The concept of a regulatory sandbox has become popular in the financial technology (FinTech) arena. The term refers to a testing grounds mechanism to develop new regulatory frameworks for emerging business models in a controlled environment. This method allows businesses to test their products or services with real consumers while providing safeguards during the market trial. It aims to give an opportunity for the business model to determine the most suitable regulatory frameworks within a certain period of time without the burden of regulations. However, the marriage of emerging technology with various sectors such as Government Technology (GovTech), Regulatory Technology (RegTech), Legal Technology (LegTech), Advertising Technology (AdTech), Insurance Technology (InsurTech), and Education Technology (EdTech) means that sandboxes are becoming a conducive avenue for innovators to design a proper regulatory framework for industry before business models are put into operation.
Innovators often face issues in tackling developing technologies and markets due to regulatory ambiguity. Furthermore, some potential innovations cannot be trialed and can even be discontinued before they are introduced to the market. One of the primary causes is because of regulatory uncertainty. Regulatory sandboxes help tech-based sectors advance business models by providing tools to facilitate testing and access to regulatory expertise. The approach allows firms to test their business model directly with consumers and to examine existing regulatory barriers. As a result, the regulator can work together with firms in a supportive environment to Saidestablish a comprehensive set of regulations that are tailored to the development of technology.
The UK, as the leading FinTech Hub, has successfully launched sandbox programs for financial innovators to develop financial regulation through the Financial Conduct Authority (FCA). FCA’s sandbox provides criteria for eligible firms to assess the market and decide upon a bespoke regulatory framework without hampering the growth of industry. It further creates a practicable structure as to how the regulators should treat the sector based on emerging issues such as consumer protection, risks programs, and data security. Some of the firms have specifically tested the approach using online platforms, blockchain, application Programme Interfaces (APIs), biometrics, artificial intelligence, machine learning, and other traditional business models. These technologies are used to perform various financial services, such as tax, e-commercial payment and insurance, mortgages, and robot-advice.
Since it launched in 2017, FCA’s regulatory sandbox has received 375 applications and accepted 118 firms from a various range of areas such as blockchain based payment, insurance, AML controls, biometric identification tools, and Know Your Customer (KCY) verification. So far, the FCA has conducted five sandbox cohorts since it was launched in November 2015. This sandbox initiative has inspired other countries in Europe and Asia to adopt this approach in financial services such as FinTech.
Regulations have become a great challenge for businesses. Regulators play an essential role in both establishing barriers and providing to innovation in technology. Knowing that a sandbox approach is applicable in various sectors, regulators may wish to consider implementing the sandbox mechanism as an incentive for any emerging technology-based businesses in order to support innovation. Even though the future of technology is unpredictable, regulators have an opportunity to accommodate the needs of various industries and help them to explore new innovations without violating current laws.
The Regulatory Sandbox is one of the most promising methods to establish a complete regulatory framework. However, regulators should be flexible in the implementation process in order to provide sufficient safeguards to mitigate the potential risks — especially for customers — during and after testing. The government also should balance innovation with appropriate cybersecurity frameworks, as that technology is heavily reliant on data security. Moreover, the government should encourage the private sector to support the program by providing authorization that allows private sector entities to have input into sandbox parameters and the trial process. If done properly, the sandbox approach will continuously update the needs of regulation while making sure that innovation keeps progressing.
