Technology & Innovation

Regulatory Sandboxes Speed Innovation to Market

November 15, 2021

If there’s any one thing that defines the third decade of the 21st century, it’s that change is all around us. On every level, we are examining the past and replacing things deemed to no longer work with better approaches. Sometimes this is negative but when it comes to replacing outdated state regulations that keep entrepreneurs from thriving, change can be overwhelmingly positive.

Regulatory sandboxes — the policy reform that streamlines regulatory approval via a waiver to innovators  — are becoming increasingly popular nationwide. Most are targeted at different industries at the state level, but even that is likely to change in the near future. The Libertas Institute, a think tank in Utah dedicated to spreading free-market principles through education and policy reform, has received support from Charles Koch Institute for its work on regulatory sandboxes. Thanks to the strength of these ideas, Utah developed the first state-wide  all-inclusive regulatory sandbox. Libertas Director of State Government Affairs Rees Empey recently sat down to talk about how this tool works and why it’s gaining traction nationwide.  

Charles Koch Institute: So let’s start with the basics. What is a regulatory sandbox and how does it work? 

Rees Empey: A regulatory sandbox is a policy tool that highlights the outdated regulations standing in the way of an entrepreneur’s innovative idea and lets him or her receive a waiver for two-plus years. A state regulator watches to see what happens during that time as the entrepreneur brings his innovation to market. The regulator can then recommend reform or repeal of the regulation. 

CKI: Where did this idea begin?  

RE: It began in 2014 or 2015 in the United Kingdom with financial technology, or fintech, and took off. Other countries followed — Singapore, South Korea, Japan — and then the United States. It took us so long compared to the rest of the world. We were late to the party.  

Arizona passed the first sandbox in the United States in 2018, aiming it at fintech. Wyoming followed, then Utah in 2019. Kentucky passed the first one for the insurance industry, followed by Vermont, Utah, South Dakota, and North Carolina. We have a map on our website that tracks all the implemented sandboxes across the country.

The two industries most states have targeted are fintech and insurance. Arizona has a property tax sandbox, Hawaii has one for cryptocurrency technologies. In 2020 Utah adopted a sandbox for insurance, and now has one for legal services. There are 30 participants. California has been flirting with the idea but hasn’t done anything yet. The Mississippi Center for Public Policy is researching an agricultural technologies sandbox.  

We are trying to spread the idea across the country. In the long run we’d love to see federal reform. We are starting to brainstorm and research what a local government sandbox could look like.  

CKI: The idea seems to be spiraling out in all kinds of directions. 

RE: And we’re very excited about it happening so quickly.  

CKI: What do you think is the most exciting direction it’s going so far? 

RE: Honestly, I think the most exciting thing is that folks are beginning to realize that this can be applied to stuff other than just fintech and insurance. People are getting creative; there may be industries that haven’t even been thought of yet. That’s why the universal sandbox idea is future-proofed. It’s like, “Oh, we haven’t come up with this industry yet. Yeah, come into the sandbox and try it out.” And then you don’t risk excluding any industries or ideas. 

CKI: What are the biggest advantages of sandboxes? 

RE: There are lots of benefits. Sandboxes level the playing field as well. Businesses both big and small can take advantage, not just the new guys. I’ve heard arguments that this would be a lot better than tax breaks to draw industries into a state, because the taxpayer typically foots the bill to invite businesses in.  

Another important point is that sandboxes with reciprocity agreements, which is most of them at this point, allow states to work together and businesses to scale up and offer their products across several states rather than just one. Say Kentucky’s insurance sandbox doesn’t have many participants because it’s kind of a small market. But if they start working across West Virginia and Tennessee, there’s a bigger market to trial the innovation. And maybe an entrepreneur wants to know if this is more of an East Coast thing or will it work out West? So it kind of provides more room for trial as well, and just growth.  

CKI: How does a universal sandbox work? 

RE: Utah is the only state with a universal sandbox. But I know that several other states are considering it, such as Tennessee. There’s a council of folks who advise on the regulations that businesses want waived, and there’s a liaison in the governor’s office who goes between the businesses, the regulators, the Legislature and the governor, just talking to everyone while making sure everything’s going well.  

CKI: How do you measure impact?  

RE: I don’t know if there’s a universal answer. I think just the fact that people and businesses are using it to trial their products and learning what it will take to make them work. With businesses using it, consumers are getting something or else that business wouldn’t last.  

You have to wonder how many great ideas have already died. You know, someone came up with the next big thing in their garage or in their living room. And then they said, “I don’t have the resources to navigate this regulatory maze.” An unsung hero of the sandbox is that people have thought their ideas aren’t legal — but just by applying for the waiver, they find out, “Oh, we actually are legal and we don’t need to use the sandbox.” That’s much cheaper than having an attorney tell you. 

CKI: Which industries are already taking advantage of sandboxes? 

RE: There are financial technologies, insurance, property, tech. Health digital devices. We observed some bills last session for energy technologies, agriculture technologies, and legal services. There was another bill partnering fintech with a special depository sandbox to try to create some banking system for cryptos. Those are some of the areas we’ve seen thus far in the United States, but it could really be anything under the sun.  

I have to say that spreading the idea just couldn’t be done without strong partners across the country — the State Policy Network, all the other think tanks, the Americans for Prosperity chapters. This cannot happen without all of them and their willingness to cooperate. We love hearing their ideas for things that we should be changing here in Utah and that they are working on in their states.  

The Charles Koch Institute inspires and invests in social entrepreneurs developing solutions to America’s most pressing problems. Read more about our support for technology and innovation.