A Better Way to Create a Regulatory Sandbox
When regulators set out to create a sandbox, they often focus on the static, rule-like elements of sandbox design — framework documentation, eligibility requirements, even application fees. These elements are common across many sandbox initiatives and are now crystallized in numerous global landscaping reports. While sandbox teams may spend months or years debating preliminary design choices for a full-blown sandbox, a better approach might be to start out with a minimum viable product (MVP).
MVP is a well-worn concept in Silicon Valley. It’s basically a very simple version of a product that allows an entrepreneur to gather initial insights from the marketplace. The product is then refined based on feedback from early users. Regulators considering sandbox initiatives should take this concept to heart. A sandbox MVP launches quickly and provides an opportunity for feedback and iteration. Indeed, evidence from several jurisdictions suggests that initial sandbox designs often evolve and adapt to fit local market conditions.
Consider these examples:
Expanding from incumbents to FinTechs
The Hong Kong Monetary Authority (HKMA) initially launched its Fintech Supervisory Sandbox (FSS) as a program for incumbent banks. During the first year of operation, however, HKMA received applications from technology firms requesting direct access to the FSS and soliciting feedback on emerging FinTech projects. Against this backdrop, HKMA upgraded to FSS 2.0 in 2017. This version includes expanded access for both incumbents and nonbank technology firms; an FSS Chatroom to provide streamlined access, feedback and support for market participants; and increased formal coordination between HKMA, the Insurance Authority and Securities and Futures Commission on tests that may cut across multiple regulatory perimeters. By the end of August 2018, HKMA had received around 170 requests to access the chatroom. Nearly 70 percent of these requests were made by nonbank technology firms from Hong Kong and overseas.
Expanding from FinTechs to incumbents
The Bank of Sierra Leone's (BSL's) regulatory sandbox has gone the opposite direction. Launched in early 2017 as a cohort-based program to encourage local FinTech innovation, BSL’s dedicated sandbox team became the focal point within the bank on issues related to innovation. Based on its early experiences, the team found that the nascent FinTech market was producing only a few start-ups per year. Yet incumbents were frequently requesting access to the sandbox. By focusing only on start-ups, the team was making incumbents wait unnecessarily long to test their innovations. With increasing inquiries from incumbent financial institutions, BSL is now bifurcating its regulatory sandbox into two tracks: a cohort-based track for start-ups and a rolling admission/open door sandbox for incumbents.
Streamlined application processes
Many early sandbox initiatives adopted elaborate application processes. As a result, written applications would run dozens of pages while providing little actual insight into the nature of the innovation to be tested. In recent months, several jurisdictions have taken steps to streamline their application processes. Singapore has sharpened its sandbox application form and begun to explore whether “pre-defined (express) sandboxes” enable firms to conduct certain low-risk experiments more quickly. The Canadian Securities Administrators have mandated pre-application conferences to assess sandbox fit prior to triggering the formal review process. HKMA recently launched the FinTech Contact Point, a chatroom that enables market participants to discuss potential sandbox applications with HKMA. Bank Negara Malaysia has begun to develop communication and licensing mechanisms that firms can use as alternatives to the regulatory sandbox. Each of these changes flows from regulators’ early experiences processing and onboarding high-quality sandbox participants.
As we’ve written elsewhere, sandboxes are neither necessary nor sufficient to promote financial innovation. But if you determine a sandbox may be helpful in advancing your mandate, don’t be too worried about the first iteration. Think of it as a sandbox MVP. As these emerging experiences suggest, your sandbox is likely to evolve over time as you determine the best fit for your jurisdiction.