With Congress reopening, the SANDBOX Act introduced by Sen. Ted Cruz (R-TX) will again take the stage. If passed, it will construct a framework at the federal level for a regulatory sandbox program.
As the name suggests, a sandbox provides innovators with a safe place to create products and get consumer feedback, enjoying freedom from some regulatory risk in exchange for specialized regulatory oversight. As the federal government and many states prepare to adopt these rules, they would do well to learn from challenges encountered by pioneers in the field.
After the United Kingdom (U.K.) passed the first sandbox law in 2015, Arizona became the first jurisdiction to create a U.S. version in 2018, and 13 other states have since adopted their own variations. Analysts have had ample opportunity to recognize flaws and make adjustments, so jurisdictions readying themselves to craft their own legislation can sidestep some of the pitfalls and skip to the rewards:
More Participants
Sandboxes only yield gains if developers use them. Especially in small and/or sparsely populated states, such as West Virginia, sandboxes have struggled to get enough applicants to generate a robust group of participants.
Most places should steer clear of the short application windows useful in a cohort model, opting instead for open enrollment to ensure the maximum number of entrants. The U.K., which has more time experience than any other country, switched to an always-open model in 2021.
Additionally, putting more responsibility on regulators and less on entrepreneurs will attract a larger pool. Sandboxes can loosely be categorized as narrow or wide, with narrow models mitigating few regulations or requiring applicants to specify exactly which regulations they wish to be mitigated.
This constitutes a challenge for most innovators, who typically specialize in their products and not in regulatory laws. As of March 2022, only ten of the 67 businesses that completed sandbox programs in the U.S. used narrow sandboxes. Legal confusion discourages applicants in narrow models; wider models encourage them.
Improved Data Utilization
Because one desired sandbox outcome is shared knowledge, the program must make the best possible use of data generated by the project. One concern about Sen. Cruz’s bill, voiced by the National Taxpayers Union Foundation (NTUF), is the emphasis on job creation over knowledge creation and utilization.
After four successful years with their sandbox, Utah recently updated its law to reflect this newly appreciated need. Utah’s Office of Regulatory Relief now has 14 days to report results to applicable agencies, and the agencies have 30 days to suggest legislative reform based on outcomes. Any new regional laws should likewise include strict criteria for gathering and using data.
Less Likelihood Of Regulatory Privilege
Industry lobbyists help craft regulations, purportedly to protect consumers with their expertise, but often with the outcome of eliminating competition. One of the primary benefits of a sandbox is the potential to prevent these regulatory privileges during development.
However, if implemented incorrectly, it also has the potential to cause the same predicament.
In Utah, a sandbox graduate specifically urged better transparency in the state’s program. As he noted, “Transparency is a powerful deterrent to harmful industry lobbyists because it allows the public to learn for themselves what’s going on.”
Of all pitfalls, unfair advantage is possibly the most detrimental. If industry insiders are able to infect advisory boards and agencies, they can intentionally squeeze out promising applicants and let in their own chosen ones. They can even obfuscate data. Indeed, regulatory privilege would totally undermine the purpose of these programs. Making boards and rules open to public scrutiny is imperative.
Conclusion
Regulatory sandboxes have been in use long enough to reveal their strengths and weaknesses. Free market enthusiasts still vouch for their usefulness, while admitting to the necessity of improvement on some current forms.
Jurisdictions new to the game should follow these developments closely. They are in the enviable position to skip some growing pains.