How a Sandbox Could Spur Economic Recovery
Outdated laws often protect existing industries against their upstart competition by not having foreseen future changes in business models and technology.
Even worse, for all the companies that eventually powered their way through these legal barriers, there are countless other would-be entrepreneurs who have stopped before even starting, deterred by restrictions that outlawed their idea before it had time to flourish.
But what would it look like for the government to adjust or remove regulatory roadblocks rather than stubbornly refusing to budge?
These questions aren't merely theoretical — they're increasingly becoming the new reality across the country. But the new approach to regulating innovative companies actually first began in another country — the United Kingdom — where in 2014, a "regulatory sandbox" was launched for financial technology (FinTech) companies whose new technology needed more flexibility since the business model didn't always line up with how financial systems had long operated.
The concept of a sandbox is well known in the tech sector as a testing environment where code can be safely deployed and tested without risking production environments and jeopardizing consumer data. These systems enable experimentation and innovation faster than might otherwise occur, given the reduced risk.
As applied to legal systems, a regulatory sandbox is an approach where a company can offer its products and services under the suspension of a particular law or regulation that might have otherwise inhibited it — and the concept is catching on in America.
States that step ahead
In 2018 Arizona became the first state to launch a FinTech sandbox, allowing companies to remain in said box for up to two years and service up to 10,000 clients before having to apply for a formal license. Wyoming followed in 2019, as did Florida, Hawaii, Nevada, Utah, and West Virginia shortly thereafter.
Several states have also explored how regulatory sandboxes might apply to other industries beyond FinTech. The insurance industry was the next target, with boxes created in Kentucky, Utah and Vermont.
Utah then began quickly outpacing other states in furthering the sandbox model to protect innovation. In 2020, the Beehive State's Supreme Court launched a first-in-the-country box for legal services to “profoundly re-imagine[e] the way legal services are regulated in order to harness the power of entrepreneurship, capital and machine learning in the legal arena.” One of the potential reforms is to enable non-practicing lawyers to have investments and even ownership in law firms, helping increase efficiency and reduce cost. Other companies are using automation technology to provide routine legal services at a substantially reduced rate. Since then, California has also approved a legal service sandbox.
As novel as this legal service was, the Utah Legislature has pressed forward to create an all-inclusive regulatory sandbox — meaning any business in any industry can benefit from a flexible approach. House Bill 217 received unanimous votes at every step of the legislative process and is another first-in-the-country model for encouraging innovation.
This broad approach across every economic sector is a recognition that elected officials cannot foresee the future. As best as they might try to regulate what is seen, they do not know what is unseen; no one can predict what innovations might soon come. So, rather than subjecting entrepreneurs to narrow-minded regulatory barriers conjured up in the past, a regulatory sandbox allows them to hit "pause" on an offending law or regulation while elected officials catch up and revise the law.
Take Turo, a company that allows individuals to rent their cars to others using an app, much like Airbnb, but for vehicles. Across the country, states and local jurisdictions have laws in place that prohibit individuals from directly renting vehicles, as the car rental companies have concocted and defended legal frameworks that protect their business model.
But why should individuals who simply want to share their car for a modest profit be punished? Rather than criminalize conduct that is later legalized after elected officials review and resolve the matter, why not temporarily shield the innovative company and its customers and clients while the law catches up? This is precisely what a regulatory sandbox allows.
This does not allow for the suspension of laws directly tied to health and safety; any important consumer protections fully remain in place and won’t be waived. And during their time in the sandbox, companies are in close communication with the relevant regulators to monitor progress and ensure safety. Elon Musk recently pointed out that "rules and regulations are immortal and if we keep making more every year and do not do something about removing them, then eventually we'll be able to do nothing."
The world is better because of innovators who create new products and services that benefit us all. But what innovations have we all been deprived of because would-be entrepreneurs thought up ideas that were illegal at the time and didn't have the capital and lobbying power to strong-arm their way through the many regulatory barriers?
Looking forward, Utah's all-inclusive sandbox is likely to be adopted by other states also looking to boost economic recovery and welcome innovation and investment, signaling that they are open for business and hoping to help entrepreneurs who want to think up new ways of doing things.
As policymakers explore how best to help businesses in the aftermath of a pandemic, the answer might lie in a regulatory sandbox that helps get the government out of the way of entrepreneurs who can best solve the many problems we face.