Everything you need to know about regulatory sandboxes

There’s an innovative new policy idea gaining traction across the country that you might not have heard of—regulatory sandboxes—that nine states have already adopted and more are considering.

Why is this policy idea so popular? Let’s take a look at what regulatory sandboxes are and how they work.

What is a regulatory sandbox?

A regulatory sandbox is a legal classification that creates a space where participating businesses won’t be subject to onerous regulations—usually for a limited amount of time. The point is to allow these businesses to “play” in the sandbox without regulations to see if innovative ideas and products can get traction and enter the market.

While some restrictions are lifted, regulatory sandboxes are not a free-for-all. Regulations that impact public health, safety, and consumer protection remain in place,a ll other regulations are suspended. After businesses explore their concepts for one year without regulations, lawmakers will evaluate what’s working and what isn’t—namely, what regulations the business needs to follow once it transitions out of the “sandbox.”

The point of a regulatory sandbox is to find the appropriate, and perhaps reduced, number of regulations needed for a specific product, service, or business model.

Why do businesses need fewer regulations?

Remember, regulations are rules concerning what individuals, businesses, and other organizations can and cannot do. Both federal and state agencies enact thousands of regulations each year. The US Code of Federal Regulations grew from 9,745 pages in 1950 to over 174,496 pages through 2014. Some economists argue there are several costs to this growing regulatory activity. The Mercatus Center at George Mason University notes the buildup of regulations over time deters economic growth, raises the prices of basic goods, harms workers, increases inequality, and makes it difficult for entrepreneurs to start businesses. The costs are especially high for small businesses—who often don’t have the resources to figure out how to comply with so many rules.

What problem do regulatory sandboxes fix?

Today’s economy is driven by innovative new technologies and platforms. Think Uber, Lyft, Airbnb, DoorDash, and Tesla.

Since these new technologies and business models don’t fit neatly into previous regulatory models, policymakers have struggled with how to regulate them. And sometimes lawmakers, despite having the best interests of consumers in mind, can discourage innovation and risk-taking by imposing antiquated or excessive regulations.

Regulatory sandboxes are a solution to this problem. Sandboxes allow these new business models to develop while also putting the interests of consumers first. What’s more, regulatory sandboxes especially help small businesses, who often don’t have the money or influence (unlike big companies like Uber and Tesla) to ensure their business is complying with complex regulations. In addition, small businesses, unlike powerful companies, don’t have the ability to challenge regulators and the regulations that impact them. Regulatory sandboxes level the playing field for small businesses.

Who came up with the idea of a regulatory sandbox?

The United Kingdom (UK) Financial Conduct Authority (FCA), a regulatory body that regulates financial service firms and financial markets, came up with the idea of a regulatory sandbox in 2014. FCA defines a regulatory sandbox as “a ‘safe space’ in which businesses can test innovative products, services, business models and delivery mechanisms without immediately incurring all the normal regulatory consequences of engaging in the activity in question.”

FCA wanted to create competition to benefit consumers in the finance field, and they started with a regulatory sandbox for the fintech sector. Since the UK pioneered the idea in 2014, several other countries have adopted similar sandbox policies, including Abu Dhabi, Denmark, Canada, Hong Kong, and Singapore.

How many states have regulatory sandboxes?

Arizona, Nevada, Wyoming, Kentucky, West Virginia, Vermont, South Dakota, and Florida have industry-specific regulatory sandboxes. Thanks to the Libertas Institute, Utah adopted the country’s first all-inclusive regulatory sandbox in March 2021.

Who do regulatory sandboxes help?

Regulatory sandboxes ultimately help consumers, who can benefit from the innovative products that companies create when they don’t face overly burdensome regulations. They also benefit entrepreneurs and small businesses, who no longer have to worry about how their new product or business will fit into outdated regulatory models. Finally, regulatory sandboxes help the economy. Sandboxes allow new businesses to develop more easily—which can create jobs and opportunities for communities.

Who is opposed to adopting regulatory sandboxes?

Established industries and entrenched special interests are not in favor of regulatory sandboxes because they allow competitors to more easily enter the market.

In addition, some economists have pointed out that regulatory sandboxes, although well-intentioned, have the possibility of being abused or misused. Hester Peirce, Commissioner of the US Securities and Exchange Commission, noted “facilitating and hosting the sandbox” may play the role of gatekeeper, slowing down or even halting innovation.