When confronted with new and untested technologies, progressive regulators around the World are departing from the sterile debate of simply regulation vs. deregulation and are looking for ways to enable new breakthrough solutions in regulated domains. A number of tools such as regulatory sandboxes and innovation hubs have been tested, especially in the domains of FinTech and blockchain, with the aim of having a real two way dialogue (including the possibility of live testing) between the innovator proposing implementation of a breakthrough technology and the responsible regulator.
In order to share best practice in this area, Startup Europe Comes to Silicon Valley (SEC2SV) will be organising a Transatlantic Policy Hack powered by Dell on regulatory innovation on 18 September in San Francisco, which will be followed by the Startup Nations Summit (SNS) in November in Tallinn. The SNS, the Estonian Presidency of the EU and the European Commission have proposed that policymakers from both inside and outside Europe will test the approach hands-on in the SNS Policy Hack in order to provide feedback and adapt the process to their own ecosystems.
In advance of the Policy Hack in September at Mind the Bridge, we are looking forward to starting the discussion and collecting inputs on what is being tested in the EU, North America and elsewhere in the World.
In the European Commission Communication on Startups and Scaleups, adopted in November 2016, the Commission stated that an enabling framework for regulatory sandboxes would be explored, with the aim of supporting the introduction of innovative technologies to the EU market. A regulatory sandbox creates a “safe space” in which businesses can test innovative products, services, business models and delivery mechanisms in the context of regulation, in collaboration with the regulators. The sandbox framework enables firms to manage regulatory risks during the testing stage. The sandbox is intended for testing new solutions, in real life situations, where potential consumer or user needs to be demonstrated, as well as the need to manage potential risks and to respect binding legal rules. Regulatory sandboxes are not about “de-regulation”, but rather an approach based on a two-way regulatory dialogue between an entrepreneur and an approachable regulator.
Startups, being smaller teams, may lack the experience to deal with complicated regulatory compliance. Among established firms, current structures may be unable to efficiently respond to new developments emerging from their innovation teams or take an overly risk averse approach due to broad regulatory concerns. Regulatory sandboxes are already considered to be a useful tool for areas such as FinTech, blockchain/DLT, data, municipal services, automated transport and drones. It is in the financial sector – due to its highly regulated nature – where sandboxes and the related innovation hub approach have primarily been tested. Some European supervisors set up dedicated teams and departments to support FinTech developments, using “innovation hubs” to provide guidance to innovative firms (regardless of their size) and help them understand regulatory requirements. Others also started more systematic monitoring of innovation by establishing a regular forum with the relevant stakeholders.
Finally, some are setting up regulatory sandboxes to work with pre-selected firms in testing innovative technologies. Sandboxes are mainly supervisory tools for firms and supervisors to explore how regulation should be interpreted and applied in light of a firm’s new solution, by running live tests. The sandbox framework enables ventures to manage regulatory risks during the testing stage, even though more solutions may be trialled later and potentially introduced to the market.
Existing financial sector regulatory sandboxes in the EU are in the Netherlands, Lithuania and the U.K. Similar steps are being considered in Sweden and in Portugal (in other sectors). Another example is that of the Monetary Authority of Singapore, who have a dedicated page and materials. We’d like to hear about what other jurisdictions (in North America?) are doing.