15 May 2024
Indonesia’s FSA Amends Fintech ‘Sandbox’ and Licensing Rules, Prepares for New Crypto-Asset Regulatory Role

BACKGROUND

The Indonesian Financial Services Authority (Otoritas Jasa Keuangan,“OJK”)  has made a number of changes to the fintech regulatory framework in Indonesia through the issuance of OJK Regulation No. 3 of 2024 on Financial Sector Technological Innovation (“FSTI”) (the “New Regulation”),[1] which replaces the previous legislation on the issue: OJK Regulation No. 13/POJK.02/2018 (“Reg. 13/2018”).[2]

Like its antecedent, the New Regulation is designed to facilitate and regulate the adoption of FSTI, which encompasses technology-driven advancements that impact products, services, activities, and business models within the digital financial ecosystem.

In this ABNR Legal Update, we focus on two key aspects of the New Regulation:

a. FSTI licensing
b. The regulatory sandbox regime

Note: Regulatory authority over digital financial assets (including crypto-assets) is currently being transferred from the Commodity Futures Trading Regulatory Agency (Bappebti,[3] a supervisory agency under the Ministry of Trade) to the OJK. The transition is to take place over 24 months and must be completed by 12 January 2025. To conform with this, the scope of the New Regulation also covers digital financial assets (including crypto-assets).

A. FSTI Licensing

While it has been argued that the New Regulation streamlines the process of getting an FSTI product onto the market (as, among other things, it eliminates the previous recordation stage), it is not entirely clear that this will be the case. To understand why this may be so, we need to compare the process under Reg. 13/2018 with that under the New Regulation:

Reg. 13/2018

The process comprised three stages: (i) recordation, (ii) regulatory ‘sandbox’ testing, and (iii) registration (there was no explicit licensing requirement).

The New Regulation

While recordation is now no longer required, the process still consists of three stages, as a new licensing requirement has been introduced. So, for a fintech product or business model to be approved, the initiating entity must (i) participate in a regulatory ‘sandbox’; (ii) if successful, proceed to registration as an FSTI provider (if so required by the OJK); and (iii) apply to OJK for an FSTI business license for the relevant fintech product / business model.

Despite the process still comprising three distinct stages, the New Regulation does mark an improvement over the previous situation as it makes clear that a license from the OJK is needed in order to engage in FSTI activities, whereas Reg. 13/2018 only referred to “registration” with the OJK, a somewhat nebulous concept in the context of Indonesian law that gave rise to a certain amount of uncertainty. This uncertainty has now been remedied.

B. REGULATORY SANDBOX REGIME

The OJK’s regulatory sandbox is a framework that allows the small-scale testing of new fintech products in a controlled environment under the OJK’s supervision. While the framework under the New Regulation is similar to that under Reg. 13/2018, for the sake of clarity we will set it out again here:

Who may apply to participate in a regulatory sandbox?

Any entity engaged in FSTI activities is eligible. FSTI activities may include:

• Settlement of securities transactions
• Raising of capital
• Investment management
• Risk management
• Collection or distribution of funds
• Market support
• Activities related to digital financial assets, including crypto-assets

If a business wishes to test a proposed product in a regulatory sandbox, it should inform the OJK of this intention by email.

Enhancement of Regulatory Sandbox

The regulatory sandbox mechanism has been enhanced to better facilitate the testing and development of innovative fintech products. Notable improvements include clearer eligibility criteria for participation, and a requirement for a testing plan to be submitted to the OJK before a sandbox is set up.

The eligibility criteria encompass innovations in the financial sector that:

• are aimed at the public;
• exhibit unique features or significant variations on products that were previously available in the financial sector;
• provide benefits, improve services and/or provide added value to the public and/or the financial sector ecosystem;
• are ready for testing and further development;
• require support through testing and development, and are not governed or supervised under existing financial sector regulations,

or as may otherwise be determined by the OJK.

Sandbox Outcomes and Exit Policies

The New Regulation also provides more clearly defined guidelines for sandbox participation, allowing OJK to assess the performance of products and determine if they have satisfied all requirements, as reflected in the awarding of pass or fail status.

In the case of a pass:

• OJK issues a document confirming the product has successfully passed the sandbox process. The document remains valid for 6 months and is extendable at OJK discretion.
• The participant must apply for a business license within the validity period of the document.
• The participant may continue limited business operations during this period.

In the event of an unsuccessful outcome:

• OJK informs the participant that their product has failed to pass the sandbox process.
• The participant will then be barred from engaging in the operational activities tested in the sandbox.
• All relevant obligations to consumers and other parties must be settled.
• The participant must follow the exit policy as outlined in their testing plan.

ABNR commentary

The New Regulation is more tweak than fundamental overhaul. However, it does make a number of changes that should help to enhance the regulation and supervision of the fintech sector.

In particular, the fact that it makes provision for crypto-assets (in line with the upcoming transfer of regulatory authority over such assets from Bappebti to OJK in January 2025) is to be welcomed, as OJK has significantly greater experience, expertise and capacity to manage financial instruments than Bappebti.

Given the plethora of scandals involving dodgy crypto-assets in recent years in Indonesia, the public will no doubt warmly welcome comments by senior OJK officials that a crypto-asset product that fails to comply with the New Regulation’s requirements may be declared “unlawful”. This should go at least some way towards reducing the incidence of frauds and scams in this particular financial services sub-sector, as a declaration of “unlawfulness” means that the OJK can then block access to, and warn the public about, the offending website / app, in collaboration with the Ministry of Communications and Informatics.

By partner Ms. Chandrawati Dewi (cdewi@abnrlaw.com) and senior associate Ms. Meitiara Bakrie (dbakrie@abnrlaw.com).

This ABNR News and its contents are intended solely to provide a general overview, for informational purposes, of selected recent developments in Indonesian law. They do not constitute legal advice and should not be relied upon as such. Accordingly, ABNR accepts no liability of any kind in respect of any statement, opinion, view, error, or omission that may be contained in this legal update. In all circumstances, you are strongly advised to consult a licensed Indonesian legal practitioner before taking any action that could adversely affect your rights and obligations under Indonesian law.