Scarinci Hollenbeck, LLC, LLCScarinci Hollenbeck, LLC, LLC

Firm Insights

What Is a Regulatory Sandbox and Can It Help Your Fintech Business?

Author: Scarinci Hollenbeck, LLC

Date: March 27, 2019

Key Contacts

Back

Government Agencies Are Increasingly Turning to the Use of Regulatory Sandboxes to Promote Innovation in Fintech While Maintaining Oversight…

Regulatory uncertainty remains the primary roadblock for the financial technology (fintech) industry and other disruptive business models that don’t fit neatly into existing regulatory structures. The good news is that government agencies are increasingly turning to the use of “regulatory sandboxes” to promote innovation while maintaining oversight.    

What Is a Regulatory Sandbox?

A regulatory sandbox is supervised yet flexible regulatory framework that allows startups and other businesses to experiment with new technology, products, business models and other innovation that may exist at the fringes or even outside of the existing regulatory framework. Regulatory sandboxes can take a variety of forms. The common thread is that businesses and regulators maintain a continuing dialogue, which is then used to craft regulatory actions that strike the right balance between enabling innovation and managing risk.

In cases where businesses participating in a sandbox, they often are eligible to obtain waivers of specified statutes and rules under certain conditions, such as not being required to obtain licensure for a designated period of time. While rigid regulations may not exist, regulators don’t take a completely hands off approach; regulatory sandboxes still have eligibility requirements, operating rules, reporting mandate, and other safeguards under which businesses must operate. Businesses must also typically apply with consumer fraud and criminal laws.

For businesses, regulatory sandboxes make it possible to test out innovative products and services in the real world and reduce regulatory barriers and costs. For regulators, the framework can be used to gather valuable information that can then be used to inform future regulatory action.

Who Is Using Regulatory Sandboxes?

The majority of existing regulatory sandboxes involve the fintech industry. Because the body of financial regulations was largely adopted decades ago – in many cases prior to the Internet revolution – the fintech regulatory regime has been slow to adapt to use of technology in financial products and services. Regulators are seeking to change that.  As regulators work to determine how to best supervise financial technology innovators, regulatory sandboxes are filling the gap.

The United Kingdom launched the first prominent regulatory sandbox for this space in 2015. At the beginning of 2018, there were more than 20 jurisdictions actively implementing or exploring the concept, according to United Nations Secretary-General’s Special Advocate for Inclusive Finance for Development.

In February of this year, Wyoming became the second state in the U.S. to establish a regulatory sandbox for the fintech industry. Arizona created one last March. Under Wyoming’s Financial Technology Sandbox Act, businesses can test innovative financial products and services, including those involving blockchain and cryptocurrencies, for up to two years before they need to seek formal licensure.

On the federal level, regulators have not yet adopted regulatory sandboxes. The Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), and the Office of the Comptroller of the Currency (OCC) have all considered the concept of sandboxes, but none have moved past the proposal stage.

In December 2018, the Bureau of Consumer Financial Protection (CFPB) issued proposed revisions to its 2016 Policy on No-Action Letters and proposed a BCFP Product Sandbox. Among other changes within the proposal, the Bureau also proposed to create a Product Sandbox. Under the proposal, the CFPB would provide approvals pursuant to one of three statutory safe harbor provisions in the Truth in Lending Act, the Equal Credit Opportunity Act (“ECOA”) and the Electronic Funds Transfer Act. In addition, the Bureau will provide exemptions by order from certain statutory provisions in ECOA, the Home Ownership and Equity Protection Act and the Federal Deposit Insurance Act. The approval relief and exemption relief would be provided for two years. In contrast to recipients of no-action letters, participants in the sandbox “would be immune from enforcement actions by any Federal or State authorities, as well as from lawsuits brought by private parties.”

Interestingly, this proposal for a regulatory sandbox is to regulations largely adopted in the last 20 years. 

The proposal is somewhat controversial.  The CFPB Attorneys general from 21 states are opposing the CFPB’s proposal. They maintain it “would erode critical consumer protections under the guise of fostering innovation in the consumer financial marketplace.” According to New York Attorney General, Letitia James:

The CFPB was created to protect consumers and ensure the financial stability of this country. These proposed rule changes would have the complete opposite effect – putting blind faith in the very industries and services they are supposed to regulate and correct. At a time when so many Americans are struggling to make ends meet, the CFPB should be focused on protecting consumers, not advancing regulations that could hurt them.

The comment period on the CFPB’s proposal closed in February. However, the state AGs have called on the CFPB to rescind the proposals and conduct a more formal rulemakings subject to a notice and comment period under the Administrative Procedures Act. 

Opportunities for Fintech Startups

The fintech industry is poised to rapidly expand in the coming years, with the creation of regulatory sandboxes predicted to help fuel growth. Nonetheless, it is important for fintech businesses to recognize that additional compliance burdens will likely remain, even as the industry becomes more mainstream. As always, businesses are encouraged to consult with experienced counsel regarding how the many ongoing proposals to amend financial regulations may impact their business plans.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.

No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.

Scarinci Hollenbeck, LLC, LLC

Related Posts

See all
The Current Administration's Proposals for the Financial Services and Banking Industries Will Affect Your Business post image

The Current Administration's Proposals for the Financial Services and Banking Industries Will Affect Your Business

Since his inauguration two months ago, Donald Trump’s administration and the Congress it controls have indicated important upcoming policy changes. These changes will impact financial services policies and priorities. The changes will particularly affect cryptocurrency, as well as banking rules and regulations. Key Regulatory Changes in Cryptocurrency For example, in the burgeoning cryptocurrency business environment, […]

Author: Dan Brecher

Link to post with title - "The Current Administration's Proposals for the Financial Services and Banking Industries Will Affect Your Business"
Tips for Commercial Landlords Impacted by Wave of Retailer Bankruptcies Part 1 post image

Tips for Commercial Landlords Impacted by Wave of Retailer Bankruptcies Part 1

The retail sector has experienced a wave of bankruptcy filings over the last year. Brick-and-mortar businesses in financial distress include big-name brands like Big Lots, Party City, The Container Store, and Vitamin Shoppe. When large retailers seek bankruptcy protection, they are not the only businesses impacted. Landlords can be particularly hard hit. While commercial landlords […]

Author: Brian D. Spector

Link to post with title - "Tips for Commercial Landlords Impacted by Wave of Retailer Bankruptcies Part 1"
How Understanding Bankruptcy Trends Can Benefit Your Business post image

How Understanding Bankruptcy Trends Can Benefit Your Business

The bankruptcy legal landscape presents both challenges and opportunities for businesses navigating financial distress. Understanding current bankruptcy trends can help businesses make more informed and strategic decisions. Corporate Bankruptcy Filings Trending Upwards Bankruptcy filings continued to trend upwards in 2024. According to statistics released by the Administrative Office of the U.S. Courts, personal and business […]

Author: Brian D. Spector

Link to post with title - "How Understanding Bankruptcy Trends Can Benefit Your Business"
SEC Takes Actions Against Issuers for Failure to File Form D post image

SEC Takes Actions Against Issuers for Failure to File Form D

In December, the U.S. Securities and Exchange Commission (SEC) announced charges against two privately held companies for failing to file a Form D notice, which is generally utilized for exempt securities offerings. Here, the SEC’s enforcement sends a strong message: compliance with regulatory requirements is not optional and failure to comply can have significant consequences. […]

Author: Kenneth C. Oh

Link to post with title - "SEC Takes Actions Against Issuers for Failure to File Form D"
Redefining Labor Relations: NLRB's Pivot from Abruzzo’s Memoranda post image

Redefining Labor Relations: NLRB's Pivot from Abruzzo’s Memoranda

On February 14, 2025, the Office of General Counsel (OGC) of the National Labor Relations Board (NLRB) under Acting General Counsel William B. Cowen issued Memorandum 25-05, “New Process for More Efficient, Effective, Accessible and Transparent Case handling.” The Memorandum rescinds nearly all of the Memoranda issued by his direct predecessor, Jennifer Abruzzo, setting the […]

Author: Matthew F. Mimnaugh

Link to post with title - "Redefining Labor Relations: NLRB's Pivot from Abruzzo’s Memoranda"
What Are FIRPTA Withholding Requirements? post image

What Are FIRPTA Withholding Requirements?

If you purchase real property from a foreign person or entity, you may be required to withhold taxes from your payment to the seller under the Foreign Investment in Real Property Tax Act (FIRPTA). The federal tax law is designed to ensure that foreign sellers pay any applicable capital gains tax on profits realized from […]

Author: Jesse M. Dimitro

Link to post with title - "What Are FIRPTA Withholding Requirements?"

No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.

Sign up to get the latest from our attorneys!

Explore What Matters Most to You.

Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.

Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.

Let`s get in touch!

* The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.

Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!

Please select a category(s) below: