Regulators Nurturing FinTech Innovation: Global Evolution of the Regulatory Sandbox as Opportunity Based Regulation

Abstract

The regulatory sandbox is a real world alternative to regulatory lag. Its emergence as a novel regulatory development responds to challenges faced by FinTech innovators in navigating an unwieldy regulatory landscape not designed with FinTech in mind. Regulatory sandboxes are in operation in developed countries including Australia, Canada, Denmark, Hong Kong, Singapore, Switzerland, the Netherlands, the United Arab Emirates, the United Kingdom, and the United States. Within the EU they are seen in Denmark, Hungary, Lithuania, Poland and the Netherlands. The concept has also gained traction with regulators in developing countries such as India, Indonesia, Malaysia, Mauritius and Thailand. Not only is the regulatory sandbox an experimental space for firms testing innovative FinTech products and services, it is also a novel regulatory experiment for regulators. This article advances the available literature through focusing on the contradictions inherent in the role of the regulator in administering a regulatory sandbox. It characterises the regulatory sandbox as a form of agile, opportunity-based regulation, distinguished by a regulatory approach that is concerned with actively supporting innovators in nurturing cutting-edge innovation to benefit innovators, consumers, investors, and the wider economy. This is path-breaking regulatory territory. In its provision and design a regulatory sandbox phenomenon performs a crucial positioning function in relation to a given financial system’s receptivity to FinTech business. An economic, pro-innovation agenda is at work. Distinct policy questions are therefore raised regarding the legitimate role of public gatekeeper financial services regulators operating regulatory sandboxes. The role of a regulatory sandbox in nurturing and expanding competition suggests a public interest role in the interests of consumer choice, price and efficiency rather than simply on risk minimisation. However, pressure on regulators to produce sandbox successes and to compete with other sandboxes may influence the exercise of regulatory discretion and produce regulatory distortions that affect competition in FinTech markets.