Move fast and break things: where regulation struggles to keep pace with innovation and the way forward

By Yee Chuin Lim, Head of Public Policy and Royston Wah, Consultant, Speyside Group

Technological advancements across various sectors from IT, telecommunications, finance, and FMCG are driving and forcing waves of changes in today's policy and regulatory landscape. Often, these create significant challenges for policymakers, who try to balance support for innovative practices with a sense of regulatory caution to protect consumers and businesses. In Southeast Asia where most are playing catch-up in the regulatory space, recent and ongoing examples of policymaking have shown that it is crucial for both industry and government to work together to find the right balance, allowing new technologies the latitude to ‘move fast and break things’ while setting mutually agreed boundaries to ensure a wider societal acceptability.

Blockchain & Cryptocurrencies

Within the past decade, we saw the emergence of new technologies made possible by blockchain. Cryptocurrencies have been particularly tricky for regulators with their simultaneous roles as a mode of payment and speculative asset. In countries like India, Indonesia and Thailand, the authorities have banned it as a payment tool, citing money laundering, severe market volatility and speculation, and irrevocable transactions as harmful for consumers and the growth of the countries' financial systems. On the other hand, there are countries like El Salvador and Central African Republic which have accepted Bitcoin as legal tender, partly to address weak currency and runaway inflation issues. For now, most of the world prefer to err on the side of caution by adopting the former position, a reasonable one until concerns around fiscal and monetary stability can be addressed.

However, limiting cryptocurrencies’ application in payments does not mean the same for other applications of the underlying technology. In Vietnam, Decision No 2117 was issued in 2021, listing blockchain as a priority for R&D. Its Finance Ministry has also set up a research team studying virtual assets and money. Likewise, in Singapore, the central bank has very recently announced Project Guardian to study DeFi applications in collaboration with the financial industry. The evolving discussions around Central Bank Digital Currencies, such as Indonesia’s ambitions to develop their own and Brazil's roll out of the Digital Real in 2023, also highlight that policymakers are careful not to throw the baby out with the bathwater. The key here is to understand how to better regulate and protect the financial systems and consumers alongside these innovations, through national governments and international bodies.

FinTech

Beyond cryptocurrencies, financial technology (fintech) has rapidly matured in the 21st century, alongside ancillary developments such as rising internet and mobile penetration rates, and faster computing speeds. Policymakers welcome fintech’s potential to improve financial inclusion and make financial regulation itself more efficient. Many governments in Southeast Asia are implementing long-term roadmaps to support the growth of fintech with favourable regulatory treatment. In Thailand, this is underpinned by the multi-phase Financial Sector Master Plan and the setting up of a Financial Technology Group under the central bank.

However, we also see instances where regulation is playing catch-up to these innovations. Despite having a high level of awareness locally of gold as a store of value, Thailand's policy environment had slightly lagged in terms of supporting gold investment as an alternative form of financial management. Only recently have small scale retail investors been able to trade gold easily with the launch of the Krungthai Gold Wallet in November 2021, the first endto-end online gold trading service in Thailand.

There is also the possibility of regulation stepping too far ahead of innovation, which may end up stifling it. There are legitimate concerns around the risks of fintech, such as data security and individual privacy. Additionally, a 2022 IMF report identifies several vulnerabilities posed by neobanks that threaten financial system stability, including higher risk-taking in retail loans originations and in securities portfolios, and inadequate liquidity management frameworks. However, the case of Singapore showcases a regulatory approach that can balance both innovation and risk, relying on the use of regulatory sandboxes to test new technologies in well-defined spaces and durations. The fruition of years of regulatory process to finetune the eligibility criteria for digital bank candidates and the commencement of operations of the four approved digital banks this year is also a testament of a possible coexistence of innovation and regulation.

Plastics

Another interesting phenomenon is the emergence of mixed materials packaging as well as biodegradable plastic, which has exposed limitations on current regulations. Policymakers remain cautious in the definition of such materials and tend to regulate them as plastic, imposing sanctions or bans on innovators who want to be exempt from these measures. Across Southeast Asia, several countries have recently enacted or are in the process of enacting Enhanced Producer Responsibility (EPR) policies. Defining EPR coverage becomes tricky in the face of new technologies, particularly around how governments regard mixed materials. For instance, multi-layer paper-based packaging with a minor component of plastic tend to still be regarded as plastic, despite there being the sorting and technological capabilities to separate the layers. Meanwhile, new biodegradable alternatives or substitutes that address problems around single-use plastics should be carefully considered as different products. For example, Malaysia, in its plastic sustainability roadmap, has included standards such as BSI PAS 9017 (the first standard to measure the biodegradability of polyolefins published by BSI) and ASTM D6400-05 (required specification for the labelling of plastics designed to be aerobically composted). These can help clarify new product categories and finetune regulation to cushion the impact on industry and consumers.

Conclusion

The way forward is most definitely, continued publicprivate partnerships, whereby regulation gets shaped by an iterative and collaborative process between the public and private sectors towards win-win scenarios. Fundamentally, there is a need to ‘de-risk’ technology in the view of individual users, which can happen by creating space for government and industry to explain policy and commercial considerations respectively. Crucially, it is also on the onus of both government and industry to survey the existing landscape, keep their finger on the pulse of developments, and pre-empt potential concerns to avoid a stranglehold of innovation by regulation, which can be further mired by existing legislative frameworks that may take significant time to change.

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