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.