How Sandbox Programs Can Help Promote Innovation and Consumer Welfare
Technological innovation is spurring startups and financial companies to make consumer transactions more accessible, faster and more affordable. Around the world, leading financial centers seek to attract these dynamic companies. Technological innovation is critical to maintaining a globally competitive financial sector that benefits consumers, from blockchain-based payments to alternative credit scoring systems.
However, the financial services industry remains heavily regulated, especially in the United States. Cumbersome regulations can deter established companies and startups from offering innovative financial products and services that benefit consumers.
One way to fix that problem is through regulatory “sandbox” programs, which provide high-potential startups and technology companies an experimenting space for innovation. By allowing companies and regulators to work closely, regulatory sandboxes can also help regulators better understand how different rules affect businesses and result in market-friendly regulatory frameworks that promote innovation in areas like alternative lending, digital currencies and payment systems.
In 2016, the United Kingdom’s Financial Conduct Authority launched the world’s first regulatory sandbox program. Since then, more than 50 jurisdictions worldwide have adopted similar programs, according to the World Bank. In the United States, states have taken the lead. So far, at least 11 states — such as Arizona, Hawaii and West Virginia — have establishedfinancial technology sandbox programs.
Most cumbersome financial regulations are imposed at the federal level, which curtails states’ ability to provide meaningful relief through sandbox programs. Moreover, state regulators cannot nullify enforcement actions by federal agencies against companies that participate in state-level sandboxes.
These challenges have contributed to a situation in which most-state level sandboxes struggle to attract companies, with only Hawaii and Arizona’s financial technology sandbox programs having managed to attract more than 10 participants as of late last year.
Other states that have struggled to attract companies can catch up by taking several steps to make their sandbox programs more attractive. One option is for regulators from different states to sign reciprocal agreements so businesses in one state’s sandbox can more readily offer products through another program.
Likewise, U.S. state legislation typically gives sandbox regulators the authority to sign reciprocal agreements with other regulators, including foreign ones. Such arrangements could allow American companies to offer new, innovative products in foreign markets. Likewise, foreign companies could also use state sandbox programs to test products and services to benefit American consumers and the U.S. economy. Therefore, state regulators should consider signing international agreements with advanced economies and a well-developed financial sector — such as Germany, South Korea and the United Kingdom to the extent that U.S. constitutional law allows.
State lawmakers and sandbox regulators should also avoid or eliminate requirements for applicants to establish a physical presence in the state. Wyoming, for example, requires applicants to demonstrate “a physical presence, other than that of a registered office or agent” in the state. Such requirements can pose a significant barrier for potential out-of-state sandbox participants and deter them from applying.
In contrast, sandbox programs that have been more successful in attracting companies tend to show greater flexibility in admitting non-resident companies. To entice out-of-state startups and companies, state governments should consider allowing greater flexibility instead of mandating a physical presence.
Read the full article at Inside Sources.