It was not until 2016 that the world saw the creation of the first regulatory sandboxes—frameworks set up by regulators that allow fintech startups to conduct live experiments in a controlled environment under a regulator’s supervision., offering the unique benefit of providing the empirical evidence needed to substantiate decisions in the field.
The many benefits brought about by regulatory sandboxes are analyzed in a recently released paper, Global Experiences from Regulatory Sandboxes. The research covers the challenges and lessons learned from the implementation of 73 unique fintech sandboxes in 57 countries. More than half of them were created between 2018 and 2019, and a fifth were set up in the first half of 2020 alone!
Figure 1: Global fintech-related regulatory sandboxes (announced and operational)
The power of sandboxes
When examining their experiences, we took into consideration aspects such as the context in which they operate, their design, and finally their impact thus far.
Our research shows that sandboxes can:
- Serve as evidence base for regulation: Sandboxes can be useful in countries where regulatory requirements are unclear or missing, or where they create barriers to entry that are disproportionate to risks. They can also help build consensus among different stakeholders, including across borders, although regulatory harmonization across countries remains a challenge.
- Facilitate market entry of firms: Some fintech firms attribute the ability to access markets to their participation in a sandbox, but evidence is mixed. More commonly, sandboxes provide firms a better understanding of regulatory hurdles. It’s interesting to note, however, that according to some policymakers, many more fintechs have been supported by innovation hubs than sandboxes and accelerators combined.
- Foster partnerships: Sandboxes can help the development of partnerships between existing financial firms and fintechs, either directly—through links to accelerator-type initiatives or requirements that fintechs must partner with licensed firms to be eligible to join the sandbox—or indirectly, through external recognition of the association with the sandbox.
- Strengthen competition: Policymakers have reported mixed results when assessing if a sandbox has led to an increase in competition in their respective markets. A sandbox can help create room for competition, but on the flip side it raises questions of an unlevel playing field between firms in the sandbox and those outside. Regulators have tried to address this issue by increasing transparency in their operations and decision-making processes.
- Financial Inclusion: Although some sandboxes have an explicit mandate of financial inclusion, evidence is limited on the success of these initiatives in reducing barriers to inclusion. Currently there is little evidence that those sandboxes set up with the key objective of financial inclusion have achieved more to that end than sandboxes set up with just an innovation mandate.
- Enable fintech market development: Sandboxes by themselves are not a turnkey solution or a substitute for building effective, permanent regulatory frameworks to enable fintech. However, in the right setting, sandboxes are a valuable tool for enabling fintech by providing empirical evidence and operating within a broader strategy or set of initiatives.
- Build capacity within regulatory institutions: Sandboxes can help build regulator knowledge on fintech trends and innovations while providing a structured process to strengthen dialogue and interaction with the industry.
Additionally, our research has produced relevant information regarding:
- Market maturity and demand: For a sandbox to function effectively, it must meet existing market demand. In general, the local ecosystem must already have a functioning and mature entrepreneurial environment, including some local fintechs. In some cases, though, a market can be expanded through the entrance of foreign fintechs into the sandbox.
- Thematic Sandboxes: Evidence has shown that well-defined, thematic sandboxes can be effective in encouraging particular technologies or products to come to market. While about 60 percent of sandboxes are geared toward general fintech innovations, some have adopted specific themes, such as enhancing blockchain technology, innovations in insurance or payment systems, or digital authentication technologies. (See Figure 2)
- Design Considerations: No definitive relationship exists between the legal system and the efficacy of a regulatory sandbox, but feasibility assessments are a critical first step that policymakers must undertake before setting up any sandbox initiative—and, where possible, at periodic intervals afterward.
Figure 2: Sandbox themes by Region
Is it worth it?
So, is a sandbox worth the effort? The short answer is: it depends.
, however policymakers cannot always accurately predict market reactions and impacts from them.
Translating objectives into measurable indicators and targets to ensure that progress is tracked and assessed can be challenging. Simple quantitative metrics often used by sandboxes, such as the number of firms admitted into the sandbox, are not wholly useful dimensions for quantifying achievements or testing policy implications. Measuring intangible benefits—such as catalytic change among policymakers or the indirect impacts of a sandbox on national goals—are harder to compute but relevant for policymakers to make informed decisions.
data set can hopefully help regulators in their research and efforts to create the best sandbox according to their own circumstances.This