Home Policy & Governance Sandboxes could ‘amplify problems’: IMF analysis questions many test-spaces’ impact

Sandboxes could ‘amplify problems’: IMF analysis questions many test-spaces’ impact

Global Government Fintech coverage of sandboxes: across the world there are currently 111 ‘regulatory sandboxes’, according to the ‘Global Regulatory Innovation Dashboard’ (GRID)

As a growing number of financial authorities worldwide launch sandboxes – controlled environments for firms to test innovative propositions – an analysis published by the International Monetary Fund (IMF) has questioned their efficacy.

Institutional Arrangements for Fintech Regulation: Supervisory Monitoring’ assesses the different ways that supervisory authorities have set up sandboxes and innovation hubs, and their impact. The 58-page paper will likely make timely reading for public authorities around the globe – both those already with sandboxes and those considering establishing them – as they look to justify the investment.

The paper, part of the Washington DC-headquartered organisation’s ‘Fintech Notes’ series, is co-authored by IMF financial sector expert (fintech) Parma Bains and research analyst Caroline Wu. They urge authorities to think carefully about whether devoting resources to new mechanisms such as sandboxes to help with private-sector engagement is worthwhile, stating that for most authorities existing structures will likely do a better job.

‘There are several ways to strengthen surveillance and respond to the challenges of fintech,’ the report states. ‘For most authorities, existing supervisory structures will allow them to effectively monitor new fintech developments and respond to challenges. Using existing resources and infrastructure can allow authorities to monitor new fintech developments and identify risks while saving cost and time on the design and implementation of new structures.’

‘Sandboxes may not be the most effective way for many authorities to monitor fintech developments because they are resource-intensive and costly, and engagement extends to a relatively smaller number of firms over a longer period,’ the report concludes, going on to add that ‘sandboxes are not a sensible fix to underlying problems with supervisory structures and could amplify existing problems as well as allow authorities to carry out risk-washing’.


Time to assess sandboxes’ impact

Bains summarised the paper during a webinar titled ‘Innovation offices and sandboxes – progress and the road ahead’, hosted by the Cambridge Centre for Alternative Finance (CCAF) in the UK.

“The aim of the paper is to take a balanced look at the different institutional arrangements that regulatory authorities are using,” Bains told the online audience. “But we’re approaching a decade of [sandboxes’ and innovation hubs’] implementation in some countries, so I think it’s only sensible that we start asking difficult questions like: ‘what’s been the impact of these institutional arrangements, given the resources needed to run them on an ongoing basis?’; ‘have they had an impact on policy, on regulation, on market dynamics?’. Some of these are challenging to measure.”

He summarised the paper’s three main points as being that: firstly, authorities should “focus initially on using existing supervisory structures to better monitor and respond to the impact of fintech”; secondly, that “there might be some circumstances where innovation hubs and sandboxes are useful”; and, thirdly, that “regardless of whether you have these [newer] institutional arrangements or not, international co-operation is incredibly important.”

Authorities need to be confident that there will be sustained private-sector demand. “I’ve lost count of the numerous innovation offices that have been opened, they’ve been staffed, but they’re rarely used,” Bains said. “There needs to be a clear need. What is it that these innovation offices are going to achieve that can’t already be done with what you already have?”.

The paper includes a typology of sandboxes, specifying six types: product-testing sandboxes; policy sandboxes; digital sandboxes; thematic sandboxes; cross-sector sandboxes; and cross-border sandboxes. It highlights that sandboxes that are ‘either aligned or shared across [public] agencies may use a single point-of-entry that provides common interface to ensure a standardised application process […] provid[ing] authorities with an engagement platform for a holistic view of fintech developments, thereby reducing the risk of regulatory arbitrage.’

Hong Kong provides one example of a jurisdiction with a single point-of-entry for multiple sandboxes. A second example is South Africa, where the paper describes an Intergovernmental Fintech Working Group as having taken an ‘alternative approach that takes things a step further’. The paper explains that, in South Africa, a ‘cohort-based project operates on a “first responder network”, with a core team from the Financial Sector Conduct Authority and South African Reserve Bank monitoring progress of each entrant and connecting it to subject-matter experts’.

RELATED ARTICLE UK’s FCA engages fintech company to run permanent digital sandbox – a news story (28 April 2023) on the Financial Conduct Authority (FCA) handing a three-year contract to a London-based company called NayaOne to run its digital sandbox as it moved the test-space onto a permanent footing

Regulators ‘struggling’

The growth in number of sandboxes globally has not been accompanied by proportionate growth in assessments of sandboxes’ performance, Bains said. “I don’t want to be the bearer of bad news but I think that, as a whole, regulatory authorities, we’ve struggled in this regard,” he said.

“How many evaluation reports or lessons-learned reports have been published on successes or failures of innovations or sandboxes?” he asked, rhetorically. “Not many. And believe me, we looked when we were publishing this [IMF] paper, and it was very, very difficult to come across honest and objective information in this space.”

“The first and the most important step to improving things is to share evaluation reports, share lessons-learned reports – no matter how challenging the messaging is,” he said. “I think sometimes we get hung up on trying to be perfect or trying to be better than our neighbours. I don’t think we need to do that.”

“To carry out a review, you really need to involve those making use of innovation hubs and sandboxes, and those that are affected by them. So, in essence, this often means government departments, firms, consumers, and even other teams within a regulatory authority. Engagement is very, very important,” he said.

“When you’re conducting a review, you need to consider what the vision or the objective of the innovation office or the sandbox is, and measure against them,” he continued, observing that some authorities set up a sandbox as a signal they support innovation; some do so to better understand technology; some do so “as a way of trying to mitigate risks from the impact of fintech”; and, he added, “let’s be honest, a substantial minority do it as something that perhaps they think ‘needs to be done’ without a clear need and a clear objective.”

RELATED ARTICLE Financial regulators back international ‘techsprint’ to tackle ‘greenwashing’ – a news story (14 April 2023) on an initiative being run by the Global Financial Innovation Network (GFIN) using the FCA’s digital sandbox

‘Little sense’ in sandbox proliferation

Across the world there are currently 111 ‘regulatory sandboxes’, as well as 88 innovation offices, according to the ‘Global Regulatory Innovation Dashboard’ (GRID) – a new CCAF-created digital interface, which enables people using the site to locate innovation initiatives by category, geography, status, year of inception and authority type.

Philip Rowan, co-head of the Cambridge Regulatory Innovation Hub, kicked off the 18 July webinar with a seven-minute explanation and demonstration of the dashboard. He showed how people can use GRID to not only find out whether public authorities in a particular country have set up, for example, an innovation office (he used the African nation of Ghana as an example) but also to try to book a meeting with the innovation office.

Bains formerly worked at the UK Financial Conduct Authority (FCA), which, the IMF report notes, launched the world’s first regulatory sandbox in June 2016 (just under two years after launching an innovation hub).

He joked during the webinar that he “love[s] a well-designed, well-run sandbox where there’s a need”. But he saw “little sense in having a sandbox in every country”, saying that they are “useful when a country is facing a particularly challenging fintech development, when there’s little in the way of peer-learning globally, or there are unique elements to the local market and there’s strong potential for that innovation to disrupt financial markets.”

“Let’s say there’s two neighbouring countries (both with similar financial markets): does it really make sense for one market to open a sandbox, test the solution, ‘hoard’ the results and then move on, only for the neighbouring country to do the exact same experiment six months later? I don’t think that’s good for firms, or regulators or consumers.”

RELATED ARTICLE Cambridge SupTech Lab launches with focus on low- and middle-income nations – a news story (6 April 2022) on the launch of the Cambridge initiative

Cambridge SupTech Lab projects

CCAF is home the Cambridge SupTech Lab, which launched in April last year (‘SupTech’ is short for supervisory technology). The SupTech Lab received funding of $3.1m (about £2.36m) from US-headquartered philanthropic organisation the Bill & Melinda Gates Foundation (BMGF) for 2022-2023.

The SupTech Lab is currently developing projects including a ‘SupTech Gymnasium’, described as a ‘synthetic data simulation and testing environment to accelerate the development of new SupTech applications’; ‘SupTech Open Data Library’ (a tool for exploring and providing access to public data sources of financial supervisory data); and ‘SupTech Open Code Repository’ (facilitating the sharing of non-proprietary code used by financial authorities to reduce the cost of developing new solutions).

It is also running training courses through Indonesia’s financial supervisor – Otoritas Jasa Keuangan (OJK) in Jakarta – alongside ‘design sprints’ and workshops to develop proofs-of-concept for SupTech applications that will be prototyped with ‘selected vendors’.

*** The Cambridge SupTech Lab has also recently announced the award of funding to three companies – FNA (Financial Network Analytics), Proto and Winnow Technologies – to work alongside public entities to ‘explore the immense potential of AI-powered [artificial intelligence] suites for trend and entity detection on unstructured data, and web-based social media scrapers’. FNA, for example, is collaborating with Peru’s Superintendencia de Banca, Seguros y AFP (SBS).

‘Innovation offices and sandboxes – progress and the road ahead’ (video length: 1hr 17min 2sec)

Source: Cambridge Centre for Alternative Finance recording uploaded to Vimeo

Webinar panel: IMF financial sector expert (fintech) Parma Bains; Bretchen Hoskins, senior analyst for international affairs at Chile’s Comisión del Mercado Financiero (CMF); and Patrick Saidu Conteh, chief executive of Africa Fintech Network (a coalition of national fintech trade associations). Nick Clark, co-head of the Cambridge Regulatory Innovation Hub, was moderator and Philip Rowan, co-head of the Cambridge Regulatory Innovation Hub, presented the new ‘Global Regulatory Innovation Dashboard’ at the start of the webinar.