Regulated Fintech Sandbox: The Becoming of Building Blocks for Financial Regulators
A deep dive into fintech sandboxes provisioning financial regulators with an improved toolkit.
The word ‘sandbox’ in the early days instantly made everyone relate to child’s play and painted the picture of an unending summer that gave the freedom to explore within a safe and secure space. In the ever-evolving digital world today, the concept of the sandbox remains the same, however, its application has been adopted in the real world to solve contemporary problems in a bounded environment.
The theory of sandboxes familiarises people with the paradox that exists there – freedom to explore within boundaries. Today, the sandbox can likely be related to the rectangular space of the computer screen that can reach every business in every corner of the world. The regulatory innovation experienced by the financial gatekeepers through this digital window has been the most lauded example of building a progressive and risk-based regulatory framework.
The presence of appropriate fortifications helps in containing the consequences of failure in the real world and is a part and parcel of a regulators’ toolkit, an early realisation by UAE capital’s International Financial Centre – Abu Dhabi Global Market and its regulatory arm, The Financial Services Regulatory Authority (FSRA). This realisation led to the launch of the MENA region’s first regulatory digital sandbox, RegLab in 2016. Five cohorts later, the experience has proven to be rich in learnings and takeaways, directly contributing to the launch of new regulatory frameworks by the FSRA.
Acknowledging the complementary benefits that firms gained from participating in the RegLab, the FSRA sought to build on its success by providing a platform for additional market participants such as financial institutions, venture capital firms and regulated entities to collaborate. This emerged through the creation of the ADGM Digital Lab which was launched in April 2021 as a marketplace and industry sandbox to encourage the development of proofs-of-concept under the guidance and supervision of the FSRA.
The unique environment provided by RegLab, and Digital Lab enabled the FSRA to identify and address shared industry challenges. It has worked as a well-designed and executed sandbox, facilitating innovation and protecting consumers by avoiding the pitfalls in both physical and virtual space that concern many critics. ADGM FSRA has taken a much broader view of sandboxes, one that includes not only testing and piloting but also focuses on knowledge-building and innovation-friendly policymaking. It chose to leverage a test-and-learn approach by capitalising on its regulatory sandbox, calling for innovators in the space to launch in the UAE market under the Digital Lab licence to develop financial services.
A testament to this is the graduation of the first tokenised fund launched in ADGM in November 2021 by Securrency through FSRA’s RegLab which will be a fully licensed firm that offers blockchain-enabled financial services. Another example is Europe’s largest lender, HSBC joining ADGM’s Digital Lab with a keen interest to explore and test new cost-effective solutions such as API and middleware-enabled solutions that could connect their systems with fintech and other technology providers.
In April 2022, the FSRA launched a call for applications for the 5th Digital Lab cohort focusing on specific innovations in financial services powered by decentralised applications and protocols. The cohort aims to attract the new generation of fintech solutions within the Web3.0 and token economy, building upon the recent publication of FSRA’s discussion paper on decentralised finance.
In July 2022, fintech start-up Lean Technologies graduated from the Digital Lab as the first firm to be licensed by ADGM under its Third-Party Provider framework (TPP) to provide third-party fintech services to customers of financial institutions. TPPs such as Lean Technologies intermediate the flow of information between customers and financial institutions by providing financial information and payment services.
Today, the FSRA continues to explore the intersection of finance and cutting-edge technology to inform its policy decisions. Agility in policy thinking and provision of regulatory tools to address emerging risks while supporting the various opportunities within the decentralised finance (DeFi) and virtual asset space has led ADGM and FSRA to be frontrunners in this ever-transforming sector and engaging innovators through its provisioning regulatory sandbox, every step of the way.