By James Czerniawski and Jon Sanders
Companion bills that passed the North Carolina General Assembly with little opposition would create a “regulatory sandbox.” It’s a novel administrative approach to regulating newly emerging products and services — in this case, financial and insurance technology.
The idea respects that technological change moves faster than regulations can adjust, so trying to apply old regulations to cutting-edge products could quash innovation, leaving consumers, innovators, and the economy worse off. Sandboxes waive certain regulatory obstacles on a trial period for fast-emerging products and services while keeping consumer protections in place.
Regulatory sandboxes offer a unique opportunity for states to find and loosen regulations that function mostly to block entry or stifle innovation. Since the U.K. introduced the first financial technology sandbox in 2014 to wide acclaim, sandboxes have increased in popularity worldwide, being adopted in Singapore, Abu Dhabi, Denmark, South Korea, and many other nations. The concept is catching on in the United States, starting in Arizona, Wyoming, Utah, Nevada, and, most recently, Florida and West Virginia.
Utah recognized the impact regulations can have on businesses. A survey in 2017 found that small businesses in the U.S. spend an average of $12,000 a year to comply with federal, state, and local regulations. Startups could spend as much as $83,000 on regulatory compliance. In Utah, 99.3% of businesses are small businesses; in North Carolina, it’s 99.6%.
Regulations can also hinder businesses from being able to fill critical needs during shortages brought about by emergencies. For example, during the early days of the pandemic, one of the goods in short supply was hand sanitizer. Distilleries wanted to help, since they are naturally able to produce hand sanitizer (the main ingredient is ethanol), but federal regulations prevented them from acting until they got permission from the government. Those delays kept a critical good from getting to the market faster.
Utah started with three sandboxes targeting some of the most rigid and heavily regulated sectors of the economy: financial technology, insurance, and legal services. Policymakers wanted to make sure the state was doing everything it could to put businesses in a position to be successful and to empower consumers.
As the process unfolded, Utah policymakers realized that identifying specific industries for sandbox programs, while helpful to a degree, could also come off as the government picking winners and losers. This past session, the Utah legislature unanimously passed the nation’s first “all-inclusive” regulatory sandbox. Now a company in any industry seeking to innovate and make the next great thing can have regulatory flexibility from the state that supports their endeavors without compromising the health and safety of consumers.
The program proposed by the “North Carolina Regulatory Sandbox Act” would target entities offering new financial or insurance products — or new ways of offering products — that could substantially use or incorporate new or emerging technology, including blockchain technology. A new “North Carolina Innovation Council” would support the program. It would evaluate applications by the product, its innovation, potential consumer risks, what consumer protections and complaint resolution the applicants offer, their business plan and capital, and other considerations. Successful applicants would receive a waiver from certain agency regulations for 24 months to test out a product or service.
They’d also be required to have a physical presence in North Carolina and pass a criminal background check. Their customers could be limited, and they could be required to post a consumer protection bond. At the end of the sandbox period, they would submit a final report to their regulating agency and keep records for five years.
It’s an idea that’s brimming with possibilities for North Carolina entrepreneurs. Regulatory sandboxes from Utah to the U.K. and many other countries have proven popular and successful. There’s good reason to think North Carolina could see similar success with its own.
James Czerniawski is a policy analyst in tech and innovation at Libertas Institute in Lehi, Utah.
Jon Sanders is senior fellow in regulatory Studies and research editor at the John Locke Foundation in Raleigh, North Carolina.