Some proposals on the legal framework for Fintech activities

This article was written by Lawyer Nguyen Nhat Duong (from HM&P Law Firm), published in the Legal Electronic Magazine on October 8th, 2023. Below is the English version:

Fintech (Financial Technology), is the combination and application of modern technology in the provision and use of financial services. As of 2022, the number of fintech startups has increased by nearly 13% compared to 2021, from 156 to 176 companies, and is expected to grow in the following years[1]. The rapid development of fintech companies also poses a great challenge to Vietnam in the management and control of fintech activities, as Vietnam is only at the stage of developing a decree to test the control of fintech activities without having a comprehensive legal document to regulate such activities. This article will highlight some current legal issues regarding fintech activities for some specific services, and also provide some suggestions to improve the legal framework for fintech activities in Vietnam.

1. Fintech activities in Vietnam remain in the legal gray area

As mentioned above, Vietnam has not promulgated a comprehensive legal document to regulate fintech activities, so it could be said that although such activities are extremely flourishing, they have not yet been regulated by a specific legal provision.  For example, in the case of peer-to-peer lending (P2P lending), the investor may establish an enterprise under the Law on Enterprise and with the business lines of 6619 - Activities auxiliary to financial services n.e.c., 6312 - Web portals, 7020 - Management consultancy activities; or with the business lines of 6201 - Computer programming activities, 6202 - Computer consultancy and computer systems management, 6209 - Other information technology and computer service activities, etc., when developing blockchain technology. Although the activities of such companies after their establishment are related to the financial or banking aspect, such activities are not regulated by the Law on Credit Institutions. Once not regulated by the specialized laws, fintech activities may lead to complicated legal issues or even significant legal consequences.

In the case of Emas Fintech, this financial solution seems promising in the traumatic period of the Covid-19 pandemic, with the hope of becoming an optimal financial solution for its users. By using an intelligent matrix algorithm to match virtual currency pairs, this project promised profits of up to 30 percent per month, or 360 percent per year, attracting the participation of many investors. At the same time, this model offered a high commission rate, as the broker would earn 15 percent of the total group transaction, which attracted more people to participate. This system later "collapsed", resulting in the principal and interest can not be withdrawn, which made the last participants go empty-handed. As can be seen, the system is a Ponzi scheme where the invested money of the later participants becomes the interest of the earlier ones. Please note that Vietnam has not recognized and provided any legal regulations to regulate the issuance, sale and trading of digital money or digital assets. Therefore, investing in systems that are not guaranteed by the state will have many risks, not only the risk of fraud, but also the difficulty of getting back the investment due to the lack of legal protection.

Or in the case of peer-to-peer lending, a fintech solution that blooms in the hard time of the pandemic, and comes from the financial demand of the users. Recognizing the urgency of consumer the financial demand of the borrowers, the lenders or even the fintech companies provide the consumer with a loan package with high interest rates, which many cases, falls under the case of usury, which is a prohibited act according to the laws. In addition, lending through digital platforms makes it difficult for the lender to collect the debt from the borrower due to the lack of collateral as well as legal sanctions to collect the debt. Therefore, P2P lending is extremely risky for both lenders and borrowers due to potential illegal acts.

2. The need for a legal framework for the activities of fintechs

The above-mentioned legal gray area is just one of the typical problems arising from the lack of a legal framework to regulate fintech activities. With the current rapid development, the management and control of this activity is essential and is also an issue that needs to be resolved by the competent authorities.

In order to implement the Government's Resolution No. 100/NQ-CP of September 6, 2021 on the approval of the proposal to develop a Decree on the controlled examination mechanism for financial technology activities in the banking sector to ensure the State's policy of promoting a comprehensive digital government[2], the State Bank of Vietnam is currently assigned to be the agency in charge of developing the Government's proposed Decree on the controlled examination mechanism for financial technology activities in the banking sector ("the proposed Decree").

Accordingly, the Proposed Decree is expected to experiment with the regulation and control of fintech activities in the banking sector. Article 7 of the Proposed Decree has identified six fintech solutions that the State Bank of Vietnam considers to be the basic solutions that have been implemented by many organizations in the market, such as (1) lending on digital platforms, (2) credit score ranking, (3) data sharing through application programming interface (API), (4) P2P lending, (5) application of blockchain technology and distributed ledger (blockchain technology, DLT) in banking activities, and (6) application of other technologies in banking, implementing creative business cooperation models in accordance with the testing mechanism. In addition, the proposed regulation also limits the testing period, the number of customers using the service, and the conditions for credit institutions and fintech companies to betested[3].

According to the latest news from the representative of the State Bank of Vietnam, the draft decree is expected to be finalized, submitted to the government and issued in 2023. Therefore, soon, fintech activities will be partially governed by the decree regulating the examination mechanism.

3. Some suggestions to complete the legal framework for fintech activities.

Firstly, although the Decree on the Testing Mechanism will be promulgated soon, it is noteworthy that only fintech companies or credit institutions that apply to participate in the testing mechanism will be regulated by the Decree, and those that do not apply to participate or do not meet the required conditions will continue to operate and comply with the current laws. In other words, if the fintech companies do not participate in the testing mechanism, the operations of such companies will remain unchanged at least until Vietnam adopts a comprehensive law on the whole activities.

Due to the focus on the provisions regulating the operation of fintech companies as participants in the examination mechanism, the proposed decree does not aim to establish conditions for a company to engage in fintech business. The essence of the operation of a fintech company is to provide technology and applications in the financial sector. Therefore, the drafting of conditions for enterprises to enter the fintech market should set minimum requirements for technology, operational standards, management structure and appropriate business line to ensure that the services and solutions provided by the enterprises to customers meet the standards prescribed by law.

Secondly, a problem that needs to be addressed is the regulations on the security of personal data and information. As mentioned above, the proposed decree only provides a standard framework for submission to the government on the conditions to participate in the test, the obligations of the participating organization to secure the customer information, mainly in the form of assigning the organization participating in the test mechanism the obligation to carry out the duty to secure the information. The promulgation of the Decree 13/2023/ND-CP of April 17, 2023 on the protection of personal data, effective from July 1, 2023, has shown the awareness of the State on the protection of personal data and information. Especially in the financial-banking sector, the personal data of customers are becoming more and more important and indispensable and are considered as an important resource to create value for the organization that owns the data. In order to avoid the appropriation of personal data for profit, as well as to create trust and assurance for parties as users of the service, it is necessary to have clear and specific regulations that serve as a deterrent on the obligation to secure the customer information of fintech companies to ensure that the service provision occurs safely and effectively.

Ultimately, the finalization of the legal framework for fintech activities is important and urgent. However, it is noteworthy that the proposed regulation has been in place for some time since its initiation, while the testing mechanism will last for 02 years. Therefore, the process of comprehensively evaluating the testing mechanism and finalizing the framework will not happen overnight. Therefore, during the testing mechanism, State regulators can more thoroughly and comprehensively study many aspects of fintech activities and combine the results of the testing process and practical operations of enterprises not participating in the testing mechanism to complete the legal framework for fintech activities in Vietnam.

Read the article at: Một số đề xuất xây dựng hành lang pháp lý cho hoạt động Fintech