Arizona Becomes First Sandbox State for Fintech Products

Brenna Goth Phoenix Staff Correspondent

By Brenna Goth

Arizona became the first state to greenlight a program lifting some regulations for fintech companies testing new products and services, after Gov. Doug Ducey (R) signed a “regulatory sandbox” bill into law March 22.

The sandbox idea, implemented in dozens of countries throughout the world, aims to give businesses a controlled area to try innovations without burdensome requirements. Some consumer advocacy groups, though, worry customers could be on the hook for predatory or failed fintech products.

Other states could soon follow Arizona’s lead, with similar legislation already introduced in Illinois and being considered elsewhere. Federal regulators such as the Consumer Financial Protection Bureau have considered other programs to encourage financial innovation.

Ducey said Arizona recognizes fintech will “fundamentally transform” industries like banking and data analytics before he signed H.B. 2434 at a Phoenix tech innovation summit.

“We’re going to be the first state in the nation to fully embrace it,” he said.

‘Building From Scratch’

Arizona’s regulatory sandbox will allow financial companies to introduce products or services temporarily without a license or other authorization. Instead, they will apply to the state Attorney General’s Office to enter the program.

State Rep. Jeff Weninger (R) said he sponsored the bill to reduce barriers for entrepreneurs. The Arizona Attorney General’s Office drafted it.

“We think this is a bold statement for Arizona,” Weninger told tech summit attendees.

Companies must prove their concept is innovative and provide a plan to test and monitor it as well as protect consumers. The test period lasts two years with the possibility for a one-year extension.

Up to 10,000 Arizona residents can use the product or service unless the companies show they have the capitalization and risk-management capacity to handle more. The law also sets caps on consumer loans and other transactions.

The legislation drew support from entrepreneurs and financial technology companies. Every state should consider similar programs, said Will Munsil, who works in legal and strategic projects for global blockchain alliance Sweetbridge.

“Arizona got there first,” he told Bloomberg Law.

The new law will go into effect 90 days after the state Legislature adjourns this spring. That gives the state time to plan its implementation, Attorney General Mark Brnovich told Bloomberg Law.

Consumer Protections?

Questions remain about how sandboxes should function at the state level.

Federal regulators have been cautious about testing concepts with real consumers, said Jo Ann Barefoot, CEO of Barefoot Innovation Group, a fintech consulting group.

Sandboxes and other innovation programs can help regulators work more nimbly with a rapidly-changing industry, Barefoot told Bloomberg Law. But states also need a plan for dealing with bad actors and helping harmed consumers, she said.

“The regulator needs the ability to pull the plug on it,” Barefoot said.

Local and national consumer groups said they don’t see enough protections in Arizona’s new law. Several groups raised concerns that lightly-regulated fintech innovation could include predatory lending practices.

“Let’s stop and think about this,” Kelly Griffith, executive director of the Arizona-based Center for Economic Integrity, told Bloomberg Law. “Who is going to get run over?”

Others questioned why the sandbox program doesn’t fall under Arizona’s financial services regulator instead of the state attorney general. Companies could avoid oversight with dangerous products, Lauren Saunders, associate director of the National Consumer Law Center, told Bloomberg Law.

“Consumers are not a sandbox toy to be played with,” she said.

Brnovich said the Arizona Consumer Fraud Act still applies to companies under the sandbox program. He also said that insurance companies were made ineligible for sandboxes in response to concerns from consumer advocates.

Arizona to Work With Feds, Other States

Going forward, Arizona will tackle other sandbox issues such as working with the federal government and other states, Brnovich said.

Brnovich said his office will be asking the federal government for waivers to help facilitate the state’s sandbox program. It will also work on reciprocity agreements with other states, he said, so companies can test products in multiple places.

How fintech products and services will navigate both federal and state regulations remains to be seen, said Jackson Mueller, associate director at the Milken Institute’s Center for Financial Markets.

Other states could follow Arizona in implementing a sandbox, but differing regulations could complicate the landscape, he said.

“I don’t think that’s helpful in how we address state-by-state inconsistencies,” he said.

To contact the reporter on this story: Brenna Goth in Phoenix at

To contact the editor responsible for this story: Michael Ferullo at

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