Regulatory sandboxes give states an edge attracting innovation and investment

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The latest edition of the Competitive Enterprise Institute’s 10,000 Commandments, an annual report on the federal regulatory burden, estimates the total cost of federal regulations at $ 1.9 trillion in 2020. This means the federal regulatory burden Americans face is nearly equal in cost to combined federal personal and corporate income tax collections, which stood at $ 2,076 trillion in 2020. For further background, the cumulative cost of federal regulations is slightly less than the $ 2,237 trillion of total pre-tax corporate profits in 2020.

As costly and burdensome regulations pose a challenge not only at the federal level, but also at the state level, many state governors and lawmakers have focused on proposing reforms and crafting policies that mitigate the cost of regulatory burdens. States. Among the most recent and innovative approaches to providing regulatory relief in states is what is known as a regulatory sandbox.

The concept of a regulatory sandbox comes from the United Kingdom, which instituted the world’s first in 2016, specific to the financial technology (fintech) industry. Regulatory sandboxes temporarily relieve businesses of various regulatory burdens and associated costs as they strive to bring new services, products and business models to market.

“Regulatory sandboxes often reduce barriers to entry for entrepreneurs and allow them to safely test and iterate a solution before investing significant resources to scale their offerings,” says an article in the National Law Review published by Richard Levin, Brandon Neuman and Jeffrey Kelly. October 19. “In return, regulators can collect empirical data on new business models and use an evidence-based approach for future policy decisions. This approach can validate or dispel regulatory concerns about the impact of an innovation and help regulators and businesses deliver beneficial services to the market.

“As the name suggests, a sandbox is a defined environment where innovative companies can safely experiment under the oversight and guidance of regulatory agencies,” writes Andrea O’Sullivan, director of the Center for Technology and Business. innovation from the James Madison Institute. “Companies that successfully complete a sandbox program will grow enough to become a fully-fledged regulated company in the same way as all other incumbents… By reducing the initial regulatory costs for new market entrants, these companies can have the chance to become competitors able to bear the normal costs of compliance, at which point they “step out” of the sandbox. “

In 2018, Arizona became the first state in the United States to create a regulatory sandbox, specific to fintech companies like the UK. This reform was proposed by Arizona Attorney General Mark Brnovich (R), who first argued for regulatory sandboxes in the United States 2017 Editorial in American Banker:

“Fintech startups are burdened with a fractured and redundant regulatory system,” Brnovich wrote. “Not only can it take several months to get regulatory approval to operate a fintech startup in a single state, it can cost a startup thousands of dollars in fees, compliance costs and legal work. . Launching a product nationwide is even more difficult. Entrepreneurs who navigate our 50-state licensing regime typically expect two years of frustration and spending in the millions. “

Attorney General Brnovich worked with Arizona Representative Jeff Weninger (R) to introduce regulatory sandbox legislation. This bill was finally enacted by Governor Doug Ducey (right) on March 22, 2018, making Arizona the first state in the United States to have a regulatory sandbox. Arizona’s regulatory sandbox, which is administered by Attorney General Brnovich’s office, allows participants to avoid typical regulations for two years, with an option for a one-year extension.

“Our wonderful federal system allows states to try out certain experiments that may not yet be adopted nationally,” the Federalist Society wrote of a regulatory sandbox in Arizona when proposed by Brnovich. Attorney General Brnovich acknowledges regulatory sandboxes have been discussed by federal officials, but explains why state officials elsewhere should act the way he has and not wait for help from Washington.

“The idea of ​​a regulatory fintech sandbox is not new, and although it is being discussed at the federal level, Congress is moving at an icy pace,” said Brnovich. “Arizona has always been a state of big ideas and it’s just another place where we’re pioneering entrepreneurship and innovation. I hope to see the sandbox serve as a catalyst for Arizona capital investment and provide opportunities for Arizona businesses and consumers to thrive. “

Arizona as a hub for policy innovation

Arizona, as much if not more than any other state, has been a testing ground in recent years for new and innovative reforms that have subsequently swept the country. There are reasons to expect this to be the case with regulatory sandboxes as well.

As was the case with the implementation of a regulatory sandbox, Arizona was also the first state to pass a professional licensing reform often referred to as Universal License Recognition (ULR), in which new residents of Arizona who have a professional license from their previous state, and it is still in good standing, can immediately get to work in this Arizona licensed area. Since Governor Ducey made Arizona the first state with ULR legislation, nine more states have enacted broad ULR legislation and eight more states have enacted more stringent ULR laws.

Arizona was also the first state to create Education Savings Accounts (ESAs), enacted in 2011, which help parents and children have more education options and the resources to access them. Through its leadership in passing ESAs, ULR legislation, and other reforms such as Right To Try, which was eventually passed nationwide, Arizona has established itself as a national leader in political innovation. As with these other policy initiatives, other states continue to follow Arizona’s lead in regularly enacting sandbox legislation.

This year, members of the Republican-led North Carolina General Assembly enacted sandbox regulatory legislation that was enacted by Governor Roy Cooper (D) on October 15, 2021 after being passed. with bipartite support. Similar to Arizona, North Carolina’s new regulatory sandbox is expected to make Tar Heel state a more attractive place to launch and invest in new businesses, technology, and services.

“A regulatory sandbox is a creative initiative to keep North Carolina competitive and encourage more businesses to come to the state,” said Jordan Roberts, director of government affairs at the John Locke Foundation, a group think tank based in Raleigh. “He recognizes that government acts much slower than innovators. “

North Carolina was the 10th state to offer a regulatory sandbox. In addition to Arizona and North Carolina, regulatory sandboxes have also been created in Florida, Hawaii, Kentucky, Nevada, Utah, Vermont, West Virginia, and Wyoming. The expansion of regulatory sandboxes has also continued abroad. As of November 2020, there were 73 FinTech-centric regulatory sandboxes in 57 jurisdictions around the world, according to the World Bank’s 2020 Regulatory Sandboxes report. “The vast majority of these sandboxes,” the aforementioned National Law Review article notes, “focus on promoting innovation in the delivery of digital financial services, and several sandboxes included specific goals aimed at to encourage blockchain, InsurTech and RegTech solutions.

Prior to 2021, all regulatory sandboxes created in the United States were industry-specific, such as the recently passed law in North Carolina that applies to the fintech and insurance industry. The country’s first general-purpose regulatory sandbox was enacted this year in Utah with the passage of Bill 217. This bill was enacted by Governor Spencer Cox (R) on March 22, 2021, which marked the third anniversary of the day. that Governor Ducey approved the country’s first regulatory sandbox.

Lawmakers in Tennessee and elsewhere have expressed interest in pursuing regulatory sandbox legislation in 2022. Don’t be surprised if more states follow in Arizona’s footsteps by creating a regulatory sandbox in 2022 which could make any state a more attractive destination to start and operate a new company.


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