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U.S. ‘Regulatory Sandbox’ Aims to Accelerate Fintech Innovation

By Bill Camarda

To promote innovation in financial services, the U.S. government has announced that it is creating a “regulatory sandbox” for fintech companies, similar to those already established in the U.K. and several other key financial markets.

What Is a Fintech Regulatory Sandbox?


Sometimes also called “financial sandboxes,” regulatory sandboxes enable fintech innovators to temporarily receive relaxed, or flexible, regulatory treatment. This allows them to test new products, services, business models, or delivery mechanisms without instantly having to follow all the rules normally associated with these activities.1 Sandboxes also reduce the regulatory uncertainty that might otherwise limit the ability of fintech innovators to attract investors.2


Generally, the fintech startup and its regulators agree in advance on the scope of what will be tested: for example, how many consumers or transactions will be covered, and how long the test will continue.3 Regulators monitor the participants and collaborate to understand the new products and services, thereby being able to plan long-term regulation for these new categories of offerings. A fintech sandbox might, therefore, help regulators avoid the problems they’ve often encountered in regulating nascent financial innovations, helping them to gain earlier insight into how new financial products interact, thus avoiding unintended consequences.4


Why a U.S. Regulatory Sandbox Now?


Since 2015, the United Kingdom’s Financial Conduct Authority (FCA) has operated a pioneering regulatory sandbox for U.K. startups. Its executive director of strategy and competition, Chris Woolard, recently reported that the U.K.’s domestic fintech sandbox had collaborated with 70 fintech startups, and 90 percent of those in its first cohort have successfully brought products to market.5 In addition to the U.K., Australia, Hong Kong, Indonesia, Malaysia, Singapore, Thailand, Abu Dhabi, and other nations are implementing sandboxes, often with the goal of attracting entrepreneurs and building local ecosystems of fintech innovators.6 Those initiatives have led some observers to argue that the U.S. needs its own regulatory sandbox to avoid falling behind in fintech innovation.7


Overcoming Regulatory Fragmentation that Complicates Fintech Innovation


U.S. regulation of financial markets is fragmented across multiple federal and state agencies, which has made it challenging to establish a sandbox for the country.8 Now, however, the Consumer Financial Protection Bureau (CFPB) is working closely with the Commodity Futures Trading Commission (CFTC) to do just that, building on some of the work CFTC has already done in the commodities arena.9,10


The CFPB’s announcement follows a recent U.S. Treasury report on promoting financial innovation that committed that agency to working with other federal and state agencies to establish a unified U.S. regulatory sandbox.11 Signaling greater openness to fintech innovation, the CFPB had already issued a “No Action” letter to Upstart Network, a consumer lending platform that leverages artificial intelligence, machine learning, and alternative data sources to price consumer credit and automate borrowing.12 No Action letters offer some of the same protections and regulatory collaboration mechanisms that fintech sandboxes do.13


Some states have already become involved in jumpstarting regulatory sandboxes within their jurisdictions. Most notably, Arizona recently launched its own statewide fintech sandbox – which began taking applications on August 3rd – for startups operating in areas that would otherwise require a state license, such as consumer lending, mortgage lending, and money transmission. Arizona’s rules will allow approved fintech innovators to test new offerings with up to 10,000 customers for two years.14 The leader of Arizona’s project, Paul Watkins, has since been tapped by the CFPB to run the U.S. regulatory sandbox, as part of his new role leading the Bureau’s Office of Innovation.15


What Areas Will the U.S. Regulatory Sandbox Address?


Few details on the U.S. regulatory sandbox are yet available. However, the CFPB’s interim director, Mick Mulvaney, recently told the Wall Street Journal that Watkins’ work is likely to involve “cryptocurrencies, other financial technology based on blockchain, private currencies and microlending, or lending by individuals rather than institutions.”16


A key issue will be how U.S. regulators strike the balance between promoting innovation and protecting consumers. Other sandboxes have established procedures for periodic reporting on the progress of each company’s test, so regulators can learn quickly from experience and intervene if serious problems arise. Regulators and companies typically collaborate to identify potential risks up front and agree on safeguards. These might include higher capital requirements, thorough disclosure to consumers about risks (including disclosure that they are participating in a test), stronger cyber security, and possibly insurance protection for consumers.17 Other fintech sandboxes have also faced the challenge of establishing transparent and evenhanded rules for allowing companies into the program, in an attempt to avoid perceptions of favoritism.18


Following in the footsteps of the U.K. and other key financial markets, the U.S. will develop a regulatory sandbox in which fintech startups and regulators can work together to accelerate innovation in financial products, services, business models, and delivery mechanisms.

Bill Camarda - The Author

The Author

Bill Camarda

Bill Camarda is a professional writer with more than 30 years’ experience focusing on business and technology. He is author or co-author of 19 books on information technology and has written for clients including American Express Private Bank, Ernst & Young, Financial Times Knowledge and IBM.


1. “Regulatory sandboxes (video transcript),” Coursera;
2. “Regulatory sandbox lessons learned report,” Financial Conduct Authority;
3. “Regulatory sandboxes (video transcript),” Coursera;
4. “A US Regulatory Sandbox?” Hilary J. Allen, American University Washington College of Law;
5. “CFPB, CFTC Develop FinTech Regulatory Sandbox,” PYMNTS.COM;
6. “How Can Regulators Promote Financial Innovation While Also Protecting Consumers?” Pew Trusts;
7. “Arizona Becomes First U.S. State To Launch Regulatory Sandbox For Fintech,” Forbes;
8. “Regulatory Sandboxes Arrive in the States,” Allon Advocacy;
9. “CFPB Exploring Regulatory Sandbox, Mulvaney Says,” Bloomberg Law;
10. “U.S. Moves Ahead with Federal “Fintech Sandbox” — CFPB Announces Creation of Office of Innovation,” Robinson+Cole;
11. “A Financial System That Creates Economic Opportunities: Nonbank Financials, Fintech, and Innovation,” U.S. Department of the Treasury;
12. “CFPB Announces First No-Action Letter to Upstart Network,” CFPB;
13. “Ex-Treasury Official Touts the Promise of Fintech ‘Sandboxes’,” ThinkAdvisor;
14. “Regulatory sandboxes (video transcript),” Coursera;
15. “Bureau of Consumer Financial Protection Announces Director for the Office of Innovation,” CFPB;
16. “CFPB Wants to Help Launch New Fintech Products,” Wall Street Journal;
17. “Thinking Inside The Sandbox: An Analysis of Regulatory Efforts to Facilitate Financial Innovation,” RegTech Lab;
18. Ibid.

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