Regulating fintech for sustainable development in the People's Republic of China

Xu, Zhong; Xu, Ruihui Working Paper Regulating fintech for sustainable development in the People's Republic of China ADBI Working Paper Series, No. 1023 Provided in Cooperation with: Asian Development Bank Institute (ADBI), Tokyo Suggested Citation: Xu, Zhong; Xu, Ruihui (2019) : Regulating fintech for sustainable development in the People's Republic of China, ADBI Working Paper Series, No. 1023, Asian Development Bank Institute (ADBI), Tokyo This Version is available at: https://hdl.handle.net/10419/222790 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/3.0/igo/ ADBI Working Paper Series REGULATING FINTECH FOR SUSTAINABLE DEVELOPMENT IN THE PEOPLE’S REPUBLIC OF CHINA Zhong Xu and Ruihui Xu No. 1023 October 2019 Asian Development Bank Institute The Working Paper series is a continuation of the formerly named Discussion Paper series; the numbering of the papers continued without interruption or change. ADBI’s working papers reflect initial ideas on a topic and are posted online for discussion. Some working papers may develop into other forms of publication. The Asian Development Bank refers to “China” as the People’s Republic of China. Suggested citation: Xu, Z. and R. Xu. 2019. Regulating Fintech for Sustainable Development in the People’s Republic of China. ADBI Working Paper 1023. Tokyo: Asian Development Bank Institute. Available: https://www.adb.org/publications/regulating-fintech-sustainable-development-prc Please contact the authors for information about this paper. Email: xuz[email protected], [email protected] Zhong Xu is director general and Ruihui Xu is an assistant researcher, both at the Research Bureau of the People’s Bank of China. The views expressed in this paper are the views of the author and do not necessarily reflect the views or policies of ADBI, ADB, its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms. Working papers are subject to formal revision and correction before they are finalized and considered published. Asian Development Bank Institute Kasumigaseki Building, 8th Floor 3-2-5 Kasumigaseki, Chiyoda-ku Tokyo 100-6008, Japan Tel: +81-3-3593-5500 Fax: +81-3-3593-5571 URL: www.adbi.org E-mail: [email protected] © 2019 Asian Development Bank Institute ADBI Working Paper 1023 Xu and Xu Abstract The rapid rise of financial technology (fintech) in the People’s Republic of China (PRC) inevitably generates financial risks. To prevent and resolve these risks, the government has regulated many fintech application areas, including peer-to-peer lending, third-party payment, cryptocurrency, etc. Additional measures such as financial standardization, infrastructure, and investor protection have also been strengthened to promote sustainable fintech development. The PRC is striking a balance between encouraging fintech innovation and reinforcing regulation. This study reviews both the PRC’s regulations and supportive approaches. Keywords: financial technology, fintech JEL Classification: G2, G15, O16 ADBI Working Paper 1023 Xu and Xu Contents 1. INTRODUCTION ......................................................................................................... 1 2. FINTECH LANDSCAPE IN THE PRC ......................................................................... 1 2.1 The Driving Factors of Rising Fintech in the PRC ........................................... 1 2.2 Fintech Landscape in the PRC ........................................................................ 2 3. FINTECH REGULATION FRAMEWORK IN THE PRC .............................................. 4 4. PRC FINTECH REGULATORY MEASURES ............................................................. 6 4.1 Regulatory Measures on Online Lending ........................................................ 6 4.2 Regulatory Measures on Third-Party Payment ............................................... 9 4.3 Regulatory Measures on Crowdfunding ........................................................ 10 4.4 Regulatory Measures on Internet Fund Sales ............................................... 11 4.5 Regulatory Measures on Internet Insurance ................................................. 12 4.6 Regulatory Measures on Other Fintech Areas .............................................. 13 4.7 Features of the PRC’s Fintech Supervision ................................................... 13 5. ENSURING HEALTHY AND SUSTAINABLE DEVELOPMENT OF FINTECH IN THE PRC .............................................................................................................. 14 5.1 Set Fintech Development Plans .................................................................... 14 5.2 Establish a System of Fintech Supervision Rules ......................................... 15 5.3 Financial Standardization .............................................................................. 15 5.4 Fintech Infrastructure .................................................................................... 15 5.5 Investor Protection and Education................................................................. 16 5.6 Strengthening the Application of RegTech .................................................... 17 6. DIGITAL CURRENCY IN THE PRC .......................................................................... 17 6.1 Regulatory Measures on Cryptocurrency ...................................................... 17 6.2 Central Bank Digital Currency ....................................................................... 18 REFERENCES ..................................................................................................................... 19 ADBI Working Paper 1023 Xu and Xu 1 1. INTRODUCTION The People’s Republic of China’s (PRC) financial technology (fintech) market is expanding at an astonishing rate. By the end of 2015, the PRC had become the biggest online financing market in the world, with total transactions exceeding $150 billion (Li 2015). In the PRC, the primary fintech areas include payments, online lending, digital wealth management, insurance, and digital banking. In payments, the PRC’s big tech mobile payment services reached CNY14.5 trillion in 2017, the largest in the world, with a ratio of 16% to gross domestic product (Frost et al. 2019). According to a consulting agency iResearch, the market size of the PRC’s third-party payments reached CNY312.4 trillion in 2018, of which mobile payments accounted for 61.9%, almost triple that of the US. Financial risks also arise alongside rapid fintech development, and provoke calls for regulatory guidance to mitigate fraud. The risks of fintech pertain to financial stability, consumer protection, competition in and efficiency of the financial sector, and illegal activities (PBC 2014). Fintech does not change the essence of financial risk, but instead makes financial risks more hidden, unexpected, contagious, and systemic. Ezubao, a P2P lending platform, is a notorious example, whose failure exposed the default risks of the P2P lending industry. Ezubao, which was set up in July 2014, ceased operation in December 2015, and eventually shut down in February 2016, posted fake advertisements about its projects, and operated as a Ponzi scheme, with an estimated CNY50 billion and 900,000 investors involved. A comprehensive regulatory framework for fintech has been developed. Since 2014, the annual government report has stressed internet finance, improved coordination of financial regulators, and high vigilance against accumulated risks. Before 2015, the policy environment is generally supportive of fintech innovations. Regulations have been markedly tightened after 10 major regulators jointly issued “Guiding Opinions on Promotion of Healthy Development of Internet Finance1 (关于促进互联网金融健康发展 的指导意见)” (Guiding Opinions 2015) on 18 July 2015. Guiding Opinions 2015 clarified the main financial regulators’ responsibilities in supervising internet finance. Core principles of fintech regulation are defined as “legitimate supervision, appropriate supervision, category-based supervision, collaborative supervision, and innovative supervision (依法监管、适度监管、分类监管、协同监管、创新监管)”. To further mitigate accumulated risks and facilitate healthy and sustainable development of internet finance, in October 2016, the State Council issued the Implementation Plan of Rectification Work of Internet Financial Risks (互联网金融风险专项整治工作实施方案). It specifies the targets, division of regulatory duty, and procession schedule of the rectification work. Currently, regulators are striking a balance between encouraging innovation and preventing financial risks. 2. FINTECH LANDSCAPE IN THE PRC 2.1 The Driving Factors of Rising Fintech in the PRC The rise of fintech in the PRC is mainly driven by underserved demand for financial services, technological advances, and a supportive regulatory environment. First, financial demand of the real sector is the most fundamental driver of PRC fintech. While 1 Internet finance could be viewed as an early version of fintech in the PRC. Both fintech and internet finance are based on synergy between finance and technology. ADBI Working Paper 1023 Xu and Xu 2 the PRC has deepened reforms in the last four decades, underserved demand for financial services still exists due to financial repression in some fields. Small and medium-sized enterprises (SMEs) have limited access to bank loans due to severe information asymmetry, and residents’ financing and investment needs are largely unmet due to backward development of the capital market. In addition, residents have higher requirements for the convenience of financial services. All these leave room for non-bank financial service providers. As indicated in a survey, PRC SMEs’ fintech adoption rate reaches 61%, much higher than the US (23%), UK (18%), South Africa (16%), and the global average (25%). Second, technological advances have significantly boosted financial supply. Digitization of financial information reduces information asymmetry, disintermediation lowers costs and improves efficiency of financial services, and networks have extended coverage of financial services. The PRC’s fintech success is largely leveraged via existing social media platforms and the large e-commerce ecosystem, through which tech companies collect huge volumes of customers and transactions. Other technology applications also boost fintech development, including smartphones and e-commerce, and emerging technologies such as big data, artificial intelligence, and blockchain. Third, the PRC established a fintech innovation-friendly regulatory system and a sound policy environment. Many countries have tightened financial regulation since the global financial crisis in 2008, and fintech has risen to provide services to high-risk customers whose financing needs are not met by traditional banking. The PRC has provided a supportive environment, including investment in digital infrastructure and light regulation at the early stage of fintech development (Zhang and Chen 2019). The measures are effective for enhancing market efficiency and promoting financial inclusion. Vast quantities of capital have been attracted to the PRC’s fintech market, creating economies of scale. 2.2 Fintech Landscape in the PRC While traditional institutions and many startups are rising, the PRC’s fintech market is nonetheless dominated by internet giants such as Baidu, Ant Financial, Tencent (known as “BAT”) and JD Finance, which use their large customer bases and datasets to build an integrated ecosystem of financial services, including payment, financing, wealth management, insurance, etc. (Mahoney 2019). Table 1 lists the primary fintech areas of both traditional financial institutions and leading fintech companies in the PRC. 2.2.1 Traditional Financial Institutions Expand to Fintech Traditional financial institutions embrace technology advancement to improve service, explore business model innovation, and strengthen risk management. They either partner with technology companies, or spin off their own fintech, or both. Firstly, traditional financial institutions adapt to meet the increasing needs of customers. Traditional banks improve the accessibility and convenience of financial services via online banking, mobile banking, reconceiving bank branches, and collaborating with third parties. For example, Bank of China spun off a separate company named BOC Consumer Finance, while it also partnered with Tencent to launch a fintech laboratory. In addition, the Industrial and Commercial Bank of China partnered with JD Finance to digitize their services, while the Agricultural Bank of China collaborated with Baidu, and China Construction Bank with Ant Financial. ADBI Working Paper 1023 Xu and Xu 3 Table 1: Leading Fintech Companies and Primary Fintech Areas in the PRC Business Lines Market Description Traditional Banks and Insurance Companies Large Fintech Companies Commercial Banks Ping An Baidu Ant Financial Tencent JD.com Payments Highly concentrated between Ant Financial and Tencent UnionPay Quick Pass E-wallet Baifubao (Sep 2008)/Baidu Wallet (Apr 2014) Alipay (Dec 2004)/ Alipay Wallet (Nov 2013) Tenpay (Apr 2005)/ Wechat Wallet, QQ Wallet (Jul 2014) JD Pay (Jul 2014) Wealth management (Money market fund) Market developing Robo-Advisor/ Electronic LU.com (Lufax, Sep 2011)/ Finance One Account Bai Fa (Dec 2013)/Baidu Finance (Oct 2013) Yu’e Bao (Jun 2013)/ Ant Fortune (Aug 2015) Li Cai Tong (Jan 2014) JD Finance (Oct 2013) Credit/Lending Significant start-up activity Online bank/ Mobile bank/ Intellectualized reconstruction of branched Orange Bank (Jul 2014) Baidu Finance (Oct 2013) Ant Credit (Jan 2015)/ Zhao Cai Bao (Apr 2014) Weilidai (May 2015) JD Finance (Oct 2013) Banking (Digital only) Baixin Bank (Nov 2015) Mybank (Sep 2014) WeBank (Jul 2015) N/A Insurance Traditional institutions wellpositioned Ping An Insurance (1988)/ Zhong An Insurance (Nov 2013) Bai An (Dec 2015) Zhong An Insurance (Nov 2013)/ Yu’E Bao Universal Life (Feb 2014) Zhong An Insurance (Nov 2013)/ WeSure (Nov 2017) JD Allianz Property Insurance Company (Oct 2018) Social Credit scoring Highly concentrated LU.com (Lufax, Sep 2011) N/A Zhima Credit (or translated as Sesame Credit, Oct 2015) Tencent Credit (Jan 2015) JD Credit (Feb 2014) Source: Galvin et al. (2018), PwC (2016), and authors. Secondly, traditional banks explore business model innovation. A typical example is direct banking, which has no branch network and does not issue bank cards, but offers products and services through online banking. It could be organized as an independent bank, a division, or a separate subsidiary of a bank (such as AIBank). Since the launch of the first direct bank by the Bank of Beijing in 2013, there have been more than 50 direct banks in the PRC, most of which adopt a divisional structure. Thirdly, technology is widely applied to improve risk management. Big data technology is used to develop an early warning model of credit risk, as is the practice at the China Merchants Bank. To supplement existing customer verification techniques, banks such as WeBank adopt biometrics technology to use with mobile banking, bank counters, ATMs and other online and offline situations. In addition, artificial intelligence technology is used to identify and prevent fraud. For example, the Industrial and Commercial Bank of China applies security certification measures to each transaction. Insurance companies invest in technology, emphasize online distribution, and work with technology companies. For example, insurance giant Ping An has developed many digital platforms and expanded into primary fintech areas including banking, wealth management, and payment (Table 2). ADBI Working Paper 1023 Xu and Xu 4 2.2.2 Fintech Companies Fintech companies have broadly engaged in business lines, such as payments, wealth management, lending, digital banking, insurance and credit scoring (Table 2). Among all business lines, payments, which are highly concentrated among fintech companies, are the foundation upon which many other financial applications are built. The “BAT” companies control more than 80% of the PRC mobile payments market, of which Ant Financial’s Alipay takes about 50% market share, and Tencent’s Tenpay takes nearly a fifth. Social Credit scoring is also highly concentrated among fintech companies, while traditional institutions are well-positioned in internet insurance, especially life insurance. In addition, the PRC’s fintech giants have been rapidly expanding globally and have invested in next-generation technologies. Top technology priorities by Alibaba and Tencent include cloud computing, blockchain, artificial intelligence, etc. Fintech startups fill gaps in underserved markets, mainly in credit/lending (P2P) and wealth management. Typical examples of credit/lending startups include Qudian.com, ppdai.com, Dianrong.com, Yirendai. Wealth management (money market fund) startups including CreditEase, Golden Axe, Wacai, Suishouji. In addition, startups such as YeePay, Ping++ provide payment services, and eBaoTech and Cheche Tech specialize in online insurance. 2.2.3 Market Service Providers E-aggregation platforms integrate the same type of services provided by different agents for a single entry point that improves customer experiences and reduces costs. For example, by turning financial institutions’ product information into standardized information, Rong360 builds a vertical search mode to help users to obtain appropriate financial services, and connects individual consumers, privately owned small business, small and micro enterprises with banks, small loan companies, and other financial institutions. Banks’ and payment institutions’ digital identity authentication is mainly supported by market service providers, which currently use big data, digital certificates, and biometrics and other technology for this. iFLYTEK and Fosafer are forerunners in biometrics identification, covering facial, voiceprint, and fingerprint identification. Distributed account technology applications are also explored in the PRC, especially in fields such as payment and clearing, securities registration and settlement. Some technology companies such as LinkTime, Bubi, and Bumeng have also started to provide enterprises with the underlying technology support and industry solutions of blockchain. 3. FINTECH REGULATION FRAMEWORK IN THE PRC The regulation framework of internet finance (an earlier version of fintech in the PRC) was set up in July 2015, when the People’s Bank of China (PBC) and nine other ministries2 jointly issued “Guiding Opinions on Promotion of Healthy Development of Internet Finance” (Guiding Opinions 2015). It clarified the responsibilities of the main financial regulators in supervising internet finance, encouraged financial innovation, 2 The regulators include the PBC, Ministry of Industry and Information Technology (MIIT), Ministry of Public Security (MPS), the Ministry of Finance, State Administration for Market Regulation (SAIC), the Legislative Affairs Office of the State Council, China Banking Regulatory Commission (CBRC), China Securities Regulatory Commission (CSRC), China Insurance Regulatory Commission(CIRC), and Cyberspace Administration of China. ADBI Working Paper 1023 Xu and Xu 11 10 Clause 2 of the PRC Securities Law, it is illegal to offer shares to non-specific individuals or to more than 200 specific individuals in public without regulatory approval. The 2014 government work report proposed to carry out pilot projects of equity crowdfunding, aiming to alleviate the financing difficulty and lower real economy costs. Alibaba, JD.com, and Ping An obtained the pilot qualification. Equity crowdfunding is mainly supervised by CSRC. The private equity crowdfunding is self-regulated by the Securities Association of China, as implied by its document issued in December 2014, namely “Measures for The Management of Private Equity Crowdfunding (Trial) (Draft for Comments) (私募股权众筹融资管理办法(试行)(征求意见 稿)”. The Guiding Opinion 2015 assigned the CSRC as the regulator of equity crowdfunding; regulations were tightened in 2015 and 2016. In August 2015, the CSRC issued the “Notice on Special Inspection of Institutions that Conduct Equity Financing Activities through the Internet (关于对通过互联网开展股权融资活动的机构进行专项检查 的通知)”, and excludes non-public equity financing and private equity fund raising through the internet from the scope of equity crowdfunding stipulated in the notice. In October 2016, CSRC and 15 other authorities issued the “Implementation Plan for The Special Rectification of Equity Crowdfunding Risks (股权众筹风险专项整治工作实施方 案)”, which identified the rectification priorities and prohibited items of equity crowdfunding. The PRC has made continuous efforts in guiding the healthy development of equity crowdfunding. In July 2017, the State Council promulgated “Opinions on Strengthening Innovation-driven Development Strategies and Further Advancing Mass Entrepreneurship and Innovation (强化实施创新驱动发展战略进一步推进大众创业万众 创新深入发展的意见)”, to guide and encourage the standardized development of crowdfunding platforms. 4.4 Regulatory Measures on Internet Fund Sales The scale of PRC internet funds has been constantly expanding since 2013. Yu Ebao, a money market fund investment product that was launched jointly by Alipay and Tianhong fund, became the largest money market fund in the world in 2017 in terms of total assets (Frost 2019). Data from the Wind Economic database show that the asset volume of Yu Ebao peaked at CNY1.69 trillion as of March 2018, and dropped to CNY1.03 trillion in June 2019 as other online money market funds grew significantly. Currently, internet fund sales institutions in the PRC consist of commercial banks, securities companies, securities investment advisory bodies, and independent sales institutions. The fast growth of internet fund sales is driven by easy access, convenient payment services, and higher yield of internet money market funds (FSB 2019). An internet fund sales platform collects idle funds and invests in a related money market fund, which, in turn, invests in bank-negotiated deposits, earning a higher rate of return than deposits alone. Besides, it generally set the minimum investment as low as CNY0.01, provides “T+0” liquidity with its own capital cushion, and allows free transfers between bank accounts. By integrating fund sale platforms with payment systems, customers can get access to fund account openings, subscriptions, and redemption via mobile phones. However, internet money market funds engage in maturity transformation, credit, and liquidity transformation without a banking license, and have prompted disintermediation of bank deposits and increased social financing costs (Yao 2018). This is partially due to inadequate functional or integrated regulatory policy about internet fund sales. ADBI Working Paper 1023 Xu and Xu 12 The regulatory framework of internet fund sales is based on that of traditional fund sales. The CSRC is the main regulator, and Securities Association of China implements selfdiscipline management. According to a revised version of the PRC Securities Investment Fund Law, the CSRC revised and issued the “Administrative Measures for the Sale of Securities Investment Funds and the Rules (证券投资基金销售管理办法)” in March 2013, aiming to relax control and strengthen supervision. Other related regulatory measures include “Interim Provisions on the Management of Securities Investment Fund Sales Settlement Funds (证券投资基金销售结算资金管理暂行规定)” (issued in September 2011) and “Regulations on Information Management Platform of Securities Investment Fund Sales (证券投资基金销售业务信息管理平台管理规定)” (issued in March 2007). Regulations have also been introduced to promote standardized and orderly operation of internet fund sales. In November 2009, the Securities Association of China released “Technical Guidance on Online Fund Sales Information System (网上基金销售信息系统 技术指引)” for better standardization of the sales business. In March 2013, the CSRC also released the “Interim Administrative Rules for Securities Investment Fund Sales Institutions’ Business Operations via Third-Party E-commerce Platforms (证券投资基金 销售机构通过第三方电子商务平台开展业务管理暂行规定)”, which specified the regulatory requirements on fund sales institutions and set out provisions regarding the qualification and business scope of third-party e-commerce platforms. As the market keeps developing, regulatory authorities constantly improve regulatory measures to ensure the sustainable development of the market and protect investors’ interests. For example, in March 2018, the CSRC issued “Guidelines on Further Standardizing Internet Sales and Redemption Services of Money Market Funds (关于进一步规范货币市场基金 互联网销售、赎回相关服务的指导意见)”. 4.5 Regulatory Measures on Internet Insurance The PRC is the second-largest insurance market in the world, while the insurance density is below world average. Data from the Insurance Association of China show that insurance premium incomes amounted to CNY3.8 trillion by the end of 2018. Internet insurance experienced explosive growth from 2012 to 2015, with the premium income increasing from CNY11.1 billion to CNY223.4 billion, and the penetration rate of internet insurance reached 9.2% in 2015. However, with the tightened policy environment, growth began to slow after 2016, with premium incomes declining to CNY188.9 billion, and the penetration rate drop to 5% in 2018. CIRC supervision principles are established in “Interim Measures for the Supervising Internet Insurance (互联网保险监管暂行办法)”, released in 2015. In addition to promoting healthy development and consumer protection, internet insurance regulations place great emphasis on maintaining consistent regulatory standards for both online and traditional insurance, and strengthening market exit management. Only registered companies and professional intermediaries are permitted to carry out internet insurance business. If these supervised companies do internet insurance business through a thirdparty online platform, it must obtain related qualification and meet certain requirements. The companies can determine suitable insurance products to sell online, but must not make any misleading advertisement. Internet insurance companies are also required to ensure platform safety and information security. Updates to these interim measures remain pending. ADBI Working Paper 1023 Xu and Xu 13 4.6 Regulatory Measures on Other Fintech Areas Largely due to regulatory restrictions, the internet trusts market is less developed compared with traditional trusts and other internet finance types. In 2007, the CBRC issued the “Rules Governing Trust Companies (信托公司管理办法)” and “Rules on Trust Schemes of Collective Funds by Trust Companies (信托公司集合资金信托计划管理办法 )”, which forbade trust companies from allowing non-financial institutions to recommend their schemes. In April 2014, the CBRC issued the “Guidance on Supervision of Risks of Trust Companies (关于信托公司风险监管的指导意见)”, which reiterated that third-party financial institutions are not allowed to sell trust products directly or indirectly. Against this backdrop, many trust companies set up their own direct marketing platforms, including CITIC Trust, Ping An Trust, and Zhongrong International Trust. The Guiding Opinion 2015 emphasized the requirements of qualified investors, matching customer risk tolerance with the risk level of trust products. Internet consumer finance in the PRC is provided by commercial banks, consumer finance companies and e-commerce platforms. Representative institutions include China Merchants Bank, Mashang Consumer Finance, and Ant Financial. Supervision of consumer finance started in 2009 when the CBRC promulgated the “Administrative Measures on Pilot Consumer Finance Companies (消费金融公司试点管理办法)”, which specified requirements on consumer finance companies such as establishment, business scope, and operating norms. These measures were updated in 2013, with some requirements being loosened, including business scope and sources of funds, and they also expanded the pilot cities. In 2015, the consumer finance pilots were fully liberalized and applied to the whole country. In August 2016, “Interim Measures on Management of the Business Activities of Online Lending Information Intermediary (网络借贷信息中介机构业务活动管理暂行办法)” issued by the CBRC set the basic regulatory rules of internet consumer finance. The market is regulated by both the CBRC and local government financial authorities. Regulations of internet consumer finance have been further tightened after rectification of internet lending risks. 4.7 Features of the PRC’s Fintech Supervision The PRC’s fintech supervision is based on a clear division of responsibility among major financial regulators, related government ministries, and local financial authorities, and emphasizes coordination. For example, the MIIT supervises internet financial portals, and the MPS monitors service security and investigates suspected violations and other financial crimes related to fintech lending. In addition, local financial offices conduct prudential supervision over locally registered platforms, although fintech businesses are not subject to geographical restrictions. By clarifying the supervision responsibility of local financial offices and unifying regulatory practice across regions, arbitrage space could be eliminated. The financial pilot mechanism is combined with the negative list approach to foster fintech and prevent financial risk. Regional financial pilot reform in the PRC indicates the government’s inclusive attitude toward emerging issues. Though different from the fintech sandbox, applying financial pilot mechanisms to fintech helps in judging its influences, and it aggregates valuable experience for reform at the national level. In the spirit of bottom-line supervision, fintech’s negative list is introduced because of regulatory lag, and it aims to prohibit activities that jeopardize sustainability. Taking the supervision of P2P lending as an example, fintech is defined as an information intermediary instead of a credit intermediary. The “Interim Measures on Management of ADBI Working Paper 1023 Xu and Xu 14 the Business Activities of Online Lending Information Intermediary”, issued in 2015, set a negative list for online lending platforms, and the following activities are prohibited: directly engaging in a lending transaction, facilitating/ promoting lending transactions, and engaging in high-risk financial business. The detailed rules released in 2016 enumerate 13 banned activities. The government emphasizes collaboration and self-regulation in the fintech industry. NIFA5 issues reminders and guidance about market risks in accordance with regulations, and sets up platforms for registration, information disclosure, and risk monitoring. The PBC also promotes deep integration of industry resources; for example, NIFA and eight market entities (including Zhima Credit, Tencent Credit, etc.) jointly initiated and established Baihang Credit in March 2018 as a PBC-approved, marketoriented personal credit institution that integrates personal and enterprise credit data from different institutions, and aims to improve financial inclusion and facilitate credit scoring of SMEs in the PRC. 5. ENSURING HEALTHY AND SUSTAINABLE DEVELOPMENT OF FINTECH IN THE PRC Fintech plays an important role in the PRC, but its development has been unbalanced and inadequate, and has posed challenges to monetary policy and financial supervision. The PRC has made and will make constant efforts in improving regulation efficiency, encouraging innovation, enhancing infrastructure, setting fintech standards, and fostering the use of fintech in supervision. 5.1 Set Fintech Development Plans The PRC State Council has announced guidances and plans on promoting technology development since 2015, for example, opinions on promoting cloud computing development (国务院关于促进云计算创新发展培育信息产业新业态的意见), an action plan to advance big data development (促进大数据发展行动纲要) in August 2015, and a development plan for artificial intelligence (新一代人工智能发展规划). These plans help to consolidate fintech in the PRC. National fintech development plans will boost synergy between regulatory bodies, and improve the alignment of interpretation across national and local regulators. The Fintech Committee aims to clearly define development goals, primary directions, and main tasks. The PBC partnered with the National Development and Reform Commission at the end of 2018 to launch a trial fintech program in 10 cities and provinces including Beijing, Shanghai, and Guangdong. On 22 August 2019, the PBC published its Fintech Development Plan (2019–2021). The Plan stresses the role of fintech as a “new engine” for high-quality development, highlights key tasks, and strengthens the need to build a fundamental and unified regulatory system, as well as applications for risks identification, prevention, and mitigation. In addition, the Fintech Committee aims to collaborate with industry and university researchers to sort out development status, application prospects, influences and challenges, and policy implications. 5 NIFA currently has more than 500 member organizations, covering internet finance institutions in payment, investment, money management, and lending, as well as in banking, securities, insurance, funds, futures, trust, asset management, consumer finance, and credit reporting. ADBI Working Paper 1023 Xu and Xu 15 5.2 Establish a System of Fintech Supervision Rules Prudent regulation of fintech must be strengthened systematically. The PBC plans to review current regulatory policies, evaluate fintech situations and trends, and form a complete and rigorous supervision system consisting of three mutually supportive parts, including supervision rules about basic general application, technology application, and security risks control. The PBC, as a leading regulatory authority for fintech, will continue monitoring developments of fintech and the financial stability implications. 5.3 Financial Standardization Promoting fintech standardization is critical to form industrial synergy, enhance competitiveness, and optimize resource allocation. Standardization unifies various enterprises in coding rules, data format, report structure, and other aspects, which can effectively improve the efficiency of financial markets and curtail transaction costs. The China Financial Standardization Technical Committee was founded in 1991. The PRC became a member of the International Organization for Standardization (ISO/TC68) in 2004, and the PBC began releasing the China Financial Standardization Report in 2009. As of November 2018, there were 67 effective recommended national financial standards, and 242 financial industry standards, which were divided into six categories, including general, product and service, infrastructure (information technology), statistical, regulatory and risk prevention, and control. Fintech constantly raises new requirements for standardization. Challenges include integrating fintech standards into those of the financial services industry. In 2017, the PBC and the China Financial Standardization Technical Committee and other regulators jointly issued the Financial Industry Standardization System Development Plan (2016– 2020). The PBC also moved toward standardization of new fintech, such as the new standards about cloud computing and QR code payment. 5.4 Fintech Infrastructure Well-built fintech infrastructure is important to maintain financial stability, enhance efficiency, and promote competitive neutrality. The PRC has made progress in building networks, payments, information, credit scoring, and other forms of infrastructure. For example, NUCC and its Non-bank Payment Organization Internet Payments and Clearing Platform have become critical components of the PRC’s financial infrastructure. All online payment services will route their transactions via the new platform, and NUCC will submit a clearing order to the PBC. Despite the complexity, the process does not impact the customer side. ADBI Working Paper 1023 Xu and Xu 16 Great emphasis has been put on information infrastructure. Many government authorities and institutions collect information about fintech products, firms and activities for their own use, which are not unified. For example, the NIFA collects information covering the following: 1) The Internet Finance Registration and Disclosure Services Platform that launched in March 2017 connects over 100 P2P platforms and facilitates disclosure of their institutional, operational, and financial information. 2) The Internet Finance Credit Information Sharing Platform integrates information to address problems such as “a single borrower borrowing from multiple platforms” and fraudulent borrowing. 3) The Internet Finance Statistics Monitoring and Risk Alert System collects a wide range of data and sets 23 rules to identify abnormal platforms and thresholds to caution against risks. 4) The Internet Finance Complaint Information Platform for financial regulators cracks down on activities in violation of laws and regulations. The information infrastructure building is still in progress under the guidance of “Opinions on Promoting the Comprehensive Statistical Work of the Financial Industry in an All Round Way (关于全面推进金融业综合统计工作的意见)” that was issued by the State Council in April 2018. 5.5 Investor Protection and Education Investor protection is the goal of financial supervision, and it is a critical part of financial regulations. Specific guidance for investor protection was issued by the State Council in November 2015, namely the “Guidance on Strengthening the Protection of Financial Consumers (关于加强金融消费者权益保护工作的指导意见)”. PRC regulators have engaged in multiple investor protection and education endeavors. First, a third-party depository and custodian scheme was introduced to ensure consumer security. Funds lent via a platform must be used legally and only for the purpose listed on the contract. Qualified banks act as third-party depository financial institutions, and are responsible for holding, managing, and transferring investors’ funds in fintech institutions. Second, information disclosure was reinforced. Fintech institutions are required to disclose operational and financial information in a timely manner, and are obliged to perform due diligence and assess information provided by lenders. Platform lenders are required to clearly inform investors of associated risks and prohibited activities. Third, regulators strengthen management of investor suitability. Fintech institutions must assess investors’ risk tolerance, and ensure consumers invest in proper products that suit their levels of risk tolerance. Advertisements for fintech and wealth management products should not mislead investors. Fourth, financial consumer education is enhanced. Various forms of training help financial consumers learn about fintech, and improve financial literacy and risk management ability. ADBI Working Paper 1023 Xu and Xu 17 5.6 Strengthening the Application of RegTech The government is exploring the application framework of RegTech, detecting financial risks more intelligently. Detailed tasks include the following: establish a database of digital regulatory rules in some selected regions and fields, develop a regulatory application program interface with extensibility, promote automatic data collection and intelligent risk analysis, accelerate the construction of a financial risk monitoring platform for mobile financial business. The government hopes to improve the security and integrity of financial transactions, and supervise cross-sector and cross-market financial activities. 6. DIGITAL CURRENCY IN THE PRC 6.1 Regulatory Measures on Cryptocurrency According to 2018 PBC statistics, there were 65 initial coin offerings (ICOs) completed in the PRC through 18 July 2017, of which only five were launched prior to 2017. The cumulative funding of CNY2.6 billion accounted for 20% of ICO financing globally. Speculation in the cryptocurrency market can lead to an asset bubble and large volatility; cryptocurrency can also be used for illegal purposes without leaving a trace. 6.1.1 Early-Stage Risk Prevention For investor protection and financial risk prevention, the PBC and five other ministries issued the Notice on Preventing Risks of Bitcoins (关于防范比特币风险的通知) in December 2013, which clearly forbids financial and payment institutions from running bitcoin-related businesses. The Notice defines bitcoin as a virtual commodity and warns citizens about their risks, but does not ban online trading of cryptocurrencies. The PBC led on-site inspections of bitcoin and litecoin trading platforms in January 2017, focusing on problems such as operation beyond business scope, suspected market manipulation, money laundering, and fund security risks. The PBC also urges selfinspection and rectification of trading platforms in accordance with laws and regulations. On 30 August 2017, NIFA issued Reminder about Preventing Risks from Investment in the Name of the ICO (关于防范各类以ICO名义吸收投资相关风险的提示). 6.1.2 ICO Ban and Crypto-Trading Platform Regulation The PRC has officially banned ICOs, restricted the primary business of cryptocurrency trading platforms, and cut their connection with traditional institutions. ICOs were outlawed in the Notice on Preventing the Risks of Issuing and Financing Tokens (关于防范代币发行融资风险的公告), issued jointly by seven regulators6 on 4 September 2017. ICO financing is referred to as a kind of non-approved illegal fundraising behavior under domestic law, suspected of financial fraud, pyramid schemes, and other illegal activities. Since the date of the announcement, all types of currency issuance financing activities have ceased. For completed ICOs, the Notice allows investors to request a refund from the issuer. 6 Authorities backing the statement include the PBC, CAC, MIIT, SAIC, CBRC, CSRC, and CIRC. ADBI Working Paper 1023 Xu and Xu 18 The Notice made it clear that so-called virtual currencies are essentially illegal actions of public financing without approval. There are multiple risks in the issuance, financing and trading of tokens, including fake assets, business failure, and investment speculation. Investors bear their own investment risks. The PBC takes a stringent stance against crypto trading. Trading platforms are no longer allowed to exchange fiat money and tokens, or provide information and prices for token trading. Financial institutions and non-bank payment institutions are strictly prohibited from providing ICO and cryptocurrency services, including opening bank accounts or providing registration, trading, clearing, or liquidation services. The PBC monitors the ICO market, and identified several new forms of disguised ICOs as noted in a 2018 financial stability report. For example, platforms do not directly issue virtual currency to raise funds, but instead initially offer free “gift currency” and keep part of it for speculation. To this end, the PBC will prevent risks via early detection and disposal, rectify misconduct in the cryptocurrency market, and take a variety of measures to crack down on emerging legal issues. 6.2 Central Bank Digital Currency The PBC has worked to introduce central bank digital currency (CBDC) alongside the yuan (the fiat currency). In November 2016, the PBC set up a Digital Currency Research Institute, which is responsible for developing CBDC infrastructure and research on potential influences and challenges. Many experts in developing blockchain technology, big data, cryptography, and system design have been recruited into the Digital Currency Research Institute. The PRC’s CBDC may adopt a two-layer design. Its supply system will be integrated into the existing banking system, while adopting a centralized management mode rather than being based on distributed ledgers (Fan 2018). According to Yifei Fan, a Deputy Governor of the PBC, there are several advantages to adopting a two-layer design: (1) make full use of the existing resources of commercial institutions; (2) avoid financial disintermediation and crowding out effect on the deposits of commercial banks; and (3) avoid excessive concentration of risks if the central bank directly serves the public, and risks of regime shift in monetary policy transmission mechanism. As suggested by Qian Yao, former Director General of the Digital Currency Research Institute, the PRC’s CBDC system should maintain centralized management for stabilizing value, and use distributed technology architecture to enhance system safety and access (Yao and Tang 2017). CBDC will adopt multiple mature technologies, including blockchain. The related technologies have been broadly investigated; for example, Xu and Zhou (2019) explored the economic functions of blockchain. Although there is currently no announced timetable for deploying the PRC’s CBDC, the PBC has completed trial runs on the algorithms needed for a digital currency supply, and a trial run of digital currency based on blockchain technology. In the future, CBDC may lay a solid foundation for RegTech (Yao 2017). ADBI Working Paper 1023 Xu and Xu 19 REFERENCES BIS. 2019. Annual Economic Report 2019, chapter III. Big Tech in Finance: Opportunities and Risks. Available at https://www.bis.org/publ/arpdf/ ar2019e.htm (accessed 9 October 2019). EY. 2019. Global FinTech Adoption Index 2019. Fan, Y. 2018. Central Bank’s Digital Currency: A Few Considerations (in Chinese). Jan 25. Available at https://www.yicai.com/news/5395409.html (accessed 26 March 2019). Frost, J., L. Gambacorta, Y. Huang, H.S. 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