Each FinTech startup has the right to have free choice of jurisdiction! This right is ensured by the national standards, common sense and a series of blogs “Global FinTech Map”.
We have already reviewed such popular jurisdictions as the USA and Great Britain and have come to a conclusion that although financial technology feel quite comfortable there, but in most cases there are a lot of regulatory documents to be fulfilled. It would be possible to go further around Europe, to look for recipes of FinTech success in the countries of Western civilization. But it is better to go straight to a place where financial technologies are ahead of the entire Western world, both in terms of innovation and capitalization.
Welcome to the People’s Republic of China.
China is a place where financial technologies move far ahead of Europe and the American region. It is here where giants like Alibaba and Tencent, which payment systems, online banks and online trading platforms provide more than a billion users (at least accounts) with digital financial services. By contrast, one of the largest global payment systems, PayPal, may boast of only 200 million users.
China has long been actively using mobile platforms and QR codes. Fingerprint identification, face recognition, and other advanced identification methods are already comprehensively implemented.
Online and p2p lending also gain popularity in China. By the end of 2017, more than 1900 online platforms providing lending services were operating in the country. Alongside are FinTech applications for asset management, online insurance services, Big Data Processing and blockchain platforms.
Among connoisseurs of FinTech and e-commerce it is rumoured that burst of mobile solutions and advanced methods of identification in China was prompted by the difficult Chinese hieroglyphic writing. However, I somehow doubt that this could have happened without dramatic changes in regulatory approaches and the sound economic policy. Otherwise, our country would have long been a leader in mobile applications for issuing prescriptions.
Where yuan is collected
Actually, as in most other jurisdictions, a FinTech company may raise funds through private investment or public offering of shares. To make IPO in China, your company should have a proved record of operations on the market for at least 3 years, have no changes in management during the same period and to be profitable for at least CNY 20 million.
Moreover, there are about 70 crowdfunding platforms in China that help finding financing for FinTech startups. According to expert estimates, during 2017, the amount collected through crowdfunding exceeds CNY 2.4 billion (about USD 3.5 billion).
At the same time, to get a bank loan, it is necessary to look for a mortgage or another security. According to the recently introduced Recommendation “Mass Entrepreneurship and Innovations”, banks are obliged to provide affordable credit products for high-tech companies, however, as of today, access to credit resources remains difficult for startups.
As for fund raising using Initial Coin Offering (ICO), here there are no options. Back in September 2017, the People’s Bank of China (PBOC), along with six government departments, issued a recommendation that completely prohibits funding through public offering of tokens and obliges to close all crypto-currency exchanges and exchange offices in China. As a result, crypto-currency business in China is currently prohibited.
Chinese tax privileges
FinTech companies and small businesses in China are entitled to a series of tax privileges.
In particular, qualified high-tech companies have the right to reduce their income tax to 15% (as compared to the standard rate of 25%). Special economic zones offer exemptions from income tax for the first 2 years and its reduction by 50% during the next 3 years.
Venture investment funds investing in small high-tech companies for a term of 2 years or more have the right to get compensation in the amount of 70% of the income tax on investment.
The Great Chinese FinTech Regulation is “Guidlines on Promoting and Development of Internet Finance”, approved in July 2015 by the People’s Bank of China, the Ministry of Industry and Information Technologies, as well as by 8 other government bodies. Currently, this document is seen as a kind of “constitution” for FinTech and Internet business in China.
According to the Guidelines, PBOC regulates online payments, China Banking Regulatory Commission is responsible for online lending, crowdfunding and other consumer financial services, China Regulatory Insurance Commission regulates online insurance services.
The Guidelines introduce a number of principles that should be implemented in the field of FinTech through the Internet:
- Online business must be registered with the relevant government body and authorized in the telecommunication regulatory bodies of China;
- All FinTech projects, working with consumers, should disclose their financial status, operational activities, business model and risks to clients;
- All Internet finance projects should keep confidentiality and protect personal data;
- Online lending and p2p platforms are required to maintain their status as intermediaries providing only informational services;
- Any crowdfunding should be conducted only through intermediary crowdfunding platforms. Only small business companies have the right to raise funds through this kind of collective financing.
- In general, FinTech is fairly well regulated in China, but access to this market for foreign companies will be quite difficult. At the very least, a foreign company will have to organize a full-fledged business presence.
- Pursuant to the latest PBOC initiative, which is reflected in Letter No. 7 dated March 21, 2018, foreign payment services may operate in China subject to: (1) obtaining a payment operator license from PBOC, (2) confirming safety of its financial transactions pursuant to the national standards, (3) keeping personal data and financial information about clients in the territory of PRC, and (4) ensuring compliance with other requirements that may be put forward in China for payment services.
- Personal data and AML
- Issue of handling personal data in China is regulated by the Criminal Law, the Law on Damage, the Cyber Security Law, the Rules for Protection of Personal Data of Consumers of Telecommunication and Internet Services.
Two basic principles regulated by these acts are the following:
- “Notification and consent” – personal data may only be collected after proper notification and consent of a person;
- Further commitment to ensure secure data storage.
Moreover, the recently introduced Law on General Provisions of Civil Law provides that any individual or legal entity is required to safely store personal data received by it.
AML in China is regulated by the Criminal Law and the Law on Money Laundering. In general, this results in the obligation of both financial institutions and of some non-financial companies to carry out transparent and detailed identification, to store information about the client and his/her transactions. Also FinTech companies are regulated by the anti-corruption provisions of the Criminal Law and the Law on Unfair Competition.
And traditionally, a few words about intellectual property
In China, computer programs are protected by the provisions of the Copyright Law and the Computer Software Protection Regulation, which regulate the attributes, size, licensing and assignment of copyright to the computer code. As of today, in the PRC, as in most jurisdictions, computer programs cannot be protected by patents.
At the same time, the rights to inventions and trademarks are governed by the Patent Law and the Trademark Law. Copyright in China may be protected at the national level, provided that the author is the resident of the PRC or the resident of the Berne Convention Member Country. As for patents, there is the Patent Cooperation Treaty, for trademarks – the Madrid system.
Instead of the “conclusion”
Of course, China is not the most hospitable jurisdiction for a FinTech startup and well protects its national interests.
However, despite all existing prejudices, the legal regulation of financial technology in the People’s Republic of China is at a very high level. The detailed rules of this business have been established back in 2015, when in the majority of countries of the world the modern FinTech has just appeared.
As a result, Chinese companies have invaluable experience in FinTech industry, and business connections with them may be of a great help in developing your project.