The Next Wave of Innovation Starts in Sandboxes

The Next Wave of Innovation Starts in Sandboxes

When laws and regulations are created, they often don’t consider new businesses and products that have yet to be contemplated. Twenty years ago, it would have been nearly unthinkable that nearly every American would have a cell phone, let alone be able to use it to send money across the world or use it to pay for groceries in the checkout line.

To continue to spur the creation of innovative businesses and products, many states have begun putting in place sandboxes that allow temporary custom regulatory frameworks. Sandboxes allow flexibility in regulatory structures to let businesses and regulators work together to form new rules that better fit these products while promoting the growth of jobs and opportunities through new and innovative businesses.

So far, there are 18 active regulatory sandboxes in the United States across a variety of industries ranging from financial technology, insurance, and legal services. All sandboxes share some common features of promoting regulatory flexibility, but they are often structured in different ways. In the new report from the Pelican Center for Technology and Innovation, four sandboxes have been identified as model sandbox structures. These are Arizona and West Virginia’s financial technology sandbox, Hawaii’s digital currency sandbox, and Utah’s legal services sandbox.

These sandboxes have proven successful not only in attracting participants but also having businesses join which provide products and services which are often sorely needed by consumers. Some examples are businesses that help people access their paycheck sooner to avoid payday loans, low-cost digital banking services and helping individuals deal with past legal issues affordably.

A key part of successful sandboxes is making it the job of regulators, rather than the company, to determine where regulatory flexibility can be granted. Often, companies who are interested in joining a sandbox are small and haven’t built out a legal team. They are also more focused on getting their product off the ground and in the hands of consumers. Meanwhile, regulators have an intimate working knowledge of a state’s legal structure and can more easily determine where a new product might run into regulatory hurdles and need flexibility.

Similarly, states that provide easily accessible information to potential applicants have seen far more success. Examples include easily searchable websites that explain how the sandbox works and how a company can navigate the application process. Many successful sandboxes also have regulators who heavily market the sandbox to potential participants, increasing applicants and eventually investment to their state. By contrast, many of the sandboxes without participants lack a website let alone an application process.

Year after year, the number of state sandbox programs continues to grow. This has led to an incredible opportunity for the sandboxes to offer reciprocity agreements that let sandbox businesses enter into new markets while still offering the same regulatory flexibility and consumer protections that a single state sandbox sets up.

The creation of sandboxes isn’t enough to spur the next wave of innovation. States must look to each other to find best practices in the formation and management of sandboxes to ensure the opportunity for the next generation of innovative entrepreneurs to start their businesses without having to cut through unrelated regulatory hurdles that stifle the American dream.

Click here to read the full report

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