2020-02-10

Introduction to the Regulatory Sandbox

The regulatory sandbox is an approach that permits enterprises (especially startup companies) to test the feasibility of innovative financial products, services, or technologies pursuant to a specific testing plan agreed to and monitored by the competent authority.

The first regulatory sandbox was launched in 2015 in the U.K, and such innovative idea quickly caught the attention of regulators and financial innovators around the world. On 31 January 2018, Taiwan’s Legislative Yuan passed the “Financial Technology Development and Innovative Experimentation Act”, which permits an individual, sole proprietorship, partnership, or legal person to apply to undertake innovative experimentation in Taiwan.

As innovative financial products, services, or technologies may sometimes exist at the edge or even outside of the existing regulatory framework of a jurisdiction, the regulatory sandbox creates a temporary safe harbor for those startup companies to test the feasibility, commercial value, or business model of their innovative financial products under certain rules and the supervision of regulators. In the sandbox, certain regulations are relaxed and enterprises intensively communicate and cooperate with regulators. By doing so, the protection of the public interest and the encouragement of innovation can be balanced.

A regulatory sandbox gives both enterprises and regulators an opportunity to pressure test a financial product or service, and allows them to learn from that experience. From the perspective of enterprises, regulatory sandboxes reduce entry barriers formed by existing regulations, and help enterprises to test the commercial values of their financial products where normal regulation barriers do not exist prior to launching the product or service. Regulators benefit from regulatory sandboxes in that they gain helpful regulatory experience, which helps regulators construct sound financial regulatory frameworks while fostering the development of innovative financial technologies.
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