Fintech Has Outgrown Sandboxes, Now It Needs Airports

So what can replace or improve regulatory sandboxes, making them more meaningful for their sponsors and more value-adding for companies? Regulatory airports are a better model, as well as a more fitting comparison point, than sandboxes; the latter metaphorically belonging in a playground, rather than at the nexus of dynamic markets, investments and new technologies.

This airport concept can be seen in the models espoused by some of the most successful global fintech hubs such as New York, Singapore, Paris, the UAE and Bermuda, among others. What is notable about these locations is how they all bear the properties of city-states or financial technology entrepots where real-world financial market innovations meet pro-innovation regulations. Like an actual airport, their attractiveness to a global audience of investors and operators resides in offering the opportunity to visit and eventually stay.

Despite the reality that many fintech offerings are inherently global, they ultimately need desirable places to land and intersect with traditional financial markets. Where sandboxes are too restrictive and often disconnected from real markets, airports have the opportunity to be more inviting by, for example, enabling banking partnerships for fintech companies, while setting the conditions for an extended regulatory stay (or in the parlance of regulatory licensing, passporting). A regulatory airport can be more strategically linked to investment promotion initiatives or native financial, technological and talent ecosystems that may already be present in a jurisdiction.

In developing regulatory airports, sponsors (whether countries, regional alliances or specific regulatory agencies) may consider strategic policy in making their jurisdictions more attractive. For example, a perennial challenge with novel activities or technologies in financial services is the boundary line between where “fin” ends and “tech” begins; it is often difficult for early-stage companies to get banking access. An airport can specifically ensure banking access is provided, which not only helps build early partnerships, it is critical for enhancing consumer and market protections by localizing potentially flighty money in the regulated banking system.

Most countries also eschew the idea of merely being a regulatory haven where companies establish-post office boxes, rather than a substantive nexus of mind and management. As the race to the bottom of regulatory arbitrage in often formless crypto markets has shown us (where products are often offered in a decentralized manner with no accountable management), regulating activities, as the EU has done with the far-reaching Markets in Crypto Asset regulation (MiCA), provides a better model than consigning new markets to the financial shadows.

The key is that jurisdictions can dictate the types of businesses and business models they want to build a competitive advantage around, while companies of all sizes have the opportunity to determine what ecosystems, regions or markets they want to be a part of. The airport construct allows visits to occur within clear boundaries, time commitments and regulatory or supervisory locks.

For example, a global insurance hub like Bermuda has attracted a novel category of insurance startups such as Ensuro, which is leveraging blockchain to create self-liquidating categories of insurance for hitherto uninsurable use cases. Rather than consign a viable but early stage firm to a sandbox, Bermuda’s regulatory depth and global respect in the insurance markets becomes a major selling point for counterparties, customers and investors inclined to use Ensuro’s platform.

In this instance, rather than running the risk of Ensuro going elsewhere (or insidiously risking technological or competitive obsolescence in the case of a slow-moving sandbox), the jurisdiction keeps the new entrant, and the new entrant leverages being regulated as a part of their competitive advantage – thus producing better outcomes compared to an inconclusive sandbox trial.

In more complex markets or categories of products such as securities or commodities, or where a consumer protection burden is high with retail financial products, regulators are often doing with enforcement what can be adequately resolved with better disclosure. Regulatory airports can more clearly impose conditions of entry in the case by supporting passporting of new products or clear disclosure regimes.

For example, in fast-moving and risk-prone crypto asset markets, rather than banish activities outright, some regulators are requiring exchanges to pre-clear and disclose risks in a harmonized manner for all digital assets. In this way, activities can continue evolving and improving, while informed consumers, market participants and regulators can continue taking informed risks. This model is being followed in the UAE by leading regulators such as ADGM.