Brazil has become the latest major economy to unveil details of a regulatory sandbox as it looks to encourage growth in fintech initiatives.
Sandboxes, which allow start-ups and other innovators to conduct ‘live’ experiments under regulatory supervision, are becoming increasingly popular worldwide, with established examples including those operated by the UK Financial Conduct Authority (FCA) and Monetary Authority of Singapore (MAS).
Brazil is now joining the trend with the Banco Central do Brasil (BCB) and the country’s National Monetary Council (CMN) having announced the guidelines for the operation of a ‘controlled tests environment for financial and payment innovations’.
The sandbox aims to promote innovative business models, competition, financial inclusion, ‘as well as enhancing the BCB’s supervision processes’.
First ‘cycle’ set for 2021
Sandboxes typically operate by admitting cohorts of businesses at certain intervals. For example, Global Government Fintech reported last month that the FCA had opened the application process for the seventh cohort of the UK sandbox.
Brazil’s sandbox will similarly operate through ‘cycles’, whose lengths are defined by BCB, limited to one year – with the possibility to be extended once for the same period. The first cycle is scheduled for 2021.
In order to be considered an innovative project, the BCB said the experiment has to employ technological innovation or promote alternative use of existing technology; and bring improvements to the financial industry, such as efficiency gains cost reduction or improved security.
To be licensed to operate within sandbox, organisations must carry out transactions ‘with integrity, reliability, security and confidentiality’, and also must comply with the regulation on the prevention of money laundering and combat of the financing of terrorism and the handling of complaints of clients and users.
The sandbox is being introduced as part of ‘Agenda BC#’, an initiative launched by the BCB 18 months ago to promote structural change in the financial sector to take into account technological advances. The sandbox, which falls under Agenda BC#’s ‘competitiveness’ dimension, was proposed in July last year. There was subsequently a public consultation.
BIS research: sandbox firms get capital boost
Separately, the Switzerland-based Bank for International Settlements (BIS) has this week published a working-paper on sandboxes, specifically exploring the extent to which gaining admission to a sandbox boosts fintechs’ access to finance.
Entitled ‘Inside the regulatory sandbox: effects on fintech funding’, the 42-page paper looks at the experience of the FCA sandbox in the UK. Based on a data analysis (2014-2019), the paper’s authors say that firms entering the sandbox saw an increase of 15% in capital raised post-entry relative to firms that did not enter; and their probability of raising capital increases by 50%.
The authors conclude that their findings can be seen as an encouragement for policymakers to scale up experimentation in sandboxes.
Global Government Fintech reported last week that more than 20 regulators from countries including the UK, Canada, USA and Australia – coming together as the Global Financial Innovation Network (GFIN) – have opened applications for a global fintech ‘sandbox’ following a trial last year.