States Embrace Fintech Sandbox Concept as Federal Action Stalls

By Sara Merken

States looking to attract fintech companies are moving to create regulatory sandboxes, a concept that has gained traction internationally even as U.S. federal regulators have been slow to embrace it.

Arizona is the first state to announce plans to develop a sandbox, which allows companies to experiment with innovative products and services in a controlled environment without complying with certain regulatory requirements. Lawmakers and regulators in several states have signaled they may follow.

Current regulatory tools “are just inadequate for the speed of the change that we’ve come in to,” Jo Ann Barefoot, a fintech consultant and former deputy U.S. comptroller of the currency, told Bloomberg BNA.

The Race Is On

Draft legislation in Arizona would allow fintech companies limited market access to test innovations without having to first achieve full status as a state-regulated financial institution. Up to 5,000 consumers would be able to use each product or service being tested under the state’s sandbox framework.

The bill, which hasn’t been formally introduced yet, would require certain consumer protection safeguards, such as making the companies clearly disclose information about the innovation and the sandbox, Arizona Attorney General Mark Brnovich told Bloomberg BNA. Companies would apply for sandboxes on a 12-month basis with the possibility for extensions.

The goal is to “reduce the regulatory and licensing burdens that stand in the way of innovation,” Brnovich said.

In Illinois, lawmakers hope to move a bill in the next legislative session that will “mirror” Arizona’s approach, Bryan Schneider, Secretary of the Illinois Department of Financial and Professional Regulation, told Bloomberg BNA.

Arizona “wants to be first, we’d like to be first, we’ll have a race. I think competition is a good thing,” Schneider said.

Sandboxes can bring benefits to both industry and regulators. The formal, concrete structure of a fintech sandbox, as opposed to informal meetings between regulators and companies, gives the industry more definition in complying with regulations, Schneider said.

Regulators can get an in-depth look at the innovations and more quickly get up to speed with the changing technology, Barefoot told Bloomberg BNA.

Regional Cooperation

To be successful, however, states are likely going to have to cooperate rather than compete, according to Jackson Mueller, associate director for the Center for Financial Markets at the Milken Institute, a Washington, D.C., think tank.

Individual state sandboxes with differing guidelines could end up confusing companies and presenting more complications than benefits, Mueller told Bloomberg BNA. He is concerned that several states could “jump on the bandwagon” at once, and offer different types of sandboxes. Regional efforts could curb this problem, he said.

Six New England states are considering ideas for implementing a regional sandbox, John Beccia, general counsel and chief operating officer of Boston-based payments technology company Circle, told Bloomberg BNA. Beccia is part of a group of industry and academic representatives that began discussing the idea with bank commissioners from the six states about a year ago.

The group’s initial focus is multi-state action that doesn’t require a legislative fix, although a number of the individual states do have legislation in the works, he said.

The regional sandbox could allow companies to offer products in a beta phase without being a fully licensed money transmitter, while still ensuring certain protections for consumers, Beccia said. Another idea is for state offices of innovation to share resources and expertise, and develop common procedures for reviewing fintech firm applications, he said.

Federal Regulators Hesitate

The interest in sandboxes in the states is more in line with what’s happening abroad than at the federal level. Countries the U.K. and Singapore have embraced the idea of regulatory sandboxes although U.S. regulators remain skittish.

Gerald Tsai, director of applications, enforcement and fintech at the Federal Reserve Bank of San Francisco told an American Bar Association gathering Sept. 15 that he doesn’t see sandboxes as “something we in the United States are going to be using much in the near future.”

Tsai’s comments came one day after the Consumer Financial Protection Bureau issued its first no-action letter to an online lending platform under its “Project Catalyst” designed to support new financial technologies. But the agency appears to be going it alone among federal financial regulators—at least for the time being.

Rep. Patrick McHenry (R-N.C.) has yet to introduce a revised version of his 2016 bill that would have created a mechanism for innovators to get some regulatory relief in the early stages of product development and marketing. The bill would create regulatory sandboxes at several financial agencies.

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To contact the editor responsible for this story: Seth Stern at

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