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A Regulatory Sandbox for Fintech Innovation Emerges on the U.S. Playground: What it Means for Money Transmitters

Many FinTechs have benefited from government-established regulatory sandboxes in diverse jurisdictions such as Australia, the UK and Singapore.  However, the U.S. has been noticeably slow to adapt these innovation-friendly programs.  That is now changing.

Arizona recently enacted a new law (H.B. 2434) to create a Regulatory Sandbox Program (the “Program”) that will allow FinTech companies to temporarily test innovative financial products and services without being subject to money transmitter and similar licensing requirements in that state.  The Program will be administered by the Arizona Attorney General (the “AG”) and is the first of its kind among U.S. states.

To participate in the Program, companies will be required to submit an application that details the company’s plan to “test, monitor and assess” its product or service while assuring that consumers are protected should the test fail.  The AG will notify applicants within 90 days about whether they have been approved.  If approved, participants will be allowed to conduct the test for two years, with a possible extension for one additional year.  For participating money transmitters, individual transactions per customer may not exceed $2,500 and aggregate transactions per customer may not exceed $25,000.  These caps are higher — $15,000 and $50,000, respectively — if the AG determines that the participant has demonstrated sufficient capitalization and risk management.  The AG will likely begin accepting applications by late 2018, and the Program is set to run until July 1, 2028.  The Program is limited to products or services offered to Arizona residents, but the AG can enter into agreements with state, federal or foreign regulators so that sandbox participants in those other jurisdictions are able to participate in the Program.

With Arizona leading the way in the U.S. by joining countries with regulatory sandboxes, other U.S. states may opt to enact similar laws to reduce the regulatory compliance burdens for companies hoping to launch innovative products.  One state, Illinois, has a regulatory sandbox bill (H.B. 5139) pending.  At the federal level, press accounts indicate that House Financial Services Committee Vice Chairman Patrick McHenry (R-NC) is expected to reintroduce federal legislation on the issue.

Copyright 2019 K & L Gates

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About this Author

Eric A. Love, KL Gates, Capital Markets Compliance Lawyer, Treasury Legislation Attorney
Law Clerk

Eric A. Love is a member of K&L Gates’ Public Policy and Law Practice and is based in the Washington, D.C. office. Mr. Love focuses on federal legislative and regulatory policy issues related to financial services and capital markets, with a particular emphasis on securities and corporate governance. 

Prior to joining K&L Gates, Mr. Love served as a special assistant in the Office of Legislative Affairs at the U.S. Department of the Treasury. In this capacity, he worked to help advance Treasury’s legislative agenda on a broad portfolio...

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Judith E. Rinearson, KL Gates, federal consumer protection lawyer, anti money laundering attorney
Partner

Judith Rinearson is a partner in the firm’s New York and London offices. Ms. Rinearson concentrates her practice in prepaid and emerging payment systems, electronic payments, crypto/virtual currencies, reward programs, ACH and check processing. She has more than 25 years of experience in the financial services industry, including 18 years at American Express’s General Counsel’s Office. Her expertise focuses particularly in the areas of emerging payments and compliance with state and federal consumer protection laws, anti-money laundering laws, state money transmitter licensing laws and abandoned property laws. 

Fully experienced in both the “issuing” and “acquiring” side of the payments business, Ms. Rinearson has drafted and negotiated complex agreements with strategic co-branded partners, processors and Independent Sales Organizations (ISOs), ATM networks, major retailers and service providers, prepaid card issuers and program managers, international remittance companies, virtual and mobile payment providers, as well as the Terms and Conditions and disclosures that usually accompany such products. She has hands-on experience in all legal aspects of launching and managing a range of payment products, from prepaid cards of all kinds, to Bitcoin exchanges and miners, wire transfer services, ACH, electronic banking, money orders and credit cards. Her practice includes advising on fraud avoidance and compliance with federal banking and anti-money laundering laws, as well as state money transmitter licensing laws, consumer protection laws and abandoned property laws. On the international level, Ms. Rinearson has supervised the launch of a range of payment and foreign currency products in Europe, Asia and Latin America; met with international regulators; and spoken on the issue of payment regulation. 

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