The Cyprus Securities and Exchange Commission is considering establishing a regulatory sandbox as it acknowledges that digital technologies have ‘re-shaped the landscape in which regulated entities operate’ and presented ‘idiosyncratic risks’.
The authority, known as CySEC, has run a ‘call for views’ on the creation of a sandbox as it looks to expand its innovation-related work and allow private-sector innovators to test new products and services.
CySEC states that the project aims to build on its Innovation Hub, which has helped innovative businesses to navigate laws and regulations since its launch in October 2018.
‘The challenge for regulators is to keep pace so that the benefits provided by new and emerging technologies are unlocked, while ensuring that there are adequate systems, controls, policies and procedures in place to minimise the risks they present,’ the authority states.
CySEC, which is based in capital Nicosia, has sought views on the scope of a sandbox and how it would work from regulated entities such as established banks, fintech or RegTech (regulatory technology) companies, as well as professional associations from Cyprus and overseas.
Digital momentum building
The island nation has been a European Union (EU) member state since 2004 and is the 27-member bloc’s third smallest by population (Malta and Luxembourg are smaller).
CySEC’s Innovation Hub has been providing developers and users of fintech and RegTech solutions with what the authority’s six-page ‘Call for Views on Establishing a Regulatory Sandbox’ document describes as ‘unofficial perimeter steers’ on whether their solutions amount to licensable services or products (for example, tokenised financial instruments); or whether they constitute a non-licensable tool aiding provision of a regulated service or compliance with applicable rules (for example, client on-boarding by regulated entities via a ‘contactless-selfie’).
Since its inception, the Innovation Hub – which is the responsibility of CySEC’s policy department – has received 31 applications for assessment involving artificial intelligence (AI), ‘Big Data’ and distributed ledger technology (DLT)-related solutions. In addition, a ‘general steer’ has been given 29 times. Overall, 52 per cent of interactions were for fintech projects, 42 per cent were RegTech and six per cent SupTech (supervisory technology).
In addition, CySEC’s policy department has assessed (from September last year up until last month) 62 queries relating to crypto-assets as consequence of the issuance of its ‘policy statement on the registration and operations of crypto asset services providers’ (last September).
Explaining the sandbox plans, CySEC’s document cites developments including the Covid-19 pandemic’s acceleration of adoption of digital technologies; the Crypto-Asset Service Providers (CASP) directive, which sets out detailed requirements on entities seeking registration in a register maintained by CySEC; the EU’s upcoming pilot regime for market infrastructures based on distributed ledger technology (DLT); and the EU’s upcoming regime on digital operational resilience for the financial sector known as DORA (‘Digital Operational Resilience Act’).
Sandboxes springing up
Sandboxes have mushroomed across the globe in recent years, with well-established examples including those operated by the UK Financial Conduct Authority (FCA) and Monetary Authority of Singapore (MAS).
Within the EU, Greece and Spain are among the member states where sandboxes have been launched in the past year or so. The former nation’s sandbox, run by the Bank of Greece, was funded by the EU via its Directorate-General for Structural Reform Support (DG Reform) and implemented in collaboration with the London-headquartered European Bank for Reconstruction and Development (EBRD). Spain’s sandbox, meanwhile, welcomed its first fintech projects in May last year, with 18 fintech initiatives chosen (from 67 submissions) to comprise the inaugural cohort of participants.
The EU’s financial services commissioner, Mairead McGuinness, said earlier this month that national supervisors “have made big efforts to improve what they offer to the companies they work with but have to go further”. She was speaking during an online event to launch the EU Digital Finance Platform, billed as a ‘collaborative space’ that aims to encourage interaction between European supervisory authorities and innovators seeking to navigate the fragmentation inherent in nations’ different regulatory regimes.
European Digital Finance Association president Maria Staszkiewicz suggested during a panel discussion (held as part of the same event) that the growing number of EU-backed sandbox initiatives could leave companies uncertain which regimes or procedures to follow. She referred to the Commission’s AI act proposal (unveiled one year ago), which pushes for AI sandboxes, and the plan to create an EU ‘blockchain sandbox’.
‘EU Digital Finance Platform to map fintech growth and support cross-border testing’ – our news story (11 April 2022) on the European Commission-hosted website launched earlier this month with the ultimate aim of helping private-sector innovators to ‘scale up’ fintech solutions
‘UK regulatory sandbox shifts to “always open” status’ – our news story (25 August 2021) on the Financial Conduct Authority’s regulatory sandbox evolving from a cohort-based approach to having an ‘always open’ status
‘Italy launches fintech sandbox’ – our news story (19 July 2021) on Italy’s Ministry of Economy and Finance, the Bank of Italy, financial regulator Consob and the Italian Insurance Supervisory Authority (IVASS) announcing that a decree launching a sandbox and establishing a ‘fintech committee’ had entered into force
‘Greece launches EU-funded regulatory sandbox in fintech push’ – our news story (15 June 2021) on Greece’s central bank launching its sandbox
‘Spain’s sandbox welcomes first fintech projects’ – our news story (25 May 2021) on Spain’s regulatory sandbox preparing to welcome its first cohort of fintech projects