I’ve written before about how i think regulatory “sandboxes” for financial services innovation serve a useful function and, in absence of federal action within the U.S., states should establish them.
Since that point Arizona passed legislation to determine a sandbox, other states try , and there are continuing and active discussions in my home state of Delaware around the way to support financial services innovation.
During my testimony at a Maryland Financial Consumer Protection Commission hearing on cryptocurrency, I took the chance to offer a plug for regulatory “sandboxes” because i feel crypto and blockchain projects are excellent candidates for such programs.
With that in mind, I read with great interest a recent speech by Maria Vullo, the Superintendent of the ny Department of monetary Services.
She touched on variety of various topics across the financial services landscape (including the state’s BitLicense regulations) and therefore the speech is essentially a rebuke of the present administration, its policies, and its overall regulatory worldview. It’s a superb and provocative speech and that i urge everyone to read it.
However, one passage, especially , caught my attention:
“There are those that argue that the mere utilization of monetary technology alone somehow grants them an exemption from the principles that banks and other financial institutions follow to manage risk and protect consumers. I even have been highly vocal on myriad fronts in my opposition to the present view, which might permit any company that calls itself a fintech to interact during a sort of regulatory arbitrage, either with no regulator or during a so-called sandbox.”
She followed with this memorable line:
“A sandbox is where toddlers play. Adults play by rules and if you engage in banking activities, meaning you’re responsibly regulated so as to guard the purchasers . Period.”
I don’t afflict the general sentiment of Vullo’s statement (and should note than Jan Owen, head of the California Department of Business Oversight made an identical remark a couple of weeks later): the financial services industry is very regulated for a reason, and therefore the responsibilities of a financial services company should be above that of a photo-sharing app. (I stole this line from Circle co-founder Jeremy Allaire.)
Where I afflict Vullo is within the representation of so-called “sandboxes” as a no-man’s land of unregulated financial services offerings and therefore the companies who want to debate new ways of testing financial technologies as “toddlers.”
No one serious is asserting that sort of construct — and if they’re , they ought to stop. And while many of those companies have too many of us riding scooters, they aren’t toddlers.
Her description of “sandboxes” sounds more like quicksand. It’s dangerous. In my view, it doesn’t accurately reflect what market participants need or desire — and it doesn’t accurately represent what governments are implementing round the world.
I’ve come to the conclusion that the term “sandboxes” may be a bad one. It reinforces the visual that Vullo portrays in her speech and it portends a scarcity of seriousness that’s needed when discussing about financial services.
I have stolen the term “Greenhouse” from Rob Morgan and my former colleagues at the American Bankers Association. i feel it more accurately represents what’s being attempted. Namely, it’s an area that financial technology solutions are often safely seeded, fed, and controlled.
Those that grow to potential are moved to the important world. people who fail are filled in with new seeds. and therefore the weeds are hamper .
Fundamentally, these greenhouses aim to alleviate the strain between innovation and technology. As technology has (for the foremost part) finished its disruption of unregulated industries, it’s now moved on to the regulated ones.
Testing is inherently necessary for the event of excellent technology. Disallowing it inhibits innovation, increases the prospect of poor technology, and pushes innovators into gray areas that provide little or no transparency for regulators and makes fulfilling their mandate harder .
Rather than a “trust but verify” model whereby the regulator accepts an application, allows the business to work , and checks compliance after operations begin, a greenhouse allows for the answer to be examined in real time.
A few months ago, the united kingdom Financial Conduct Authority published a report detailing its “lessons learned” from experiences over the past several years.
There are certainly problems within the implementation and execution of such programs: Jackson Mueller of the Milken Institute has opined on a number of these issues, which include: picking winners and losers, maintaining fairness, finding solutions that really need such a construct so as to try to to testing, etc.
Primarily, however, it appears the exercise promotes a two-way conversation between regulators and industry, forces government to form guidance easier to seek out and understand, and helps companies lower the value of compliance or quickly pivot faraway from solutions which may not work, avoiding the waste of your time and precious investment dollars.
These are all things we should always be promoting. regardless of what we call it.