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Fintech Regulatory Sandbox: Sign Me Up!

Written by: 
Richard C. Fay, CPA

Sandbox, accelerator, incubator—the idea behind these organizations can be very attractive. Generally speaking, they have something that early stage start-ups want. Whether it be access to capital, expertise, or data on which to test and demo a product, it’s not hard to see why companies are drawn to them.

But one feature I’d never seen marketed by these organizations (for what I assumed was good reason) was regulatory assistance, until I researched and realized fintech regulatory sandboxes were doing exactly that—creating a powerful new tool for fintech entrepreneurs.

When I first heard the term regulatory sandbox, on the surface it came across to me as a poor attempt for regulators to keep an eye on rapidly changing, emerging technologies, while not contributing much to the relationship. It wasn’t under two conferences featured the topic—and multiple inquiries on the idea crossed my desk—that I decided to pursue it further.

In 2018, Arizona became the first state to enact a fintech regulatory sandbox. Per the Arizona Attorney General's Office: “the sandbox will allow entrepreneurs to give new ideas a chance in the real market without incurring the regulatory costs and burdens that would otherwise be imposed. It also includes a reciprocity provision permitting the Attorney General to enter into agreements that would allow Arizona participants to operate in other jurisdictions that establish similar programs.”

In addition to Arizona, several foreign countries have created regulatory sandboxes, and there is a bill in the U.S. Congress that would create one at a federal level.

The definition from the Arizona Attorney General’s Office is appealing, and the benefits can be long lasting. Fintech entrepreneurs spend significant time identifying industry needs, raising and preserving cash, developing technology, and ultimately bringing their product to market. Despite having the utmost confidence in their product, they often appear to struggle when getting in the door of a prospect to begin signing their first customers.

Why not, then, use a regulatory sandbox to make your product that much more appealing? With the significant amount of time spent by entrepreneurs gaining market acceptance, it could be cost effective to bring your technology to a regulatory sandbox and have one more feature to assist in your pitch.

Although the idea of presenting your early stage technology to regulators may be daunting, the benefits could easily make the efforts worthwhile. Consider all of the time spent trying to land that first enterprise customer—could being able to promote regulatory approval be the deciding factor? If the answer is “yes,” you should consider if a fintech sandbox is a way to differentiate your product at a critical early stage of development.

For more information on the topic, or to discuss other early stage technology resources, contact Richard C. Fay, CPA, Audit Senior Manager, at rfay@wolfandco.com or 617-428-5466.