Spain’s regulatory sandbox is preparing to welcome its first cohort of fintech projects.
Sandboxes allow fintech start-ups and other innovators to conduct ‘live’ experiments under regulatory supervision. They are becoming increasingly popular worldwide as financial authorities look to encourage start-ups and competition.
Eighteen fintech initiatives have been chosen from 67 submissions to comprise the inaugural cohort of Spanish sandbox (‘Sandbox financiero’) participants, in a process overseen by the Secretariat General for the Treasury & International Financing (Secretaría General del Tesoro y Financiación Internacional).
Digital identity, new forms of payment, facilitation of access to finance, and prevention of money laundering and fraud are among the focuses of projects accepted for testing, according to the prime minister’s office.
Supervising the sandbox
The 18 projects have up to three months to embark on their period in the sandbox, then six months in the sandbox although an individual project’s testing period can potentially be extended.
The authority responsible for supervising the projects during their period in the sandbox depends on the fintech’s focus: banking, financial markets or insurance.
Of the 18-strong first cohort, ten will be supervised by Banco de España (Bank of Spain – the country’s central bank). Four projects each will be supervised by the Comisión Nacional del Mercado de Valores (CNMV – the National Securities Market Commission, the government agency responsible for financial regulation of securities markets) and the Dirección General de Seguros y Fondos de Pensiones (DGSFP – the Directorate-General for Insurance and Pension Funds).
Projects heading into the sandbox include Dalion, a blockchain-based digital identity verification solution; and Cobertoo, a Madrid-based start-up offering peer-to-peer insurance for smart-phones.
‘Road to innovation starts now’
Spanish fintech association AEFI (Asociación Española de Fintech e Insurtech), which was created in 2016 to encourage a business environment favourable to the country’s growing number of fintech and insurtech companies, has five of its 150 members in the 18-strong cohort.
“The road to innovation really starts now,” AEFI president Rodrigo Garcia de la Cruz told Global Government Fintech. Creation of the sandbox, which he hoped would become a “catalyst for innovation”, had been “long demanded by the fintech sector” and had “broad support” across the broader financial services sphere, he said.
The sandbox finally came into being after Spain’s parliamentarians approved a new law on digital finance that endured a stop-start journey on its way to ratification.
The Council of Ministers signed off the ‘Ley para la transformación digital del sistema financiero’ (‘Law for the Digital Transformation of the Financial System’ – DTFS) – which laid the ground for the implementation of a sandbox – during the first quarter of last year. But parliamentary ratification took longer than would typically be expected, largely due to the priority of responding to Covid-19. The sandbox’s creation had already been delayed by a year of political deadlock following an inconclusive general election in 2019. But Congress approved the DTFS draft unanimously in September last year with Senate approval following in November.
Aiming to spur investment
The Bank for International Settlements (BIS) published a working-paper six months ago 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 looked at the experience of the FCA sandbox in the UK. After a data analysis (2014-2019) the authors found that firms entering the sandbox saw an increase of 15 per cent in capital raised post-entry relative to firms that did not enter; and their probability of raising capital increases by 50 per cent. The paper’s authors concluded that their findings can be seen as an encouragement for policymakers to scale up experimentation in sandboxes.
AEFI believes that Spain’s sandbox will lead to the creation of 5,000 jobs in fintech directly, attract an additional €1 billion (about $1.23bn/£865m) in investment over two years and ‘will position Spain as one of the benchmark countries in the field of fintech regulation in Europe’.
Examples of well-established fintech sandboxes include those operated by the UK Financial Conduct Authority (FCA) and Monetary Authority of Singapore (MAS).
Spain’s Secretariat General for the Treasury & International Financing is planning to incorporate lessons learned from the first cohort into guidelines for projects seeking to make it into future cohorts. Projects that were unsuccessful in the first round will be able to try again.