Fintechs Can Now Jump Into Arizona’s Innovation Sandbox

By Lydia Beyoud

Great expectations await the Aug. 3 launch of the nation’s first state-level regulatory sandbox in Arizona. Sandbox supporters hope the project will position the Grand Canyon State as an innovation hub for financial technology and prove lighter regulation and consumer protection can coexist.

Whether fintech applicants flock to Arizona will be the sandbox’s first test.

Arizona Attorney General Mark Brnovich’s office anticipates several applications in the coming weeks, and is devoting multiple attorneys and staff members to the project in anticipation of steady work. “I think there’s a point at which we would stop accepting applications if we were inundated with them,” Assistant Attorney General Evan Daniels told Bloomberg Law. “That would be a good problem to have, in our view.”

But the real proof is likely months or years away as companies look to leap state licensing hurdles. The expectation is that the sandbox will alleviate some of the state licensing costs startups face when entering highly regulated industries, including net worth and bond requirements, while also retaining a level of consumer protection oversight.

Sandbox participants will get a two-year window to deploy new products, services, or technologies such as loans, investment advice, money transmission, or distributed ledger technologies on a limited number of Arizona consumers.

Likely applicants include Sweetbridge Inc., an international nonprofit building blockchain protocols for supply chains and commerce, which got its start in Phoenix.

“We think it’s important to note this is one of the best paths out there for real customers for blockchain companies in the U.S.,” Will Munsil, an attorney and strategist for Sweetbridge, told Bloomberg Law.

Arizona’s business community sees the project as a continuation of other state efforts to entice new technologies and business models to the Grand Canyon State, including self-driving car trials and relaxing restrictions on Airbnb rentals.

“We believe there are enormous advantages to be the first mover in something that I sense in a few years every state in the country will either be seriously considering” or already have on the books, Glenn Hamer, president and CEO of Arizona’s Chamber of Commerce and Industry, told Bloomberg Law.

Prep Work

Brnovich’s office and state business groups have held dozens of meetings to encourage applicants since March, when the legislation creating the sandbox was enacted, they said.

A handful of offshore companies have expressed interest in entering the U.S. market through Arizona’s sandbox, Darryn Jones, vice president of business development at the Greater Phoenix Economic Council, told Bloomberg Law.

“There is significant interest,” said Jones, who added that there would be a demand for new fintech products to serve Arizona’s sizable immigrant and underbanked populations.

Protecting Consumers

Consumer advocacy groups remain skeptical that the attorney general’s office will be able to strike the right balance.

A coalition of Arizona-based consumer groups asked Brnovich’s office in a July 24 letter to only permit loans to be made through the sandbox under the terms of the state’s consumer lender law. They also asked for a prohibition against car title loans or other “predatory loan” products using the sandbox to avoid licensing requirements.

Daniels said the AG’s office has crafted the sandbox toward ensuring that the state’s existing consumer protections would be preserved. “Our Consumer Fraud Act still fully applies,” as do state interest rate caps and other existing consumer protection statutes, Daniels said.

Sandbox advocates said they hope success in Arizona could help overcome skepticism of consumer advocates and some state regulators.

“When they see these companies have scaled in our market, we’ve maintained proper protocols for consumer protection, and we’ve also supported innovation, you can start to answer those questions and it becomes less anecdotal,” Jones said.

Moving the Needle

Others question the impact a small state like Arizona’s could have on the fintech market. “I don’t know that there’s going to be a huge rush to Arizona for people who otherwise wouldn’t have a need to be there,” Brian Korn, co-chair of Manatt, Phelps & Phillips LLP’s financial services group in New York, told Bloomberg Law.

“They’re not making it that much easier to obtain a lending license” and most consumer lenders waive into the state through a federal charter, a bank partner, or make loans under Arizona statutes that don’t require a license, Korn said.

But sandbox supporters said Arizona could inspire other states to follow its lead.

“I think we want to remind other states how much economic potential can be unleashed when states partner in innovation rather than allowing the federal bureaucracy to be the be-all and end-all of the regulatory space,” Munsil said.

To contact the reporter on this story: Lydia Beyoud in Washington at

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

Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.