Sandboxes aren’t just play areas for toddlers. Increasingly, state and national governments around the world are creating what are known as regulatory sandboxes: programs that allow software companies to bypass regulations in order to test a new product or service.
The most common US sandbox programs are for companies that manufacture financial technologies, such as digital payment applications or credit risk assessment software. The governors of six states have signed laws creating such programs in recent years. The Federal Office for Financial Consumer Protection operates two at national level.
And the idea spreads. Lawmakers in 11 states and Washington, DC, have proposed bills this year that would create fintech sandboxes, according to the Libertas Institute, a libertarian-minded think tank based in Lehi, Utah, which promotes the concept of sandbox nationwide.
Sandbox laws allow companies to test prototypes without obtaining a state license. Although the laws proposed and enacted vary, they remove requirements such as equity amounts, security deposit amounts, and interest rate limits. Several laws state that in a sandbox none of the state’s financial services laws apply, and it is up to regulators to decide whether any laws or regulations should apply to protect consumers or banks. approved against a certain product test.
States have also created sandboxes for companies developing insurance, legal, real estate and other products and services.
Supporters say the legal wiggle room can help banking and credit startups grow and create jobs. But consumer advocates say easing licensing rules could expose customers to unfair or abusive products, such as high-interest loans.
They like to quote former New York chief banking regulator Maria Vullo, who once said, âToddlers play in sandboxes. Adults play by the rules.
“Just because there’s a claim for innovation, or the technology is involved, doesn’t mean it’s automatically good,” said Lisa Stifler, director of state policy at the Center for Responsible. Lending, a Washington, DC-based nonprofit that fights predatory lending. .
State fintech sandboxes have also struggled to attract companies. In the four states accepting applications this year (Arizona, Florida, Utah, and Wyoming), no companies are currently listed.
In Arizona, only 10 companies participated. “These companies may or may not have passed their actual test,” said Deputy Attorney General Sam Fox, who oversees the state program.
FinTech sandboxes are best understood as “signaling mechanisms,” attempts by lawmakers to show their state is forward thinking, said Lee Reiners, executive director of the Global Financial Markets Center at Duke University School of Law. âThey’re not going to help that many businesses,â he said.
Play in the sandbox
Arizona Gov. Doug Ducey, a Republican, signed a law creating America’s first financial services sandbox in 2018. Supported by business groups and blockchain enthusiasts, the law has since become a model for other states.
Businesses can participate in the Arizona program without having an office or employees in the state. Once admitted, they can offer products and services, mainly loans, money transfer services and investment advice, backed by new technology to up to 10,000 state residents for two years without obtaining state license.
State regulators monitor participating companies. Participants can only manage a limited amount of money – money issuers can offer transactions of up to $ 2,500 at a time or $ 25,000 per consumer, for example – and they must comply with the state consumer fraud law. Arizona’s 36% annual interest rate limit for small consumer loans still applies.
So far, attendees have included a cryptocurrency payment company that serves marijuana businesses; a business that gives consumers money in exchange for a percentage of their future income; and a company that has developed an algorithm to assess renewable energy projects.
BrightFi Services, a company whose software cuts the costs of administering bank accounts, used the sandbox in 2019 to test an iPhone banking app for people without accounts. He chose a small group of test users, including some of his own employees, and asked them to share their feedback on the features of the app.
Proponents say sandbox programs help regulators learn about new financial products and services, which in turn can inform better laws. âLet’s make sure that the regulation we have in place is the best form of regulation possible,â said James Czerniawski, policy analyst at the Libertas Institute.
Many sandbox supporters also want to show that their state is welcoming high-tech companies.
But opponents say that due to the relaxation of regulations, the programs could harbor abusive or deceptive products.
“We are really concerned about predatory lending to families and low-income people,” said Jackson Voss, economic opportunity policy analyst at the Louisiana Budget Project, a left-wing nonprofit. The nonprofit has opposed a fintech sandbox bill proposed by Louisiana GOP state representative Mark Wright this year.
Companies that use sandboxes “are really experimenting on people in any state who adopt sandboxes,” Voss said. “And that sounds problematic.”
Even some conservative lawmakers are skeptical. “I have a problem with just saying, ‘If you come up with a product, you can ask the regulators to waive any laws that we have put in place, probably for good reason,'” the senator said. Republican State of Louisiana Jay Morris at a press conference. Hearing of the Trade Committee on Wright’s Bill.
Arizona officials say their program has consumer protections in place and note that it is overseen by a consumer protection attorney. But neither the companies admitted to the program nor the attorney general’s office have released information about the tests carried out in the sandbox, so it’s unclear whether customers have been helped or injured.
Consumer advocates have filed for public registration for more information but have not received satisfactory responses, said Kelly Griffith, executive director of the Southwest Center for Economic Integrity, a consumer advocacy group based in Tucson. “This lack of transparency, for us, raises a big red flag.”
Heads of state don’t have to bend the rules to help regulators learn about new financial products and services, said Stifler of the Center for Responsible Lending. She pointed to California, where lawmakers last year created an innovation office to study new financial services and cryptocurrency companies.
Play by the rules
In most states with a sandbox for financial services, and in some states where they have been offered, the banking industry is regulated with a relatively light touch. This can limit the number of businesses that benefit from the programs.
During the Louisiana panel hearing, Wright struggled to identify the products and services the sandbox would bring to the state. His only response was a vague reference to cryptocurrency companies, which Morris was not satisfied with.
âYou can buy cryptocurrency now,â Morris said, holding up his phone to emphasize. “You can log into Coinbase, buy whatever you wantâ¦ we don’t need this invoice to buy crypto, because it’s already allowed.”
Wright’s bill failed in committee.
Other sandboxes keep an industry running, period. For example, prior to the launch of Hawaii’s cryptocurrency sandbox last year, the state’s strict licensing rules made it too expensive for cryptocurrency trading platforms to do business there.
âWithout the sandbox program, we probably wouldn’t have been able to operate in Hawaii, frankly,â said Alexandra Gaiser, director of regulatory affairs at River Financial, a bitcoin trading app and one of the 11 companies in the program. ‘State.
River Financial operates legally in 35 states, including Arizona, Florida, Utah, and Wyoming. It has a money transfer license in 14 states. In others, Gaiser said, the company does not need a license or has an agreement with state regulators that allows it to serve unlicensed customers. He does not participate in other sandboxes.
FinTech companies typically aspire to operate in all 50 states, so a single-state program may not be convincing. Although some sandbox laws include reciprocity agreements, companies must still apply to every state program they wish to use.
“I think in order for them to be really useful, they would have to bring together a number of states – in order to create bigger markets – and to create a better understanding with federal authorities,” said Andrew Lorentz, Davis’ lawyer. Wright Tremaine who co-chairs the financial technology practice of the national law firm.
Startups also have another way around costly banking rules and regulations: rather than serving consumers directly, they can sell their software to established banks and credit unions and avoid licensing issues altogether.
At BrightFi, business leaders scrapped plans to create an affordable bank shortly after testing their app. Today, the company sells its technology to traditional financial institutions. “For small fintechs [financial technology companies]sometimes it’s easier to partner with a bank that already has a license, âsaid Lehman.
The Arizona sandbox helped convince BrightFi to move to Phoenix in 2019. But the company had other reasons as well, and it ultimately found out that establishing connections, not lighter regulation, was the key. main benefit of the program.
âI don’t think we would be where we are now if we hadn’t been introduced to some of the people – banks, regulators, even the nonprofits we were introduced to,â Crystal Lehman said. , CTO of BrightFi. “It was immeasurable.”
Â© 2021 The Pew Charitable Trusts. Visit stateline.org. Distributed by Tribune Content Agency, LLC.