Technology Sandbox—Coming Next to a Regulator Near You

How are innovation playgrounds working out so far? 

Who does not like a sandbox?  Then why not use them to unlock regulatory quagmires?  This argument is being offered increasingly around the world, including by the likes of Elon Musk and others facing regulatory barriers.  If valid at all, regulations are for fighting the last war and are rarely suitable for the innovative world that is on our doorsteps.

The few times we have put regulations aside, the argument continues, miracles have happened. Like Covid vaccines developed in months instead of decades, along with telehealth services (benefitting in the U.S. from removal of cross-State borders restrictions).  So, why not apply the idea to the digital sector overall.  In fact, regulatory sandboxes are what countries from Australia to India and Malaysia to the UK are installing. 

The theoretical benefits of the sandbox seem obvious on the face of it.  If the new approach does not work, then existing market and regulatory practices continue.  If it does, then there is a clearer idea of how legacy regulations should be changed.  Still, in practical terms, implementing a sandbox, and suspending some regulations to do so, has turned out to be complicated.  There is a need for clear definitions of the roles of each of the sandbox stakeholders and of privacy safeguards.  Also, for clear criteria as to which types of innovations qualify for sandbox treatment along with a clearly designated administrator.   

In two cases we recently examined in Kenya and Mauritius, the process has taken not months but years.  In Kenya, the sandbox concept was introduced in 2017, then took two years to flush out and implement, but is now underway with several fintech companies conducting service or product tests.  The sandbox administrator is the Capital Markets Authority of Kenya and not the telecom regulator, whose own approach to fintech innovation has centered on limiting the market position of Safaricom, a leading digital innovator due to its m-pesa service.  In Mauritius the Economic Development Board is the administrator, with numerous sandbox licenses issued to date to a diverse set of fintech projects, from cryptocurrency exchanges and digital wallets to crowdfunding platforms and blockchain-based KYC systems.

As for telecom sandboxes specifically, Colombia may be the most advanced along this path.  In 2020, its regulator introduced the sandbox concept to allow the testing of new business models and support advances in technology in particular areas for limited time periods (one year with a possible one-time extension).  The criteria for acceptance of proposals include the expected public benefits, the innovation involved as well as the entity's experience.  So far, the regulator has received more than 20 proposals, three of which (network and operations focused) have been authorized to proceed.

Even for the experiments that are promising, down-the-road issues should be noted.  If an innovation or new business model makes sense, how will the regulator undo existing layers of regulation (including associated legislative and judicial steps) fast enough so that the new approach can be implemented on a regular basis?  Moreover, as attempts to spur innovation by MVNOs have shown, the results while positive in advanced economies, have been limited in emerging ones where the main MVNO impact remains serving diaspora voice calling users at reduced prices. 

In other words, a limited trial that appears successful does not always ensure widespread success. We will continue monitoring the sandbox experience around the world.  Are we dealing with shiny toys or a valuable regulatory tool?  Stay tuned.