Building the right sandbox to attract fintechs
As Congress weighs how best to tackle the rapidly growing fintech space, it's also likely to consider whether a federal regulatory sandbox is the answer to challenges posed by such innovative financial technologies.
Sandboxes give regulators a way to understand a company’s use of advanced technologies and what regulations apply to a particular model, product or service.
While Congress has yet to form an opinion on the need for sandboxes at the federal level, several states have forged ahead and implemented their own sandbox regimes, as have governments in many other countries.
Some observers say that the U.S. is late to the sandbox party. But the point of being fashionably late is that one can call ahead to determine whether it’s worth an appearance.
If Congress is interested in sandboxes, it should seize the opportunity to learn from the experiences of others before jumping in.
First, Congress should examine efforts by several states and individual federal regulators that are in the early stages of experimenting with sandboxes. Their attempts to go it alone may generate limited interest, however.
That isn’t necessarily a reflection of their efforts, but a reflection of the fractured nature of financial regulation in the U.S.
The hearings on Facebook’s proposed digital currency, Libra, provide an illustrative example of this. Neither lawmakers nor Facebook executives seemed to have a clear idea how a project as complex as Libra would fit into America’s complicated financial regulatory system.
The value of any single regulator’s sandbox is limited when there may be several other federal regulators that a fintech firm must face. In the meantime, there are also regulators from 50 states and multiple self-regulatory organizations that fintechs contend with.
Further, there is a danger that efforts to streamline individual regulators’ processes may inadvertently create silos rather than sandboxes.
Potential applicants have noticed this, and their interest has been accordingly ambivalent.
If Congress would like to address this issue, it should look to current and past legislation introduced by both parties as a starting point for a bipartisan effort toward the development of a sandbox framework at the federal level.
Second, Congress should learn from the mixed record of sandboxes overseas.
Globally, regulators in more than 50 countries have either launched or plan to launch a regulatory sandbox. But the impact of these programs is seldom equal to the fanfare surrounding their announcements.
A recent United Nations report stated that “regulatory sandboxes are neither necessary nor sufficient for promoting financial inclusion.”
Sandboxes are only one of the tools available to regulators, as previously noted. But sandboxes alone are not sufficient for addressing the policy and regulatory challenges raised by tech-based financial platforms.
To avoid this issue, Congress should direct the Government Accountability Office to study the adoption of sandboxes in the nation and around the world. The study should include a clear statement of objectives, identify alternative approaches, and evaluate the costs and benefits of sandboxes, as well as suggest alternatives.
After the GAO completes the report, Congress should hold hearings with industry participants, fintech experts, consumer advocates and others to determine whether regulatory sandboxes are appropriate.
Many lawmakers are eager to take action to improve fintech regulation. Their ambition is admirable. And they are right to take an interest in developing innovative policy solutions that address the challenges incumbents and startups face in delivering digital financial services experiences to the end user.
However, the U.S. is already a leader in fintech, and it managed to become one without a regulatory sandbox. If Congress is interested in building a sandbox, it should seize the opportunity to learn from the experiences of others before jumping in.