The sandbox paradox

In recent years, “regulatory sandboxes” have gained a great deal of attention from both regulators and regulatory scholars. Regulatory sandboxes are closed testing environments where specific firms are able to experiment with new and innovative business models or products with reduced regulatory burden or expedited regulatory decisions. These sandboxes are perhaps most prevalent in the field of financial technology, often referred to as “FinTech.” Singapore, Hong Kong, Australia, the United Kingdom, and several other countries have already implemented regulatory sandboxes aimed at promoting the creation and development of FinTech. In 2018, Arizona created the first financial regulatory sandbox within the United States. Regulatory scholars have a tendency to support or defend regulatory sandboxes as a way to promote entrepreneurialism and innovation within the financial sector while still keeping mechanisms in place for consumer protection and regulatory oversight. Opponents of sandboxes tend to focus on the potential risk to consumers who use services being tested in the sandbox. However, there is a third group who are impacted by regulatory sandboxes, the competitors of firms in the sandbox. By definition, regulatory sandboxes grant certain advantages to certain firms without extending those same privileges to other firms. Governmentally granted advantages are an aspect of regulatory sandboxes that has received relatively little attention from regulatory and policy scholars. The goal of this paper is to examine the nature of regulatory advantages conveyed by sandboxes, consider the possible risks and costs associated with them, including the potential to distort the market and incentivize cronyism, and propose best practices that policy makers can use to mitigate those costs. While subject to change the anticipated plan of the paper is as follows: Part I of this paper would examine the current regulatory sandboxes that exist in various jurisdictions, both in and outside the United States, and the economic privileges that they create for the approved firms. Part II of this paper would analyze these economic privileges in greater detail. It would discuss the potential costs associated with this economic privilege. Part III would discuss how this economic privilege could lead to harms, including favoritism, harm to competitive equity, cronyism and corruption in the application process or in the regulatory oversight. Part IV would consider some of the ways to mitigate these potential costs and the risk of cronyism as well as establish best practices that regulators could follow to minimize this risk as much as possible.