FinTech

Overview

The Singapore government and the Monetary Authority of Singapore (MAS) have actively encouraged the growth of the FinTech industry to entrench Singapore as a global financial hub and further its initiative to transform Singapore into a 'Smart City'. Compared to Western markets, market and consumer maturity in Southeast Asia is lower since a large part of the population is underbanked or unbanked and has limited access to smart technologies. This presents different challenges for companies wishing to enter the FinTech space and for FinTech investors, as entrepreneurs are limited in the extent to which they can employ technological advances in their innovations.

In Singapore, FinTech innovations are within the payments and marketplace lending space, which provide platforms for new consumers to access traditional banking services.

Peer to peer funding and marketplace lending

Peer-to-peer (P2P) funding includes both P2P lending and P2P equity platforms. Unlike traditional banks, P2P lending firms operate a platform which connects borrowers and lenders, instead of applying funding raised from a deposit-based relationship. Furthermore, while P2P lending platforms were initially used mainly to help startups raise capital, they now operate across many industries and finance assets which could previously only be financed by bank funding. Examples include lending platforms which deal in consumer loans, real estate or student lending.

P2P lending platforms and other forms of marketplace lending have presented an ever increasing challenge to traditional financial service providers largely because their technological innovation leads to greater efficiency, cost savings and flexibility and their ability to service small and medium-sized enterprises (SMEs) that have been turned down by traditional banks in the post financial crisis era.

MoolahSense (set up in 2014) and FundingSocieties (set up in 2015) were some of the successful early pioneers of marketplace lending in Singapore. They have entered into a partnership with DBS Bank to refer successful borrowers to the bank for larger loans and other traditional banking services. FundedHere and Crowdo are other key marketplace lending players, and they provide both equity and lending based platforms. We can expect to see a longer list of crowdfunding platforms in time to come, as the number of platforms receiving licenses from the MAS is increasing.

Industry specific platforms have also taken off in Singapore. One example is CoAssets – a Singapore grown, Australian listed crowdfunding platform founded in 2013 – which focuses on real estate funding. Another example, Crowdo, earlier this year announced a strategic partnership with BFI Finance, a multi finance company in Indonesia, to offer customers (particularly SMEs) loans for vehicles and fixed assets.

Many of these domestic funds have also been expanding their operations to include securitizing loans through invoice financing which is particularly favorable for asset light SMEs.

How are marketplace lending platforms funding themselves?

Marketplace lending includes P2P-type structures often operated through an electronic platform provider as well as crowdfunding and also direct-to-retail financing mechanisms. The increase in demand for credit through these marketplace platforms has also been appealing to larger pools of available capital, such as private equity and venture capital funds as well as institutional sponsors. Funding platforms will now often be backed by institutional finance in addition to, or rather than, individual investors on a traditional P2P basis.

Issues for startup marketplace lenders

In general terms, marketplace lending has not been as successful in Singapore as it has been in the US or the UK, mainly because the local financial market is not large enough to achieve the scale and success of American P2P platforms such as Lending Club. This is a difficult challenge to overcome for Singapore's relatively small domestic funds since they do not have access to the kind of business/investor data that banks have access to and since not many P2P platforms have partnered with banks in Singapore, unlike in the UK or US.

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a P2P mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features such as its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the blocks using sophisticated algorithms and add the verified blocks to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process. This process requires vast amounts of computing power, making it practically impossible to insert fake transactions into a block.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (eg in the case of cryptocurrencies such as bitcoin) or providing an indisputable record for example relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that once authorized, can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

There seems to be a great push to make Singapore a world leader in distributed ledger technology with many users in Singapore testing the application of blockchain in areas such as:

• interbank payments;
• verifying and reconciling trade finance invoices; and
• executing and verifying the performance of contracts.

Examples of FinTechs in the blockchain space include Attores, a Singaporean FinTech startup which utilizes the ethereum platform (a blockchain that records smart contracts) to allow its customers to create and execute tailored smart contracts securely, while building an open repository of smart contracts. In September 2017, IBM announced it was piloting blockchain technology for managing the design, management and execution of its contracts with Bank of Tokyo Mitsubishi on the IBM cloud.

The Singapore government, acting through its FinTech office, is taking the lead in developing the application of blockchain technology in Singapore. The FinTech office was set up in May 2016 by the MAS and the National Research Foundation, to serve as a one-stop virtual entity for all FinTech matters and to promote Singapore as a FinTech hub. In a keynote address in November 2016, the Managing Director of the MAS expressed that there was an important opportunity for the government to build blockchain infrastructure that the private sector could meaningfully use. He discussed examples in banking, KYC, consent standards in big data and payment infrastructure for mobile payments as possible areas within which blockchain could be successfully deployed. However, attracting and recruiting talent and developing local talent remains an important challenge for the Singapore government, which it is actively trying to overcome the issue by hosting events such as the annual FinTech festival since November 2016 (for more information, see here).

In March 2017, the MAS completed phase 1 of a proof-of-concept project named 'Project Ubin' to conduct domestic inter-bank payments using blockchain. The project was formed in partnership with R3 and a consortium of financial institutions, and was borne out of a need to explore the use of blockchain in financial transactions. The project evaluated the implications of having a tokenized form of the Singapore dollar (SGD) on a distributed ledger, and its potential benefits to Singapore’s financial ecosystem. If blockchain-based interbank payments are successful, it could lead to faster settlements in securities and bond trading. The report for the project, however, mentioned the potential issue of credit risk liability and stated that an appropriate legal structure is required to ensure that the transfer of digital SGD is equivalent to a full and irreversible transfer of the underlying claim on the central bank’s currency. This would help ensure that there is no credit risk associated with the creation, distribution, use or redemption of the digital SGD.

With an unprecedented push for the adoption of blockchain led by Singapore’s government, Singapore is on its way to being at the forefront of the technology, and perhaps an example of how blockchain can work to improve the lives of its citizens.

What are smart contracts and Decentralized Autonomous Organizations (DAOs)?

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the electronic system in the form of so called 'smart contracts'. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another or advanced, more-complex interactions with the outside world using so called 'Oracles'. With Oracles, the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form or by delivering instructions to a person or warehouse to release the asset for delivery.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate, depending on their software engine, the nature of transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question if any technical issues arise with their operation.

What is a cryptocurrency?

As defined by the Monetary Authority of Singapore, a digital token is a cryptographically secured representation of a token holder's right to receive a benefit or perform a specified function. A virtual currency (examples include bitcoin or ether), also known as cryptocurrency, is a type of digital token.

Initial coin offerings and token based products

What is an Initial Coin Offering (ICO)?

ICOs are a form of digital currency or token using blockchain technology. ICOs are often a means by which funds are raised for a new blockchain or cryptocurrency venture (the market for ICOs is currently booming). ICOs come in a wide variety of forms and may be used for a wide range of purposes. Some forms of ICOs may be directed at customers or suppliers as a form of loyalty initiative or a form of access or purchasing power (preferential or otherwise) in respect of assets of the issuer’s business. Other forms may be more focused on raising initial funding. It is essential to examine the legal and regulatory basis for any ICO, as an unauthorized offering of securities is illegal and may result in criminal sanctions in a number of jurisdictions. Legal analysis of the underlying token will determine if it should be treated as a specified investment or form of regulated security or is more appropriately a form of asset that is not itself subject to the regulatory regime.

Typical attributes provided by tokens will include:

• access to the assets or features of a particular project;
• the ability to earn rewards for various forms of participation on the platform; and
• prospective return on the investment.

Key aspects to consider will include the:

• availability and limitations on the total amount of the tokens;
• decision-making process in relation to the rules or ability to change the rules of the scheme;
• nature of the project to which the tokens relate;
• technical milestones applicable to the project;
• basis and security of underlying technology;
• amount of coin or token that is reserved or available to the issuer and its sponsors and the basis of existing rights;
• quality and experience of management; and
• compliance with law and all regulatory requirements.

The nature of the business and the purpose and structure of the token offering will typically be set out in a white paper available to potential purchasers.

ICOs have become increasingly popular as a way for startups in Singapore to raise funding. Millions of US dollars have been raised through ICOs in Singapore over the last year. Digix, a platform which trades gold backed tokens issued for ethereum, raised US$5.5 million in under 12 hours in 2016, while blockchain startup TenX recently raised close to US$80 million to support the development of a protocol enabling transactions across different blockchains.

TenX is only one of many startups in the digital tokens and cryptocurrency based products space which has raised money to help finance or support the development and application of cryptocurrencies and other tech startups in Singapore. Cofund.it provides a platform much like a P2P lending or equity funding platform to connect startups in the blockchain and cryptocurrency space to investors and experts for both funding and advice. Cross Coin, a Singapore special purpose vehicle, raised US$5 million in one day through an ICO to fund and develop 60 to 70 Russian and Eastern European technology startups in Starta Accelerator, a New York accelerator. FundYourselfNow, which dubbed itself as the first cryptocurrency crowdfunding platform in Southeast Asia, has created a platform to allow entrepreneurs to raise funds for their projects using virtual currencies such as bitcoin or ethereum, instead of regular currency.

Other startups such as Coss and HelloGold Foundation aim to bring cryptocurrencies to the mass market by adopting crypto and blockchain based services and products into a user friendly and intuitive environment.

For information on the regulation of ICOs, see FinTech products and uses – particular rules.

Artificial intelligence and robo advisory systems

Digital advisory systems which employ artificial intelligence, such as robo advisory systems, have become increasingly popular in Singapore over recent years. As defined by the MAS, digital advisory services refer to the provision of advice on investment products using automated, algorithm based tools, usually online and with limited or no human interaction.

Since the availability of digital advisory services will increase investor choice and market competition and provide access to low cost investment advice, the MAS has refined the licensing and business conduct requirements for digital advisory service providers.

Digital advisors may operate with a capital markets services license (CMSL) for fund management or for dealing in securities under the Securities and Futures Act (SFA), or a financial advisor's license under the Financial Advisers Act (FAA), depending on their business models and the specific activities that they undertake. Current regulations mean that financial institutions which are already regulated under the SFA or the FAA can provide digital advisory services. In line with this, OCBC Bank Singapore recently announced plans to launch a robo advisory service targeted at accredited investors, in partnership with WeInvest. Bambu, a Singapore business-to-business robo advisor services provider, has developed a white label platform for financial institutions to offer robo advisory to their customers. One of their offerings is called 'Robo-in-a-box', which is a one-stop-shop for any company to offer end-to-end digital solutions to retail investors. Another one is called the 'Intelligent Advisor', which is a propriety algorithm-ranking tool for relationship managers to improve customer experience targeted at high-net-worth investors. Bambu has signed partnerships with notable industry players including Tigerspike, Thomson Reuters and Finantix.

In June 2017, the MAS released a consultation paper on proposals to facilitate the provision of digital advisory services. These proposals discuss the governance, supervision and management of algorithms for robo advisors to ensure integrity and robustness in the delivery of financial advice. At the same time, the MAS recognizes that some digital advisors whose activities fall into fund management and who intend to obtain a CMSL in fund management to service retail investors may not be able to meet the five-year corporate track record requirement of managing funds for retail investors in a jurisdiction which has a regulatory framework that is comparable to Singapore.

In order to make it easier for entities offering digital advisory services to operate in Singapore, among other concessions, these proposals state that the MAS is prepared to admit digital advisors (which operate as fund managers under the SFA) to offer their services to retail investors even if they do not have a five year corporate track record or do not meet the minimum total assets under management requirement (S$1 billion), provided they meet safeguards such as:

• offering diversified portfolios of non complex assets;
• having key management staff with relevant collective experience in fund management and technology; and
• undertaking an independent audit of the advisory bureau within one year of operations on key risk areas (ie prevention of money laundering and countering the financing of terrorism, handling of client moneys and assets, technology risk and suitability of advice).

However, the MAS would require the providers of digital advisory services to manage the new technology risks associated with these activities. The public consultation on these proposals ended on 7 July 2017 but the proposals have not yet been finalized.

Data analysis and cloud computing

Cloud computing refers to the use of a network of remote servers hosted on the internet to store and process data, instead of relying on a local server or personal computer. It provides economies of scale, delivers operational efficiencies and, like data analysis, is an enabler for a variety of other FinTech innovations.

There has been a growing trend among financial institutions to outsource aspects of their service delivery to cloud operators. In July 2017, as part of its Guidelines on Outsourcing Risk Management, the MAS set out specific guidelines on the use of cloud services by financial industry players. These mainly required cloud service providers to be aware of the risks to data confidentiality and data recovery posed by cloud services such as multi location processing and to carry out the necessary due diligence and implement appropriate risk management processes.

In this light touch regulatory environment, many startups have begun innovating in the cloud computing and data analytics space. Smartkarma and Call Level, both founded in 2014, provide services based on data analysis for investors. Call Level simplifies tracking investors' personal investments using tailored notifications which are generated from market analysis whereas Smartkarma provides research and transparency into Asian markets, combining intelligence from analysts, data scientists, academics and industry experts, to help investors enhance returns and proactively manage their investment strategies.

Business-to-business (B2B) platforms such as Matchmove, which provides cloud computing services to enterprises (in the form of a fully customizable secure mobile wallet service) to help businesses increase customer loyalty and user engagement are also popular in Singapore. Innovation using data analysis is also being deployed in the B2B services arena. FitSense is an analytics platform that collaborates with insurance companies to provide data analytics which allows insurance companies to personalize policies for anyone with a smartphone or wearable technology, thereby reducing insurance premiums.

General financial regulatory regime

General

Singapore has recently announced plans to become a 'Smart Nation' and it has recognized that the financial sector is ideally placed to play a leading role since the financial services industry offers vast scope for innovation and the application of technology. The government aims to work towards a 'Smart Financial Centre' where technological innovation is pervasive.

The Securities and Futures Act (SFA) is the main legislation regulating capital markets and the financial investments sector. Section 82 of the SFA provides that no person shall, whether as principal or agent, carry on business in any prescribed regulated activity or hold himself out as carrying on such business unless it holds a capital markets services license (CMSL) issued by the Monetary Authority of Singapore (MAS) in respect of that prescribed regulated activity. Regulated activities include dealing in securities, fund management, advising on corporate finance, providing custodial services for securities and securities financing, amongst others. Therefore, generally, unless a licensing exemption is invoked, all financial institutions would be required to obtain a CMSL. In some instances, the Financial Advisers Act may also be applicable.

The MAS is the main financial services regulator in Singapore. Generally, the MAS's regulatory approach towards FinTech can be described as activity-based regulation to keep pace with innovations. MAS believes that regulation must not front-run innovation since this may stifle or potentially derail innovation or the adoption of useful technology. However, it puts equal emphasis on keeping pace with innovation in order to assess what the risks might be and continually evaluates whether it is necessary to regulate or leave technologies and industries to evolve further. The MAS will only bring regulation in when the risk posed by new technology becomes material or crosses a threshold. Any regulation ought to be proportionate to the risk posed.

In order to provide a safer, less expensive and more controlled environment within which FinTechs can innovate, the MAS has set up a regulatory sandbox framework for financial institutions to test their innovations. This will provide FinTech firms with a space within which to experiment with their technology, even if they are not able to anticipate every risk or meet every regulatory requirement.

To enter the regulatory sandbox, the relevant FinTech must apply to the MAS. The MAS and the applicant will then define the boundaries within which the experiment will take place. The MAS will also determine the specific legal and regulatory requirements, which it is prepared to relax for the duration of the experiment within these boundaries. The sandbox has been a huge success, attracting proposals that leverage on a range of technologies, including blockchain, machine learning and big data analytics. PolicyPal, an insurance technology startup which allows customers to buy and manage insurance policies through a mobile application, is the first 'graduate' of the sandbox.

Regulation of peer-to-peer funding and marketplace lending

The MAS announced initiatives in June 2016 to improve small and medium-sized enterprises' access to equity and lending-based crowdfunding from accredited and institutional investors by relaxing certain financial requirements for capital markets intermediaries that deal in securities and clarifying the application of certain exemptions from prospectus requirements. Its approach is to regulate equity and lending-based crowdfunding platforms within the existing regulatory framework and accept lower regulatory requirements in accordance with the risks and characteristics of the business model (eg serving only accredited investors and institutional investors, and not handling clients’ monies) of the relevant entity. The MAS does not see a need to create a new investor class for equity or lending based crowdfunding since the framework is already calibrated to treat retail and non-retail investors differently. As at June 2016, in light of the high risks inherent in equity crowdfunding, the MAS does not intend to remove the regulatory safeguards such as prospectuses that apply where securities are offered to retail investors but is working to refine its guidelines to facilitate the intermediation of offers to investors (including retail investors) under the existing framework and continues to monitor developments and may make adjustments to the approach in the future, if warranted.

CMSL requirement

Generally, an equity and lending based crowdfunding platform operator will require a CMSL since it will be dealing in securities (ie by facilitating the offer of debentures even if the platform operator does not itself offer the debentures) or advising on corporate finance (as defined in the Securities and Futures Act) unless it qualifies under one of the prescribed exemptions from the requirement to hold a CMSL. Requirements under the Financial Advisers Act may also apply where financial advisory services are provided by the platform operator to investors who wish to invest in the securities.

Following a public consultation held in 2015, the MAS has simplified the financial pre-qualifications to be met by platform operators to allow them to obtain a CMSL for dealing in securities. Therefore, if the platform operators only serve accredited and institutional investors, do not hold or handle customer money, assets or positions and do not act as principal against customers, the base capital requirement for dealing licensees will be reduced from S$250,000 to S$50,000 and the requirement to maintain a security deposit of S$100,000 with the MAS will be removed.

In assessing corporate license applications, where an applicant platform operator does not possess the requisite five years' corporate track record (as set out in the Guidelines on Criteria for the Grant of a CMSL other than for Fund Management), the MAS will consider other factors in place of the corporate track record, such as the experience and track record of the shareholders and the key officers of the applicant.

Offer of securities

In addition to the requirement to have the appropriate CMSL, under section 239(3) of the SFA, any invitation to lend money to an entity (eg a company) is deemed to be an offer of debentures, which is a type of security. The entity offering debentures is required to prepare and register a prospectus with the MAS in accordance with the SFA unless it falls within one of the several prospectus exemptions. Currently, securities-based crowdfunding (SCF) can be carried out, albeit in a limited way, without the need to register a prospectus if it is done in reliance on existing prospectus exemptions, such as the small offer exemption under the SFA.

Under section 272A of the SFA, crowdfunding platform operators may make personal offers of securities, up to S$5 million within any 12 month period, without a prospectus (referred to as the small offers exemption), subject to certain conditions. As of June 2016, the MAS has amended the investor pre-qualification process found in the MAS’s Guidelines on Personal Offers made regarding the Exemption for Small Offers in order to make it easier for SCF platform operators to rely on the existing regulatory framework for small offers, to raise funds through SCF including from retail investors. However, to ensure investors (including retail) are fully aware of the risks and deterred from investing if they are unable to accept the potential losses, the MAS has concurrently strengthened the existing risk disclosures to require any licensed crowd-funding platform operator appointed by an offeror to intermediate the offeror’s small offers online; and such an offeror is to provide, at the minimum, a prescribed risk disclosure statement to each potential investor and obtain the investor’s acknowledgement that he is fully aware of and accepts the risks. The MAS has also advised however that in appointing a licensed SCF platform operator to intermediate the offeror’s small offers, the offeror should satisfy itself that the SCF platform operator has the necessary procedures to ensure that the revised pre-qualification process, as well as the revised risk disclosure and acknowledgement requirements, are complied with.

Offerors can also rely on prospectus exemptions under sections 274 and 275 of the SFA to make offers of securities to accredited investors and institutional investors through SCF without a prospectus. To ensure that offers made in reliance of the abovementioned prospectus exemptions are limited in scope and reach, and are not subject to mass solicitation, offers to accredited investors are subject to specified conditions, including a restriction on any advertisement on the offer (Advertising Restriction). Although the MAS has clarified the scope of the advertising restriction for offers made pursuant to the prospectus exemptions, the bottom line remains that as exempted offers are intended to be offers that are restricted in scope, these offers should not be subject to any mass solicitation, advertising or canvassing. If the platform operator of a ‘restricted access platform’ (as opposed to an ‘unrestricted access platform’) has conducted due diligence to confirm that investors who have access to the platform are within the scope of the prospectus exemption (eg accredited investors), the publication of statements containing information on the offeror and the terms of the offer on the platform would not be regarded as a breach of the Advertising Restriction.

Licensed platform operators may still offer equity securities to retail investors by registering and providing a prospectus or by utilizing some of the other statutory exemptions (such as the small offers exemption described above) to issuing a prospectus.

Regulation of payment services

Payment services are currently governed by two separate pieces of legislation: the Money Changing and Remittance Businesses Act (MCRBA) which governs stored value and the Payment Systems (Oversight) Act (PS(O)A) which governs remittance businesses. With the advent of FinTech, payments and remittances and the providers of these services can no longer be easily classified and differentiated.

In August 2016, the MAS released a consultation paper on the proposed changes to the payments regulatory framework and the establishment of a National Payments Council to drive innovation, as well as to create a more efficient and competitive business environment. The proposals bring payment services regulations under a single framework that will provide for the licensing, regulation and supervision of all payments services including stored value facility holders, remittance companies and virtual currency intermediaries. Regulation will be applied on the basis of the activity carried out by the service provider and entities will only be required to apply for a single license to undertake several payment activities. The proposed regulation also aims to strengthen standards of consumer protection, anti-money laundering and cybersecurity related to payment activities.

The consultation was the first in a series of consultations on the proposed governance model for Singapore. The proposals from these consultations do not yet appear to have been implemented.

Regulation of Initial Coin Offerings (ICOs), cryptocurrencies and token based products

In light of the booming ICO market in Singapore, the MAS clarified in August 2017 that the offer/issue of digital tokens which constitute 'products' regulated under the SFA will be regulated by the MAS. Where tokens fall within the definition of securities in the SFA, the issuer is subject to licensing requirements under the SFA (unless exempt) and is required to lodge and register a prospectus with the MAS prior to the offer of such tokens (unless exempted). Any platform facilitating the secondary trading of these tokens would also have to be approved or recognized as an approved exchange or recognized market operator under the SFA.

In line with other countries, the MAS has previously confirmed that virtual currencies are not specifically regulated but that intermediaries in virtual currencies would be regulated for money laundering/terrorist financing risks. It is considering introducing regulations to prevent money laundering/terrorist financing risks involving digital tokens which are not virtual currencies, in the near future.

Application of data protection and consumer laws

The increasing sophistication and use of technology within FinTech, data analysis tools and the applications of big data means that more data than ever is being collected and stored. Data protection in Singapore is governed by the Personal Data Protection Act 2012 which fully came into effect in 2014. It governs the collection, use, disclosure and care of personal data (whether electronic or non-electronic) and recognizes individuals' rights to protect their personal data and their rights of access and correction.

Money laundering regulations

In order to be compliant with anti-money laundering regulations, companies operating in the FinTech sector must collect the right information to conduct appropriate 'know your customer' procedures. This includes determining the business model's risk of money laundering and carrying out enhanced due diligence if the model is high risk. FinTech companies dealing with online payments and internet-based stored value facility holders are two sub-categories which have been identified as high risk. The MAS has issued guidance papers and 'Notices on the Prevention of Money Laundering and Countering the Financing of Terrorism' for different types of FinTech business models. These outline the specific requirements and standards to be met by each type of institution.

Early stage

Seed investment

Initial investment in FinTech businesses may be provided by family and friends of the founders, other high net worth individuals (often known as angel investors) or equity crowdfunding investors in return for an equity stake. Such seed investment is often used to fund the establishment and early growth of the business before larger investment is available. The investing individuals may also provide know how and expertise to assist in the company's development. Seed investors would typically not require the same controls over the business as, for example, venture capital providers.

Investors may also apply to the Singapore government's Angel Investors Tax Deduction Scheme between 1 March 2010 and 31 March 2020. If approved as an angel investor, the investor will receive a 50% tax deduction of the investment at the end of a two year holding period when he or she commits a minimum of S$100,000 in a qualifying startup.

The Singapore government also stimulates private sector investments into innovative Singapore-based technology startups with strong intellectual property rights and market potential through its Startup SG Equity Scheme by co-investing in them with an independent, qualified third-party investor. The government's Startup SG Founder Scheme aims to provide mentorship support and startup capital grants to first-time entrepreneurs with innovative business concepts. This scheme provides up to S$30,000 by matching S$3 to every S$1 raised by the entrepreneur.

Crowdfunding

In relation to equity crowdfunding, the sector is well established in Singapore and may be appropriate for a FinTech business in the early stages since they often have limited cashflow, making it easier for them to offer shares in exchange for services or investment in the business. Reward-based crowdfunding, where investors will receive tangible benefit to a product that a startup is developing, is also used in Singapore but more commonly found in the entertainment or fashion industry where consumers may feel a stronger personal affinity towards the products.

Accelerators

There are various incubators or accelerators in the Singapore market which offer support, facilities and funding for startups, often in return for an equity stake. For example:

• The incubator fund Expara (which works closely with the Singapore government) provides services, mentorship and training, and invests money in innovative enterprises including FinTech companies and has previously invested in market-leading FinTech players such as CoAssets (the first listed marketplace lending platform in Asia) and 2C2P (a payment services provider).
• United Overseas Bank worked with SGInnovate (a government-backed technology agency) to create FinLab, a FinTech-focused accelerator initiative that successfully produced a number of interesting FinTech companies in 2016 (including Attores, CardUp and Nickel) and is currently off and running for its second cohort.

In order to support accelerators, the Monetary Authority of Singapore (MAS) runs the Startup SG Accelerator which provides funding and non-financial support to further enhance incubators' initiatives and expertise in nurturing high potential startups.

Venture capital and debt

Venture capital (VC) funding is a type of equity investment usually targeted at early stage FinTech companies with an established business and some trading history. VC provides a viable alternative to traditional lending given that the business is unlikely to have the tangible asset base or long track record needed to attract traditional debt funding from financial institutions. The benefit of having a venture capitalist as an investor for a FinTech startup is that the VC is able to share its knowledge and expertise of the FinTech sector with the company and act as an advisor.

In order to promote venture capital financing for enterprises and in recognition of the factors differentiating a VC fund from other investment funds, the MAS published a consultation paper in February 2017 proposing a simplified authorization process and regulatory framework for venture capital managers and plans to implement the new rules towards the end of 2017. These proposals focus primarily on the fitness and proprietary assessment of VC managers. Therefore, unlike fund managers, VC managers will not be required to have experience as directors and representatives with at least five years of relevant experience in fund management and they can expect a shortened application process. To the extent that there are contractual safeguards to provide sufficient protection to a VC's sophisticated consumer base, the MAS is also looking to exempt VC managers from the business conduct requirements applied to asset managers in general.

An additional funding option is venture debt, which is typically structured as a three year term loan (or series of loans), which is secured against a company's assets and includes an equity element allowing the debt provider to acquire shares in the company. However, venture debt providers will usually only invest into companies that have already received investment through venture capital.

Platform lending

Peer-to-peer (P2P) lending platforms bring individual borrowers and lenders together without the involvement of traditional banks. P2P lending does not involve equity investments, and instead interest is paid on the money borrowed.

The total amount that has been financed by the most active players in the P2P lending in Singapore is still negligible compared to the total debt/invoice financing market, though some of the companies have reached a monthly financing volume of several million Singapore dollars. Further, very few players publish their total loan book statistics. Capital Springboard claims to have financed around S$160 million, Capital Match S$44 million, Invoice Interchange S$17 million and Validus S$22 million. These amounts are commendable for startups, but cannot be compared to the overall funding market that is estimated by the MAS at S$633 billion (comprising total loans and advances to non-bank customers) in May 2017.

Senior bank debt and capital markets funding

Senior bank debt

Once a FinTech company is established and has a track record, bank debt becomes a more viable source of funding, either on a secured or unsecured basis depending on the creditworthiness and asset base of the business. In contrast to capital markets funding which is often covenant-lite, bank funding will generally involve the imposition of financial covenants and controls that will apply over the life of the facility. Bank finance may be particularly important for working capital, overdraft, accounts management and general liquidity purposes.

Capital markets funding

Singapore has both debt and equity capital markets which are accessible to businesses of certain size. Raising funds by way of an initial public offering (IPO) is therefore a popular funding arrangement for FinTech companies that have grown to a certain size.

In 2015, CoAssets listed its shares on the Australian Securities Exchange (ASX) in a deal that represented the first IPO of a Singapore grown P2P lender. Ayondo, a FinTech firm specializing in financial trading technologies, is planning a listing on the Singapore Exchange (SGX) in 2017. Upon its completion, the company will be the first FinTech company to be listed on the SGX.

Convertible bonds/loan notes

FinTech companies may issue bonds as a way of raising more competitive funding. A popular funding tool for fast growing FinTech businesses is to issue convertible bonds or loan notes which are essentially a hybrid between debt and equity. Convertible instruments begin as a loan accruing interest and are convertible into shares in the issuing company at prescribed prices in certain circumstances.

Incentives and reliefs

The regulatory sandbox (as described in FinTech products and uses – particular rules) is a key factor in attracting FinTechs to Singapore. Beyond the regulatory sandbox, there are other tax incentives promoting innovation, research and development and intellectual property management. These incentives also seek to attract new technologies into Singapore.

One of the schemes is the Productivity and Innovation Credit (PIC) scheme which was introduced in Budget 2010. Under the PIC scheme, qualifying businesses may enjoy up to 400% tax deductions/allowances for qualifying expenditure incurred in any of the six qualifying activities (such as research and development or acquisition of PIC IT equipment,) from 2011 to 2018. The concern is that with the phasing out of the PIC scheme in 2018, this could have an adverse effect on the momentum of innovation developed in Singapore over the past few years.

The MAS has also organized a return of the FinTech Festival in November 2017 and launched a new FinTech and Innovation Group within the MAS to provide information and advice to FinTech entrepreneurs.

Finally, the MAS has committed S$225 million over the next five years under the Financial Sector Technology and Innovation scheme (FSTI) to attract FinTech firms to set up innovation centers in Singapore. The FSTI scheme also has a 'Proof of Concept Scheme' which provides support to both financial and non-financial institutes in early stage development of innovative projects.