Illustration of a sand city in a sandbox.

FinTech Academy: What Is A Regulatory Sandbox?

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Let’s set the scene…

Imagine you are the owner of a FinTech business and have spent the last two years developing a very specific, blockchain-based digital app that you just know will revolutionise life in Africa as we know it. You know that this platform will enrich the population’s lives by allowing citizens to truly own, control and manage their money in a secure way, all via their smartphones, without the need of a bank account.

On top of that, you have financial backing! A tech angel investor has recognised the merit of your MVP (Minimum Viable Product) and has promised access to $20 million in funding! Now imagine you are a few steps away from finalising the development and having all the hard work come to fruition. You can almost taste the success.

Then, something unexpected happens. You thought developing your product and security investment would be the hard part, but right at the finish line,  the country’s regulation framework prohibits the release of this much needed solution from going to market, and it’s like banging your head against a brick wall.  

For many, this is not just a theoretical scenario but a reality. Whether you are a startup, an established business or work tangentially with FinTech in any capacity, the regulatory body of the country in which you wish to go to market will likely rear its stubborn (we won’t say ugly) head with its deaf ears.

Why did we not want to call it an ugly head? While these regulations hamstring the industry and innovation, they were created in an earlier time to ensure security and prevent fraud. The issue today is that innovation in government and financial institutions are victims of their own bureaucracy, and this often strangles the growth of businesses and the wealth of individuals that they set out to protect.

How does this impact the FinTech industry in particular? These industry regulations and laws not only affect the growth and innovation of FinTech businesses, but also prevent solutions to national or international challenges being delivered to the market.

The problem for FinTech is twofold. Firstly, for fintech startup owners trying to provide new digital financial services, these laws and regulations are complex and unclear, as the financial industry is fraught with layer upon layer of regulations. Secondly, many of these regulations and laws, once understood, are outdated and modelled for a less tech savvy age, preventing the development of more efficient and effective solutions because they are not able to strictly adhere to restrictions that are fast becoming obsolete.

Ironically, in some cases, adoption of the new technology itself would alleviate the need for such strict checks and balances, with the emergence of secure technology such as blockchain making fraud harder to achieve.

So how can FinTech companies grow and innovate in this context? It is only through collaboration and action with regulators and governments that FinTech startups can realise their potential and bring their creations to market. A practical example of this in action is the creation of regulatory sandboxes by some forward thinking governments.

Asian Developer Using Laptop Computer Sitting Working

Ensuring FinTech technologies are market-ready requires live-testing and fine-tuning of code & systems. Sandboxes allow for testing, collaboration and programming adjustments that ensure products are secure and adhere to regulations.

What is a regulatory sandbox?

A regulatory sandbox is a safe space for FinTech businesses to conduct live-testing with temporarily adjusted regulations. FinTech startups and businesses can operate within a sandbox for a set time period without having to go through the usual full authorization processes that are set out by the regulators. The regulators create an environment of limited reach and duration, where fintech products can be tested effectively without causing too much damage, should anything go wrong.

These regulators, which differ from country to country, are usually government-regulated agencies that work in specific fields such as banking and insurance. These regulatory entities all work independently, but their coverage or jurisdiction often overlaps.

As you can imagine, a regulatory sandbox can be beneficial for FinTech startups. Firstly, because it allows them to test a service that may otherwise have been prevented from running by pre-existing regulations, making sure that they do not run into any legal issues, or any other unexpected nasty side effects, like possible exploitation and security breaches by fraudsters. Secondly, it provides them with the opportunity to trial the new service with their market, allowing the business to judge whether or not it is worth more investment and rolling out on a larger scale.

Illustration of businessman sitting in sandbox

Regulatory sandboxes don’t just benefit FinTech start-ups but also corporate entities, banks and governments as they ensure the safety and efficacy of new technologies dealing with the public’s money.

Regulatory sandboxes are often created by governments and banks in order to test solutions that are available in other countries, or have been produced in the private sector by FinTech companies. This insulation prevents potentially long-lasting damage in an industry that deals with the public’s money.

The duration of a regulatory sandbox varies, however, the most common duration is that of one year, often with the possibility of being able to renew for another year. If after this duration all legal and regulatory requirements are met, and of course no fraud or other disasters have been detected, the solution or offering can be introduced to a wider market.

A regulatory sandbox is essentially, and importantly, a platform and safe space that provides current industry regulations a chance to keep up with innovation. This means that for many third-world populations suffering from lack of job creation and financial exclusion, regulatory sandboxes could be part of the solution in their evolution to national growth.


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