More States Establishing Regulatory Sandboxes for Fintechs
Regulatory sandboxes are increasingly being used across the United States as a way to foster innovation, as they provide opportunities for companies to test new products or offerings before going through the full regulatory process required for widespread distribution or adoption. Many states are now looking to regulatory sandboxes as a way to spur advances in the fintech sector.
Florida and West Virginia have recently passed legislation to offer fintech sandboxes, joining Arizona, Nevada, Utah, and Wyoming as the only states in the U.S. that offer such a solution.
“The market is changing and people are asking for different things in terms of financial services,” said Carl Memnon, chief operating officer of fintech startup Grain, as reported in American Banker. “The pandemic has exacerbated the need for mobile solutions.”
The goals for sandbox participants are similar across states: to persuade companies providing innovative financial products and services to bring their business to the state. This includes cryptocurrency, money transmission, and peer-to-peer lending services.
Firms are not required to have a license to run limited tests on consumers, but they are subject to consumer protection laws and, upon applying, are required to outline how they will protect consumers. Once accepted, firms must keep detailed records and report to the supervisory agency.
“Companies have to open up their books so we can run checks to test their progress and make sure they are consistent with Arizona law,” said Mark Brnovich, the state’s Attorney General. “We’re trying to reduce those regulatory barriers and eliminate companies going through various agencies to get approval to test a product that may or may not be successful.”
Though Arizona is currently the only state with active sandbox participants, West Virginia is the first to have fintechs apply through the Nationwide Multistate Licensing System, so companies can easily apply for licenses in other states upon exiting the sandbox.
“When we discovered the sandbox, we saw it as an opportunity to validate our idea in a controlled environment with guidance and oversight of a regulatory authority,” Memnon said.