FinTech sandboxes and the measure of success


As the Federal Reserve Bank of New York and the Bank for International Settlements (BIS) launch a regulatory sandbox for FinTech companies, it’s worth considering what they are and how they aim to foster and nurture innovation.

Announced Monday (November 29), the New York Innovation Center (NYIC) will test and investigate new financial technologies, including central bank digital currencies (CBDCs), stablecoins and cross-border payments, with a focus on supervisory and regulatory technology, the financial market infrastructure, the future of money, open finance and – given the electricity demands of bitcoin mining nationwide – climate risk.

UK leads the way

FinTech sandboxes are relatively new – the first was established by the UK’s Financial Conduct Authority (FCA) in late 2015. They provide a controlled and closed test environment in which companies can try out their technology with a small number of people. of clients in close cooperation with and control by financial regulators. They are essentially safe spaces for companies to experiment with new business models that have gone ahead of existing financial regulations.

Last November, the BIS concluded that companies that were part of the FCA’s sandbox – especially smaller and younger companies – had a 50% higher probability of raising funds and an increase of around 15 % of the average amount of financing raised.

Comparing them to similar companies that did not participate in the sandbox, the study found that participation in the sandbox gave potential investors more information about the companies (‘reduced asymmetric information’) and reduced both regulatory costs and uncertainty.

That’s not to say they guarantee success, as over 20% of FCA sandbox graduates have gone bankrupt.

A major study on Asia-Pacific FinTechs found that participation in the sandbox fosters financial innovation and new business models, dialogue with regulators, faster and cheaper business development, advertising, ” successful licensing of participants and establishment of financial and legal frameworks.

Make a statement

Like the NYIC, not all are sponsored by national governments. In the United States, the Consumer Financial Protection Bureau (CFPB) has its compliance assistance sandbox.

Arizona, Kentucky, Nevada, Utah, Wyoming, Vermont, Florida, West Virginia, Hawaii, and North Carolina have created sandboxes in the United States, but not all of them have not completed. As of June, only 10 companies had participated in the Arizona sandbox and not all had passed their graduation test. At that time, neither Arizona, Florida, Utah, or Wyoming had any listed companies.

That said, the Arizona sandbox has had its successes. Clutch CEO, FinTech software developer Nicholas Hinrichsen told the Phoenix Business Journal in October that the “sandbox has basically allowed us to experiment in space without having to build the entire regulatory machine. And then really quickly we noticed, hey, instead of going straight to the consumer and being lenders, there are a lot better lenders out there, so let’s create software for them.

Sandboxes are best viewed as a way of signaling that the state is open to experimentation and more generally has a good business environment, Lee Reiners, executive director of the Global Financial Markets Center at Duke University School of Law, Recount Arizona Mirror in June. Some proponents see them as a way for regulators to learn about new financial products and services.

EU lagging behind

The EU is not that far along in the sandbox. On November 11, Mairead McGuinness, EU Commissioner for Financial Stability, Financial Services and Capital Markets Union, said the EU plans to finalize plans for a sandbox at the block scale for blockchain products by the end of the year.

Italy opened its regulatory sandbox on October 1. Austria, Denmark, Greece, Malta, the Netherlands, Spain and Sweden are among the countries that already have one.

Currently, there are sandboxes in over 50 countries, including Australia, Brazil, Hong Kong, India, Mexico, Nigeria, Russia, Switzerland, Singapore, and Thailand.

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NEW REPORT: TECHREG â„¢ CHRONICLE – DECEMBER 2021

On: This report represents the inaugural edition of the TechREG â„¢ Chronicle. The regulation of digital companies appears to be one of the key issues of our time. Through this new publication, we seek to contribute to the debate and discussion about when, how and when not to regulate digital businesses and the key technologies they use.

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