Regulatory sandboxes

Abstract

Fintech" has become an increasingly important part of the financial landscape over the last decade, but financial regulation remains a barrier to entry for many fintech innovations. In a highly anticipated report, the U.S. Treasury Department recently recommended the adoption of a "regulatory sandbox" intended to ease these barriers. A regulatory sandbox allows fintech startups to conduct a limited test of their products with fewer regulatory constraints, less risk of regulatory enforcement action, and ongoing guidance from regulators-and versions of the sandbox are becoming increasingly popular around the world. Despite their popularity, however, there has been almost no critical analysis of any regulatory sandbox model adopted to date. Notwithstanding that the Treasury Department has called for a regulatory sandbox to be implemented in the United States, this Article argues that the benefits and drawbacks associated with such a regulatory approach should be considered more fully before doing so. It is perhaps too soon to come to any definitive conclusion about whether the merits of a fintech regulatory sandbox outweigh its disadvantages, but it is already evident that there are some pitfalls to be avoided in adopting such a regulatory structure. Given the possibility of political support for a U.S. regulatory sandbox, this Article draws on administrative-law literature relating to new governance theory and principles-based regulation, as well as financialregulatory literature pertaining to consumer protection and financial stability, to offer suggestions on how such a sandbox might best be designed to avoid many of these pitfalls. It also tackles a design challenge that arises because of the United States peculiarly fragmented financial regulatory architecture: for a regulatory sandbox to be valuable to firms operating in the United States, the sandbox must be designed to preempt enforcement actions by a range of federal and state regulatory actors. This Article, therefore, proposes a model whereby a committee of regulators will make decisions about whether to admit a firm to the regulatory sandbox and any relief granted will preempt enforcement actions by all federal and state financial regulators. A regulatory sandbox could serve as a pilot program for trialing this and other new approaches that could improve the regulation of financial innovation in the United States-this is perhaps the best argument that can be advanced for adopting a regulatory sandbox.