Introduction to the Concept of Sandbox in the Securities Sector
FinTech comes from the abbreviation of “Financial Technology”, and in practice, it refers to technology enabled financial solutions. As the financial landscape continues to evolve rapidly, Fintech Regulatory Sandboxes have emerged as a crucial mechanism for fostering innovation, financial stability, financial integrity, financial inclusion and market development while ensuring investor protection.
In the Cambodia Context, the Royal Government of Cambodia has taken significant strides towards fostering a robust digital economy. For instance, Cambodia has adopted the Digital Economy and Society Policy Framework 2021-2035 and the FinTech Development Policy 2023-2028.
In alignment with these policies, and the global and regional technological advancement, the Non-Bank Financial Service Authority formally adopted the Regulation on Fintech Regulatory Sandbox in the Non-Bank Financial Service Sector in 2023, aiming to set a management framework on the application of Fintech Regulatory esbox of relevant regulators who are subordinated to the Non-Bank Financial Service Authority with the target of promoting the adoption, adaptation and innovation of technologies.
Accordingly, the Securities and Exchange Regulator of Cambodia(SERC) has adopted the Guideline on FinTech Regulatory Sandboxes in the Securities Sector, paving the way for building a more sustainable and inclusive financial ecosystem.
In the Securities Sector, the FinTech Regulatory Sandbox is an environment allowing firms to experiment innovative financial products or services with real customers in a productive environment, but within a well-defined space and for a limited duration before launch and promotion on a broader scale in accordance with applicable laws, under the supervision of regulators through Guideline No. 009/23, issued on August 7, 2023 as to encourage innovation in the securities sector. The regulatory sandbox is designed to increase efficiency, to manage risk better, to create new opportunities and to improve people’s lives.
Example in Practice
To date, 28 companies have applied to join the FinTech Regulatory Sandbox in the Securities Sector, including five companies that are authorised by SERC to test digital asset exchange platforms in sandboxes. SERC expects more companies to receive authorisation.
A practical use case of this initiative is Royal Group Trustee Co., Ltd., a company authoried by SERC to test the Digital Asset Trading Platform (RGX) on the business operation in regards to Digital AssetTrading, Digital Asset Derivatives Trading, P2P Trading and Digital Asset Wallet Management in the Digital Securities Sandbox.
Advantages of Financial Technology (FinTech) Regulatory Sandbox in the Securities Sector
- Encouraging Innovation: The Fintech Regulatory Sandbox Framework in the securities sector enables financial companies or institutions and all related fintech players to experiment with innovative financial products and services in a live environment. This experiment is supported by the relaxation of certain legal and regulatory requirements, but within a well-defined space and duration. By offering a secure environment for testing, the sandboxes promote innovation, creativity and encourage the development of advanced financial solutions.
- Enhancing Investor Protection Efficiency: The Fintech Regulatory Sandboxes in the securities sector ensure that customer protection is maintained while promoting innovation. The regulatory sandboxes provide assistance in the core aspects of risk mitigation, transparency, feedback mechanisms integration, compliance testing and promoting customer awareness. Although the sandboxes provide a controlled and flexible framework, this regulation also ensures that the sensitive customer data is handled responsibly and securely, protecting individuals from privacy breaches. This combination aspect contributes to fostering trust and confidence in the Fintech Innovation introduced within sandboxes in the securities sector.
- Promoting Financial Inclusion and Increasing Efficiency: Enhanced efficiency is a cornerstone benefit of the framework, which fosters the development of financial products that are innovative in addressing the market demands. By providing a structured and supportive environment, sandboxes eliminate unnecessary regulatory hurdles during the testing phase, enabling fintech firms to focus their resources on refining functionality and optimising performance. This streamlined process leads to faster and more cost-effective solutions through improved accessibility and reduced transaction costs. Additionally, the sandbox framework encourages collaborative efforts between regulators and innovators, ensuring that not only products are efficient, but also align with regulatory standards, paving the way for smoother integration into the wider financial market in the securities sector.
- Regulatory Certainty: Fintech Regulatory Sandboxes create an environment of clarity and structure that significantly reduces uncertainty related to regulatory requirement for fintech firms, particularly navigating complex compliance law or regulatory requirements. Within the sandbox framework, clear guidelines are established regarding the procedure and other compliance requirements during the testing phase. Additionally, the predefined rules within the sandbox foster better communication and collaboration between regulators and innovators, ensuring smoother adaptation to regulatory requirements once the testing phase concludes.
Challenges of Financial Technology (FinTech) Regulatory Sandbox in the Securities Sector
- Limited Technological Infrastructure/ Infrastructure Technological Readiness: Despite progress, Cambodia’s digital infrastructure is still developing, which can hinder the adoption of advanced technologies in terms of blockchain technology. This may impede the effectiveness implementation of fintech solutions as they require robust infrastructure to support a secure and efficient trading within the regulatory sandbox in the Securities Sector.
- Capacity Building: The repaid evolution of financial technologies demands a workforce equipped with specialised knowledge and technical expertise. However, there is currently a shortage of professional skill in both the fintech companies and regulatory bodies, which poses challenge in effectively managing and participating in the regulatory sandbox in the securities sector.
- Public Awareness and Education: While Fintech Regulatory Sandboxes have introduced innovative trading opportunities, many investors and the general public may still lack familiarity with the concept of fintech and the potential benefits of sandbox-tested solutions. This limited awareness can be attributed to gaps in financial literacy and digital technologies.
The Future of Fintech Regulatory Sandboxes in the Securities Sector
The framework of regulatory sandboxes in the securities sector will open the door and opportunity for full-scale securities and asset tokenisation projects in terms of Government Bonds, Corporate Bonds, Green Bonds and other Real World Asset Tokenisation. This will enhance transparency, efficiency and accessibility in the securities sector, driving more financial inclusion, promoting sustainable growth and financial innovation and fostering an international partnership to share the best practice and enhance the sandbox framework in the securities sector.
***Disclaimer: This article has been compiled solely for informative and educational purposes. It is not intended to offer any recommendations or as investment advice. The SERC and Phnom Penh Post are not liable for any losses or damages caused by using it in such a way.
Prepared by: Securities and Exchange Regulator of Cambodia
Securities Intermediaries Supervision Department
Email: [email protected]
Telephone: 023 855 611
