“The entire industry takes its cues from the regulators. Therefore, we know with certainty that digitalization is not a trend, but a permanent paradigm shift that every firm will need to embrace, or be left behind.”
The word “sandbox” has over the years experienced an intriguing evolution. The tech world saw the word morph into a term meaning a closed environment for testing digital or web-based projects; now in the same digital universe, the word also refers to a “regulatory sandbox” — an environment for testing new business models insulated from current regulations.
The first regulatory sandbox was formed in the U.K. in 2014: Project Innovate, which would serve as a model for subsequent sandboxes. In the U.S., Arizona became the first state to sanction a regulatory sandbox, and Illinois is currently considering enacting one.
Experts have generally viewed regulation and innovation as inherent adversaries. A sandbox can be seen, though, as a sort of compromise where innovative ideas are tested in the absence of outright regulation while still preserving consumer protections. A sandbox helps companies with unique business ideas avoid the trappings of traditional compliance while still adhering to any regulations already in place.
The Origin of GFIN
The Financial Conduct Authority (FCA) in the U.K. had advanced the idea in 2018, along with eleven other regulatory groups, of a global sandbox, a fintech term for an environment designed for testing technological ideas on a global level. The concept became a reality, resulting in the creation of a conglomerate of 38 organizations called the Global Financial Innovation Network (GFIN). The initiative listed its three purposes as follows:
— To give companies an environment conducive to testing international solutions.
— To unite regulators so they could discuss new business models and technologies, as well as provide companies with regulatory information.
— To provide a venue for policy discussions.
Responses to the initial idea of a global sandbox included a concern that the project be just in its dealings with those who want to test across international borders, along with other issues like blockchain technology, data protection, artificial intelligence, regulation of initial coin offerings (ICOs) and securities.
Responses also included enthusiasm over how quickly news of such technological innovations encryption technology would reach the global marketplace, interest in cooperation among regulators on common issues that companies must face across different jurisdictions, with a focus on the challenges bilateral relationships between companies and regulators face, and interest in providing businesses and regulators an environment where they could discuss policy issues.
“Many regulators around the world are themselves embracing technology, as seen by the global rise of regulatory ‘sandboxes’ and other initiatives like ASIC’s Innovation Hub in Australia,” said Dean Patzer, Ascent’s Director of Solutions Engineering, who previously served as Senior Compliance Officer and then as Capital Markets Vice President at BMO. “The entire industry takes its cues from the regulators. Therefore, we know with certainty that digitalization is not a trend, but a permanent paradigm shift that every firm will need to embrace, or be left behind.”
The FCA announced in April the proposed creation of a cross-border pilot program to test new technologies under GFIN. Ascent, an AI-driven platform that provides insight to customers on regulatory responsibilities, was one of eight solution providers selected for consideration in the trial program. A pioneer in RegulationAI, Ascent works with regulators the world over, including the U.S., the United Kingdom, Asia and Australia.
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