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Financial Planning > Behavioral Finance

Ex-Treasury Official Touts the Promise of Fintech ‘Sandboxes’

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(Editor’s note: This article was adapted from Human Capital, Melanie Waddell’s newsletter on the people shaping the financial regulatory landscape.)

Regulatory “sandboxes” are in the spotlight this week as the fintech brouhaha took center stage at various industry events.

I caught up with former Treasury Department official Jonah Crane on Tuesday – who’s now an advisor to FinTech companies and also Regulator in Residence at the FinTech Innovation Lab in New York– to get the rundown on the current fintech/regtech environment in the U.S. and what’s ahead innovation-wise on these two fronts.

Also on my Tuesday phone interview with Crane – whose resume includes serving as a former policy advisor to Sen. Chuck Schumer, where he worked on the Dodd-Frank and the JOBS Act — was Michael Meyer, co-founder of Route 66 Ventures, who worked with Crane to pen the recently released RegTechLab report, Thinking Inside The Sandbox: An Analysis of Regulatory Efforts to Facilitate Financial Innovation, which zeros in global “sandbox” activity.

As it stands now, “there’s nothing that calls itself a sandbox” in the U.S., Crane said. But comments by a Treasury official on Thursday at a SIFMA event about an upcoming report by Treasury on such reg tools signals promise of movement.

What exactly is a “regulatory sandbox”? As the RegTechLab report explains, it’s a new tool allowing companies “to test new products, services, delivery channels or business models in a live environment, subject to appropriate conditions and safeguards.”

Regulators, the report continues, “have also taken other proactive steps to engage with industry directly, and in some cases pursued mechanisms less formal than sandboxes to facilitate testing or piloting of new innovations.”

Craig Phillips, counselor to the Treasury secretary, weighed in on Thursday that the financial services landscape “has over 3,300 new fintech companies” and “over 20% of all personal loans” originate in the fintech marketplace.

“We need a new approach by regulators that permits experimentation for services and processes,” said Phillips, adding that it could include regulatory sandboxes, aka innovation facilitators.

Crane’s frustration with how sandboxes are characterized: that they’re “environments where a bunch of rules don’t apply.”

U.S. regulators, he said, “have increased engagement with financial innovators in recent years, and it’s a good time to consider taking the next step. As RegTechLab’s report highlights, sandboxes can be quite effective, especially in combination with other tools to facilitate engagement.”

One of the biggest obstacles in the U.S. “has been a perception that sandboxes are a regulation-free zone, or a blank check from regulators,” Crane asserts. “In fact, as noted in our report, it is quite the opposite: Sandbox pilots involve close scrutiny from regulators.”

Crane — advisor to fintech companies including Quovo, Monzo Bank, and BlackBox, is also executive director of RegTechLab in Washington, and has served as Deputy Assistant Secretary for the Financial Stability Oversight Council and senior advisor at Treasury – stated that while no sandboxes exist in the U.S. today, mainly due to the nation’s “fragmented regulatory system,” there are some offerings with “sandbox like-elements.”

One being the Consumer Financial Protection Bureau’s Project Catalyst. The CFPB “has issued one no-action letter that has a lot of things in common with a sandbox approach, but the CFPB wouldn’t claim that it is, at this point, a sandbox,” Crane said.

Also, the Office of the Comptroller of the Currency is exploring participating in a “bank pilot project that again, has some characteristics of a sandbox.

”Then there’s the state of Arizona, which has proposed, and is expected to launch this year, “a sandbox run by the attorney general at the state level,” Crane added, and Illinois has “pending legislation” to create one a sandbox.

While “there’s some activity in the U.S. … it’s pretty minor,” Crane said. “There’s nothing up and running that calls itself a sandbox.”

“We’re hoping that if U.S. regulators are interested in implementing sandboxes down the road that this [RegTechLab report] is a useful guide path to them,” Crane said.

“We went to great lengths in the report to focus on ideas around designing a sandbox to help address some risks with running a sandbox,” based “in large part on research we did, talking to regulators who have run sandboxes around the world.”

Other trends on the Regtech front: “Tech Sprints,” which are being conducted by the Financial Conduct Authority in the UK that act as “a multiday hackathon” hosted by regulators. The FCA just hosted one with “a few hundred plus participants with a hundred plus companies” split into 16 teams to compete around various Know Your Customer and Anti-Money Laundering themes.

The Commodity Futures Trading Commission in the states is considering adopting a similar approach as the Tech Sprints, Crane said, and has a request for information out on ways to run some “Innovation competitions.”

Efforts are also afoot for regulators “to innovate their processes,” adds Meyer, with “Regtech-focused companies that are spotlighting the regulators themselves as customers.”

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