What is a regulatory sandbox?

BY: Kwami Ahiabenu, II

There is fierce friction between banking regulations and innovations. Innovations require free space for enabling creativity which is invariably infused with a high degree of risks. On the other hand, regulators take tough, almost stifling postures which seek to control and effectively restrict spaces so as to protect consumers and maintain the status quo. Invariably innovations in the financial system are always ahead, with regulation always trying to catch up, pronouncing this conflict.

Worldwide, China is in a unique position when it comes to managing the friction between regulations and innovations. The problem appears to be an under-regulation of financial technologies, not over-regulation making the whole country's regulatory landscape, in and of itself, a sandbox. This loose (under regulations) approach to regulations comes with the advantage of ensuring disruptive innovations are experimented without concern for regulations leading to some great innovations. Though this might sound like the wild wild West, China is now putting in place far reaching regulations to curb the exponential growth of the sector.

For countries desirous of achieving maximum benefits of innovation there are a number of options open to banking regulations. Financial sector regulators can consider three policy options among others to pursue in regulating innovations, namely establishing a regulatory innovation hub, an innovation advisory office or a regulatory sandbox. A regulatory sandbox is becoming more and more popular with regulators as they grapple with regulating fast-moving innovations occurring in the financial sector effectively.

What is a regulatory sandbox?

The idea of an innovations sandbox, was derived from nursery schools, where there is a dedicated space called a sandbox in which kids can go and play, imagine and create using sand. An innovation sandbox is a controlled environment where innovative ideas can be worked in without implications on the live environment. A regulatory sandbox, as can be deduced, is based on the innovation sandbox concept, in this case, it is a safe environment that supports incredibly disruptive innovations without the burden of regulations.

The first country to introduce a regulatory sandbox is the United Kingdom in 2016. Under a regulatory sandbox framework, innovative financial services are tested under a regulated environment before they are introduced to the market. Being a middle ground where disruptive innovations can be created within the confines of a controlled environment while at the same time risks are managed, the regulatory sandbox is now popular with regulators worldwide, including Ghanaian regulators.

According to the World Bank (https://bit.ly/3r2R92y) there are over 73 regulatory sandboxes around the globe. Under the regulatory sandbox regime, financial technologies entities can operate over a period without a license to test and validate products before rollout to the marketplace. Upon completing the regulatory sandbox process, the financial technologies entities can decide to roll out or modify the product. . Regulatory sandboxes are not limited to banking sectors. Other financial sectors such as insurance, pensions and stock exchanges are also relying on them. For example, to regulate Insurance Technology (InsurTech), the Insurance Regulatory Authority of Uganda issued “The Insurance Regulatory Sandbox Guidelines (2020)” ( https://bit.ly/3xyoFQJ )

Global Financial Technology Sandbox

Given the growing interconnectedness of the global financial market place, it is imperative for the creation of an international financial technology sandbox which can support companies’ operating across different jurisdictions to experiment with innovations in a controlled environment under regulatory supervision. Given this background, several regulators under the aegis of Global Financial Innovation Network (GFIN), made up of over 60 member organizations (https://www.thegfin.com/), have launched a global financial technology sandbox on a trial basis. It is expected this “global sandbox” will go a long way to stimulate international partnerships around innovations.

In conclusion, there is evidence that regulatory sandboxes across the globe are increasing the capabilities of participating financial technologies firms to innovate by providing them with the opportunities to develop and innovate in a controlled regulatory environment. Although regulatory sandboxes come with disadvantages, such as the regulator still having a say in what innovative products or services are permissible in a sandbox environment, there is ample evidence that regulatory sandboxes are one of the best options to regulate a very complicated and dynamic financial technology sector. It is a win-win situation; regulated entities can play in this regulatory sandbox while innovating and regulators can have peace of mind since they can offer protection and safeguard the interest of consumers against risks that emerge from nascent financial technologies innovations.


Kwami Ahiabenu, II is a Technology Innovations Consultant
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