Regulatory Sandboxes: A Practice For Innovation That Is Trending Worldwide
Over the past couple of years, a number of countries have initiated ‘regulatory sandboxes’ to facilitate growth in their financial sectors. Regulatory sandbox usually implement a set of rules that allow trailblazers to test their products and business models in a live environment with minimal legal requirements. The majority of these programs come with predefined restrictions, such as limitations on clients, time-limit testing, predetermined exceptions, and testing under regulator supervision. Their purpose is to minimize legal uncertainty, improve access to investment, and create rules for new products and business models.
Recently, Bahrain announced it is organizing a plan to transform the Middle East fintech space and invigorate its internal economy by way of using the blockchain as a key tool, and is working to establish a corresponding regulatory sandbox. CEO of The Bahrain Economic Development Board (EDB), Khalid Al Rumaihi, stated recently during the GCC financial forum in Manama:
“We are in talks with a group of people from the central bank of Singapore, which began its own blockchain project for bank transactions 18 months ago and is making huge progress. The ability for blockchain to be adopted at the country level is a huge opportunity for Bahrain to move into the spotlight as a pioneer in this space.”
In June 2016, the Monetary Authority of Singapore (MAS) proposed guidelines for a sandbox that enables financial and non-financial institutions to test fintech solutions in an environment with relaxed regulatory requirements. The MAS examines applicants based on qualities such as ingenuity and the ability to distribute the product nationwide.
The MAS, Singapore’s stock exchange, and eight local and foreign banks are collaborating on a project to utilize blockchain technology for interbank payments.
On February 23, 2017, the Canadian Securities Administrators (CSA) announced the launching of a regulatory sandbox initiative that is open to business models focused on energizing the Canadian market. This includes cryptocurrency or distributed ledger based ventures, the utilization of artificial intelligence for trading, regulatory technology, and online investment platforms. During the application process, CSA staff may request live environment testing, a business plan, and/or a demonstration of how potential investors can benefit.
The Financial Conduct Authority (FCA) of the UK offers a regulatory sandbox that seeks to clarify applicable rules before proceeding with an original idea. The sandbox offers participants access to potential waivers and modifications to FCA rules. The FCA evaluates applicants by examining the ingenuity of the idea, the company’s benefit to consumers, the status of the project, and the need for FCA guidance. The program is broken down into two cohorts, the first of which received applications from 69 companies, though only 24 were accepted. The application period for the second cohort ended on January 19.
On June 8, 2016, the Australian Securities and Investments Commission (ASIC) issued a formal proposal for a regulatory sandbox that is intended to bolster the Australian fintech industry. The sandbox allows ASIC to assist with any issues related to ‘speed to market’ and meeting the organizational competence requirements of obtaining a license. The program will allow start-ups to conduct tests on certain financial services for up to six months.
In March 2016, The Switzerland Financial Market Supervisory Authority (FINMA) announced it would introduce a new licensing category for innovative companies, along with a license exempt sandbox. This program is specifically tailored to businesses that conduct some form of banking activity but will limit lending.
On October 18, 2016, Bank Negara Malaysia (BNM) announced its own regulatory sandbox framework in a Discussion Paper. However, Malaysia’s sandbox focused on the proven track records of the companies applying, and held a preference for start-ups from institutions that collaborated well with others. BNM has indicated that, after the one-year sandbox pilot is completed, it would consider altering regulations to facilitate the successes of new ideas and/or business models that have promising outcomes.
To aid Hong Kong’s aspirations as a competitive financial hub and facilitate development of fintech in its banking sector, Hong Kong Monetary Authority (HKMA) launched a sandbox on September 6, 2016. Breaking with the trend of other countries, Hong Kong’s program is only offered to established banks seeking to explore distributed ledger technology and fintech solutions. Start-up firms are prohibited from entering this program.
The Bank of Thailand announced in September 2016 that it would be pushing for a fintech regulatory sandbox with the goal of sharing information and shaping regulation. Commercial banks were encouraged to apply first and only later would admission be opened up to non-bank firms and technology companies. Smaller firms are encouraged to join incubators.
In February 2017, Roman Shiiko, economic advisor to the Bank of Russia, announced the rollout of the first phase of a Russian sandbox, in which new and inventive global services could be explored and developed. Shikko describes Russia’s initiative as “a major step forward in the creation of an innovation ecosystem in Russia’s young fintech community.”
The adoption of these regulatory sandboxes confirms that governments are taking a more progressive and proactive approach toward the idea of fintech innovation. In addition, many of the countries listed are including blockchain technology in the evolution of their financial systems. As more new ideas from people of varying cultures and backgrounds are tested and perfected, the world-wide financial landscape is positioned to thrive.