institutions (licensed banks, restricted license banks, deposit-taking banks). 80 Hong Kong Regulatory sandbox is more focused on authorized institutions, which means government help the incumbent to develop their system to keep up with the innovation and could compete with the fintech or startups that emerging in Hong Kong. HKMA will use the following principles in operating the FSS 81 : a) The FSS is available for Fintech and other technology initiatives intended to be launched in Hong Kong by AIs; b) AI is allowed to test its innovation or product without the need to achieve full compliance with the HKMA s supervisory requirements in the trial period. While testing their innovation, AI will ensure that: - Boundary The scope and phase of the trial, timing and termination arrangements. - Customer protection measures Protection measures during the trial period for customers. - Risk management controls Implementation of risk management controls to mitigate the risks arising from less compliance with supervisory or regulatory requirements. - Readiness and monitoring 79 Hong Kong Monetary Authority, 'Guidelines And Circular Of Fintech And Supervisory Sandbox' (Hong Kong Monetary Authority 2016) 80 'Hong Kong Monetary Authority - The Three-Tier Banking System' (Hkma.gov.hk, 2017) < accessed 28 May Hong Kong Monetary Authority, 'Guidelines And Circular Of Fintech And Supervisory Sandbox' (Hong Kong Monetary Authority 2016)

47 The trial is subject to be close monitoring by AI, so AI could identify and handle any problems or incidents that may arise during the trial period. c) The FSS should not be used by AIs as a means to bypass applicable supervisory requirements

48 PERCENTAGE CHAPTER IV Developing a Regulatory Sandbox in Indonesia 5.1. Development of Fintech and Startups in Indonesia Indonesia is one of developing countries and one of the most populated countries in the world. Mobile and the Internet is a common thing in Indonesia. With the massive use of internet and mobile phone, it is not difficult to bring innovation to the people. Fintech and Startups in Indonesia are developing. Indonesia is ready for more improvement and innovation. It is shown by the establishment of Fintech Indonesia an Indonesian Fintech Association in Fintech Indonesia starts from a community and develops into a registered association under Indonesian Ministry of Law and Human Right. Fintech Indonesia 82. They are also actively cooperating with the regulator (Bank of Indonesia and Indonesian Monetary Authority) to discuss an issue regarding innovative business (Fintech and Startups). Figure 8 Indonesia's Fintech player 83 Indonesia Fintech Player 90% 80% 78% 70% 60% 50% 40% 30% 20% 10% 7% 6% 9% 0% YEAR 82 'Fintech' (Fintech.id, 2017) < accessed 1 June Indonesia Tech Startup Report 2016 (1st edn, dailysocial 2017) < accessed 1 June 2017.

49 In Figure 3, shows that fintech market is growing in Indonesia in the past few years. In , only 9% of fintech player existed, and it starts skyrocketing next year in where there is a significant increase on the fintech player in Indonesia. It means that the innovation trend is emerging in Indonesia and also become a hot sector for investment. While on the other hand it still needs improvement in the future. Regulatory issue is a key point to nurture the growth of innovation to keep all business aspect such as market protection and competition issue. Despite the regulatory issue, there are several challenges for the development of Fintech in Indonesia such as 84 : - Large unbanked population Some of the area in Indonesia still unreached by the banking system or maybe even worst, no access to proper internet connection. - Large underserved small and medium-sized enterprises (SME s) Indonesia has a lot of SME s, and some of them are not registered - Inefficient existing banking infrastructure There is a banking system, but the infrastructure is not enough to cover whole Indonesia. - Geographical fragmentation within the country Indonesia is an archipelago and consist of approximately islands with five big islands (Sumatra, Java, Kalimantan, Sulawesi, Papua). 84 'Indonesia Fintech Ecosystem' (FinTech Asia, 2017) < accessed 31 May 2017.

50 Figure 9 Indonesia's Fintech Player Profile by Sector 85 Fintech Players Profile by Sector Crowdfunding 8% Others 11% Personal Finance Planning 8% Payment 43% Lending 17% Agregator 13% The payment system is the most popular sector in Indonesia as we could see in figure 4. Electronic payment is common in Indonesia. For example, banks creating an e-wallet for their customer to increase efficiency and increase a pay less transaction. Carrying a lot of money in the wallet is traditional and transferring money with the bank where the customer should fill a form to transfer amount of money is outdated. E-payment, mobile banking, or innovative payment platform were created to give a simplicity to customers. Payment gate company also one of the fintech sector that has a lot of players. A payment gateway is an electronic service that processes payment by credit card. It facilitate transactions by transferring key information between payment portals (web-enabled mobile devices/websites and the front end processor/bank) 86 While the other sector is also emerging in 2016, there would be another fintech or startups that will develop and disrupt the market. Singapore, Malaysia, and Australia are the closest countries from Indonesia, and they are a developed country that provides more innovation-friendly ecosystem. Singapore is recognized as one of the best business hub and innovation hub in the world. While Malaysia and Australia are right behind Singapore but they are on the move. 85 Indonesia Tech Startup Report 2016 (1st edn, dailysocial 2017) < accessed 1 June 'What Is A Payment Gateway And What Is Its Role In Ecommerce?' (Bigcommerce, 2017) < accessed 3 June 2017.

51 Indonesia is surrounded by developing country in innovation and business, so it will be advantageous for Indonesia since it will indirectly increase the opportunity for Indonesia to grow their innovation ecosystem. Indonesia also has entered into an agreement with Australia s regulator regarding the development of innovation and regulation. Australian Securities Investment Commission (ASIC) has entered into a Cooperation Agreement (Agreement) with Indonesia s financial services sector regulator Otoritas Jasa Keuangan (OJK) to promote innovation in their own market on April 21 st, The cooperation agreement will include information sharing on market trends that are currently emerging, and regulatory issues arise from innovation growth. ASIC and OJK aim that the cooperation agreement would be able to promote innovation in their respective markets further. For Australia, this cooperation agreement could strengthen ASIC s profile among financial services regulators within Southeast Asia or even Asia and maintain a good relationship with OJK. For Indonesia, the cooperation agreement is positive for the financial services industry in the region since Indonesia is the largest economy in Southeast Asia with a fast growing financial technology sector and need to learn or maybe could adopt the ASIC regulation that could be applied in Indonesia 88. The background of the cooperation agreement is the emerging fintech and startups in both Australia and Indonesia s market. Most of the innovations whether a fintech or startups are not bound by national borders and such thing is a challenge for regulators to be able to create a regulation or keep updated with the innovation. With the cooperation and collaboration of this two countries, innovation challenge to the regulator could be addressed and another benefit from Australia s Fintech policy environment as an example of best practice for a developed, digitally advanced economy 89, it could also push Indonesia s regulator to develop the ecosystem with Australia s ecosystem as an example. 87 'Australia S ASIC And Indonesia S OJK Sign Agreement To Promote Financial Innovation Across Respective Markets' (Opengovasia.com, 2017) < accessed 3 June 'ASIC Signs Fintech Cooperation Agreement With Indonesia Fintech Law Watch' (Fintechlawblog.com, 2017) < accessed 2 June 'ASIC S Indonesia Fintech Play' (InnovationsAus.com, 2017) < Indonesia-FinTech-play/> accessed 3 June 2017.

52 5.2. Fintech and Startups in Indonesia In 2016, Indonesia s startups more concentrated in online shopping. Indonesian use a platform which is an app based to create an online market where buyer and seller could do a transaction with their phone. Efficiency and simplicity are the most important points why online shopping become popular. Daily routine made people couldn t go to the conventional shop to buy things. Startups saw this opportunity and create a platform that could facilitate such problem. Blibli, Bukalapak, and Tokopedia are the example of the successful startups that works in online shopping platform 90. Those three startups providing online shopping platform shows that understanding the market is vital for startups to develop their businesses by choosing which sector they should engage with. Other interesting startups from Indonesia are Go-Jek. Go-jek is a social tech company that providing transportation via informal sectors in Indonesia and it has motorcycle riders partnered with in 25 cities in Indonesia 91. With total funding US$ 550 million ( in August 2016), Go-Jek is one of the biggest startups in Indonesia 92. Go-jek is a tech-based transportation company that using a scooter as its vehicle. The service is similar to Uber, but rather than using a car, Go-Jek uses a motorcycle. The motorcycle is common in Indonesia since Indonesia is an emerging country and more people tend to buy a motorcycle because it is cheaper and efficient when there is a traffic jam. Go-Jek understands that the market is more into a motorcycle and there is a lot of drivers that is the primary resource for Go-Jek. As local startups, Go-Jek has an advantage that they know the market better and could get support from the regulator. Go-Jek is an application based transportation provider, and with Indonesia s market that most of the people are using their mobile phone, Go-Jek could fit in and accepted well in Indonesia s market. Uber and Grab are the main competitors for Go-jek. While Go-Jek main sector is transportation with a motorcycle, Uber and Grab uses the car as their primary service, but currently, they also have a motorcycle as a part of their transportation services. 90 'Indonesia Top Startups - Tokopedia, Bukalapak, Blibli Startup Ranking' (StartupRanking, 2017) < accessed 1 June 'GO-JEK Indonesia' (Go-jek.com, 2017) < accessed 4 June 'Tech In Asia - Connecting Asia's Startup Ecosystem' (Techinasia.com, 2017) < accessed 4 June 2017.

53 Figure 10 Popular non-bank fintech service in Indonesia 93 As we could see in figure 5, Doku has more popularity among other fintech services. Doku is the first electronic payments and risk company in Indonesia, established in 2007 and already have an e-money license from Bank of Indonesia in Also partnered with ten banks and serving merchants including SME s and consumers. 94 Doku is an e-wallet or e-payment with credit card link feature. DOKU could be used for online or offline shopping in a merchant that has a collaboration with DOKU. DOKU offer two products 95 : DOKU Wallet: a digital wallet in the form of a mobile application. Top up the DOKU wallet could be done through ATMs, convenience stores or by credit cards linking. DOKU MyShortCart: a payment gateway for small and medium enterprises (SMEs). 93 Indonesia Tech Startup Report 2016 (1st edn, dailysocial 2017) < accessed 1 June PT DOKU, 'DOKU About' (Doku.com, 2017) < accessed 5 June 'Indonesia Fintech Ecosystem' (FinTech Asia, 2017) < accessed 5 June 2017.

54 E-payment is an efficient model, and it is easier for people nowadays. DOKU is the leading fintech services in Indonesia, and there will be more innovation whether in fintech or another sector that may emerge in the near future Regulator s Reaction of Innovation As a developing country, Indonesia still in the process of learning and accepting such innovation. Regulators respond to innovation should be positive and embrace the age of innovation. Creating an innovation-friendly ecosystem through regulatory process is the main aim for the regulator. Currently, Indonesia has two main institutions that focus on financial sector; they are Bank Indonesia and Financial Services Authority (Otoritas Jasa Keuangan OJK) Otoritas Jasa Keuangan (OJK) role is to give supervision to 96 : - Non-bank financial industry and capital market - Financial sector - Microfinance Institutions Creation of OJK is using the similar approach with UK and Australia which separates monetary policy from prudential regulations. OJK will help and support Bank Indonesia in several sectors such as digital wallets and P2P payments 97. Bank of Indonesia (BI) and Financial Services Authority (OJK) collaborate with Fintech Indonesia community are creating a business industry that is innovative. Specifically in fintech and startups. 96 'About OJK' (Ojk.go.id, 2017) < accessed 5 June 'Indonesia Fintech Ecosystem' (FinTech Asia, 2017) < accessed 2 June 2017.

55 Innovation is a fast-paced technological movement that sometimes regulators could not keep up with it. Gojek and Uber in Indonesia, are some of the application based transportation providers that disrupt the market in Indonesia. Indonesia through Bank Indonesia launch fintech office in 2016 with four main objectives: - Facilitating innovation in financial technology ecosystem in Indonesia - Preparing Indonesia to maximize technological development in developing its economy sector - Increase competitiveness of financial technology development in Indonesia - Gathering information and giving feedback to Bank Indonesia for regulating a suitable regulation in the response of Fintech development. Otoritas Jasa Keuangan (OJK) issued fintech regulation No.77/POIJK.01/2016 with the purpose of facilitating access to alternative financing for all businesses and improving financial inclusion. Such regulation is designed for regulating peer to peer lending. OJK would like to provide fintech companies with transparent guidelines and the easiness and relaxed requirements to the regulation. This regulation is expected to encourage the creation of new fintech ecosystem that would create a bridge between fintech services (banking, capital markets, venture capital) with supporting fintechs, such as big-data analytics, robo-advisory, the blockchain, e-commerce, and e-government. According to OJK, the number of fintech companies in Indonesia increased from 51 to 135 over the course of OJK s regulated about registration and licensing in the application of regulatory sandbox. Fintech providers are required to register before they apply for licenses. During the registration being processed, applicant still allowed to conduct their activities but with the supervision of 98 'Indonesia Surfs Fintech Wave To Financial Inclusion Bloomberg Professional Services' (Bloomberg Professional Services, 2017) < accessed 31 May 2017.

56 the OJK 99, which will supervise the tested business or product. After maximum one year after their registration, providers are obliged to apply for licenses to the OJK. To protect consumer interests, providers are required to open escrow accounts and virtual accounts at banks and set up data centers in Indonesia. In the interest of maintaining national financial system stability, the maximum amount of loans that providers can grant to a single borrower is limited to IDR 2,000,000,000 in Rupiah currency Fintech Office Bank of Indonesia establish Fintech Office on 14 November 2016 as a response to emerging innovation that creates a disruption not only to the market but also to the regulator. Fintech office is set up with four main purposes 101 : - Facilitate the innovation in fintech ecosystem in Indonesia - Preparing Indonesia to develop their technology especially fintech in economic sector - Improving competitiveness of fintech sector in Indonesia - Collecting all information and give feedback for the creation of Bank of Indonesia regulation as a response to technology-based innovation. As mentioned by the governor of Bank Of Indonesia on Fintech Office launching event 102, Fintech office has four functions, there are: - Fintech office as a facilitator to the innovative idea for fintech development in Indonesia. - Fintech office as a business intelligence, where Fintech office will routinely give an update from regulator and regulation national or international. 99 Otoritas Jasa Keuangan, 'OJK ISSUES REGULATION ON IT-BASED LENDING SERVICES' (2017) < Regulation-on-It-Based-Lending-Services/SIARAN%20PERS%20POJK%20%20%20%20FIntech-ENGLISH.pdf> accessed 1 June Ibid 101 Kompas Media, 'Bank Indonesia "Fintech Office" Resmi Berdiri - Kompas.Com' (KOMPAS.com, 2017) < accessed 31 May Bank Indonesia - Fintech Office, 'Sambutan Gubernur Bank Indonesia-Launching Bank Indonesia Fintech Office' (Bank Indonesia 2016).

57 - Assessment function - Fintech Office will do monitoring the potential benefits as well as the risks of innovation of business models and products offered. The results of the assessment will form the basis for policy formulation at Bank Indonesia - Coordination and Communication function - Provide insight into existing regulatory frameworks, and encourage cross-regulatory harmonization of regulations Creating regulatory sandbox Regulatory sandbox is one of the initiatives of Bank Indonesia initiative to creating a safe space to test the innovative business or product. A laboratory for business players and regulators to test products and business models that will also facilitate innovation and test future policies regarding such innovation. Fintech office will assess all the application submitted, and if there is a disruption potential of such business or product, it will be evaluated under regulatory sandbox. There is no detailed information regarding the guidelines of the regulatory sandbox currently. Arguably, Indonesia should create specific guidelines for its regulatory sandbox like Singapore did. Ensuring regulatory sandbox scheme works properly and the creation of expected output. If look at Singapore, the creation of regulatory sandbox guidelines involved the fintech player that will apply their product or business in the sandbox.