Regulatory Sandboxes for Blockchain
Regulatory sandboxes are key to successful and rational blockchain adoption at the governmental level. Across the world, whether it’s the FCA in the UK or the Bahrain FinTech Bay, regulatory sandboxes have proved popular testing grounds for blockchain-based applications, in particular crypto-assets in regulated financial activities. Sandboxes present an opportunity for firms to demonstrate and improve the various benefits of their proposed innovative services. Additionally, this allows the regulator to better identify the risks posed by the new technology and assess the adequacy of its regulatory approach, including enforcement and supervision activities.
One year on from the first edition of GovChain Research, there is an even greater variety of sandboxes across different jurisdictions, clearly demonstrating the political will for thriving national ecosystems. As identified by GovChain Research, government support for sandboxes helps ‘mitigate regulatory uncertainty and promote innovation’. For example, the proactive Monetary Authority of Singapore (MAS) has launched a regulatory sandbox programme, as part of its long-term “Smart Nation” vision, which is spearheading an array of policies and initiatives to develop its FinTech ecosystem.
In the U.S., most initiatives are occurring at the state-level, as seen in Arizona and North Carolina. This suggests that, following advances made by Wyoming and Delaware, other states are now looking to enact policies to make their regions more attractive to innovation.
In Europe, while the FCA’s sandbox remains world-leading, other European countries are attempting to catch up. For example, the French government, together with the private sector, has initiated Le Swave, an innovation platform dedicated to FinTech businesses. Further, the Spanish Banking Association has set up its own regulatory sandbox, thanks to the Spanish Government’s approval of the Digital Transformation of the Financial Sector law, which included the creation of a sandbox as well as ways to work with blockchains and cryptocurrencies.
International Collaboration
Beyond national developments, a key trend observed among regulatory sandboxes is the use of international forums for collaboration. The GovChain Research recommended that jurisdictions ‘should look to participate in global forums, such as the FCA-led Global Financial Innovation Network, where they can share best practice and collaborate on common challenges or policy questions.’ Following this, there has been a rise in initiatives to facilitate cross-border collaboration. For example, the European Union recently launched the European Forum for Innovation Facilitators (EFIF), a platform for supervisors to meet regularly to share experiences from engagement with firms through innovation facilitators (regulatory sandboxes and innovation hubs), to share technological expertise, and to reach common views on the regulatory treatment of innovative products, services and business models.
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The Bank for International Settlements (BIS) meanwhile, which fosters cooperation between central banks, launched its own Innovation Hub. The Hub’s work reflects the innovation priorities of the central bank community and which could be scaled up through international cooperation. Topics under consideration for the work agenda include central bank digital currencies, global stablecoins, payment innovations, the impact of big tech on financial intermediation, RegTech and SupTech, fast-paced electronic markets, and the digitalisation of trade finance.
Other global developments include the International Organisation of Securities Commissions (IOSCO) establishing a network to facilitate exchanges among members on their experiences regarding FinTech developments, including sandboxes, and the G20 assessing the need for a G20 FinTech Working group, which would establish regulatory principles to enable better cooperation of the FinTechs and the banks, provide best practices for the establishment of financial regulatory sandboxes and government-led investment and cooperation schemes.
Sandboxes are becoming more and more popular
These initiatives suggest most governments are placing innovation and a friendly regulatory environment high on their agendas. There is a wide variety of sandboxes now available, which presents a great opportunity for firms to test use cases, including those based on blockchain technology.
However, a sandbox alone will not make a jurisdiction the destination of choice. As recommended in our 2019 research, sandboxes need to be supported by other policies, such as ‘adequate levels of investments and continuous dialogue through public-private partnerships’. As always, successful blockchain adoption will most likely occur through a combination of rational policies, including but not limited to regulatory sandboxes. A clear plan and vision at the government level is necessary to ensure the growth of a thriving blockchain ecosystem.
Author: Victor Chatenay
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