In the realm of technology innovation, rarely does a company say that local government and regulators made it possible for them to innovate in the way they wanted. In fact, in most instances, regulations that favor existing systems and ways of operating are seen as a hindrance to the type of significant or rapid change that accompanies true innovation.
The result is either the tamping down of innovation or a “seek forgiveness instead of permission” approach where companies ignore the regulation and hope to receive good graces down the road.
What is a Regulatory Sandbox?
A regulatory sandbox has the potential to foster innovative approaches to commercial activity, such as the development and deployment of FinTech applications, without encouraging companies to do so outside the bounds of the law.
The sandbox is permissive, in that it creates opportunities for experiments that might not fit within existing regulatory frameworks. It is also supervisory, inviting innovators to work within regulatory oversight, rather than ignoring it on the theory of asking forgiveness later.
Jurisdictions can choose to maintain the status quo, and innovation will still occur —slowly over time. But those who adopt the regulatory sandbox approach have the potential to fast-track FinTech activity in a way that benefits all parties.
- Speeding Productive Innovation
Legacy regulatory regimes, however well intentioned, have necessarily been tailored to a set of practices and concerns growing out of the established customs of the targeted industry. As a result, they often mandate approaches that will block truly innovative steps.
The process of removing these impediments through traditional legislative and regulatory revision is generally cumbersome. A lighter touch, that involves controlled, supervised experimentation, can be a quicker route to permitting – and regulating – productive innovation.
- Bringing Innovation Out of the Dark
High regulatory barriers tempt innovators to “seek forgiveness and not permission.” The example of Uber’s assault on the traditional taxi industry illustrates such a strategy. This approach is not optimal, either for society or for the companies involved. Rather, it is important that innovators and regulators engage in a productive dialog as new applications and business models are developed. The sandbox approach should be designed to encourage just such an interchange.
- Regulatory Education
A more collaborative approach will allow the regulators to learn directly about the functioning of the innovative companies and their creative applications and products. A government using a regulatory sandbox can be nimbler and more accurate in allowing productive innovation and short-circuiting harmful practices. Rooting regulatory approaches in experience will also produce improved frameworks.
- Benefits to the Consumers
The creation of new products and services through FinTech applications doesn’t just benefit their suppliers. To be successful over the long haul, they must also bring benefits to consumers. Internet banking, while not a perfect application, has been adopted by millions of Americans because of its convenience and ease of use.
Other innovations now entering the pipeline — or not even yet imagined — will have similar impacts. The process of speeding them to market, while continuing to protect the public interest, can be accelerated through the supervised experimentation that a sandbox permits.
- Financial Inclusion
A common impact of technology innovation is the creation of benefits available only to the wealthy, and the FinTech industry is no exception. For example, well-intentioned protective regimes have created a private marketplace for accredited investors, often providing higher yield investments opportunities for the wealthy and only vanilla deposits and returns available to less wealthy, non-accredited investors.
While the need for safeguards continues, tokenization and other technologies can assist in opening well-vetted investment opportunities with higher yield possibilities to less well-heeled populations.
- Jurisdictional Head Start and Economic Development
In addition to these directly related benefits, jurisdictional competition is a reality in the blockchain and FinTech industries — with states competing for the direct economic development and the indirect benefits, such as increased tax revenues, that being a center of innovative commerce can bring. A sandbox allows a state to keep at the front edge of the process.
Several jurisdictions, including the United Kingdom, Arizona, and Singapore, have created FinTech sandboxes to take advantage of the variety of benefits discussed above. States that do the same have the opportunity to become leaders in FinTech innovation.