The Special Secretariat of the Ministry of Economy, the Central Bank of Brazil, the Securities and Exchange Commission and the Private Insurance Superintendency issued on last June 13 a joint statement making public the intention to implement a sandbox regulatory model in the country.
The Government entities justify the measure referring directy to the use of innovative technologies such as distributed ledger technology (DLT), blockchain, among others. According to the institutions, these technologies have been allowing new business models, with impact on the products and services offering with higher quality and range.
It is known that the laws cannot keep up with the pace of innovation, and that is why legislators in many countries face the same challenge: updating existing standards to give legal security to the new realities created through innovation or simply waiting the market to try by its own these new technologies based on the existing legal framework.
Certainly, it is not an easy task. Given this dilemma, the sandbox regulatory model is gaining momentum worldwide, as it allows the regulator to act with some flexibility in granting rights and distribution of duties, and at the same time providing the much dreamt legal security for entrepreneurs and investors. As a result, they claim that those regulated activities remain suitable to the rules of each segment, especially with regards to legal security and protection of customers and investors.
Why the crypto regulatory sandbox in Brazil is great news
The news is therefore very timely for the Brazilian market. The Brazilian authorities had already indicated in 2018 that a regulatory sandbox model was being studied and the joint statement confirms the initiative.
The term sandbox, in literal translation for the Portuguese language, is used in computer science, when there is the intention to isolate the execution of certain program or software in a test environment, a virtual ecosystem, delimited and neutral. That way, you can test the initiative in a closed environment in order to protect the rest of the computer’s operating system. Which means, the sandbox is an effective way to test new microsystems without compromising the system as a whole
The regulatory sandbox is a concept, adopted in countries such as the United Kingdom, in which, for a limited period of time, the current regulatory standards are eased in order to allow technology companies, such as fintechs, to develop themselves without breaking the legal rules. In reality, this period of simpler rules act as a “push” to the initial development of the companies.
There are many benefits that can be tested in a Brazilian sandbox model, highlighting the following:
(a) the approach and greater interaction between the regulator entity and the industry-fintechs, allowing a better understanding of the market and ensuring that adequate consumer protection standards are incorporated into new products and services;
(b) allowing more products to be pre-tested and therefore ensuring they are complying with the regulations before being released into the market;
(c) reducing the time and, potentially, the cost of putting innovative ideas into the market with legal security;
(d) enabling greater access to financing for the genuinely innovative projects, since it would be eliminating the legal and regulatory uncertainty of some projects beforehand, and consequently attracting more investors to support the projects.
Regulatory sandbox is used successfully in other countries
The sandbox has been used with increasing frequency in other countries, especially the Anglo-Saxons ones. In the United Kingdom for instance, the regulatory regime of sandbox was officially released in June 2016. This new system allowed the creation of environments for the establishment of new product tests, without the risk of being punished by the regulator, which is one of the biggest concerns of the entrepreneur and new projects’ investors.
However, this regulatory gift or advantage is not granted for any venture and some eligibility criteria are required from the entrepreneur so that it can benefit from this test environment. The FCA – Financial Conduct Authority, regulator within the United Kingdom, for example, requires compliance with certain requirements, which are:
(i) the product or service that will be tested represents true innovation;
(ii) consumers will be benefited by innovative product/service;
(iii) the entrepreneur must establish appropriate guarantees for the secure management of risks and consumers protection;
It´s also important to emphasize that the regulatory sandbox in the United Kingdom and in most countries where this model is adopted, such as Malaysia, Singapore and Australia, is not approved for an indefinite period. Entrepreneurs should establish an implementation schedule of tests and final release to the market out of the sandbox environment.
The deadlines were not disclosed, as well as phases, processes and/or procedures for the regulatory sandbox in Brazil to initiate and actually boost innovative projects in Brazil. In any case, the news in itself is quite encouraging. Pursuing this line of attack, Brazil would be lining up to the best practices of global regulators in order to allow and encourage innovation in financial markets.