Arizona Creates a Regulatory Fintech Sandbox

Arizona has become the first state in the US to enact a law that creates a regulatory Fintech Sandbox. This is an interesting move as the US Securities and Exchange Commission has been slow to embrace Fintech innovation by creating their own Fintech Sandbox meanwhile other regulators around the world have created a safe zone for Fintech startups to test new applications and financial services. First launched by the UK, countries such as Singapore, Australia and more have since emulated the Brits. The Arizona bill (HB 2434), sponsored by state Representative Jeff Weninger, was signed into law by Governor Doug Ducey this past week. The Arizona Attorney General, Mark Brnovich, promoted the idea of an Arizona Fintech Sandbox at the end of 2017 thus pushing the concept forward. The Arizona Attorney General’s Office will administer the sandbox that will create a low cost environment to enable startups to experiment minus the excessive regulatory burden.

“The idea of a regulatory Fintech Sandbox is not new, and while it’s being discussed at the federal level, Congress is moving at a glacial pace,” said Attorney General Mark Brnovich. “Arizona has always been a state for big ideas and this is just one more place where we are trailblazing in entrepreneurship and innovation. I hope to see the sandbox serve as a catalyst for capital investment in Arizona and provide opportunities for Arizona businesses and consumers to thrive.”

The law includes a reciprocity provision permitting the AG to enter into agreements that would allow Arizona sandbox participants to operate in other jurisdictions that establish similar programs.

The Regulatory Fintech Sandbox program includes:

  • The Office of the Attorney General is responsible for approving and providing entry of applicants into the Sandbox.
  • The Sandbox program will be administered by the Civil Division of the office.
  • The regulatory Sandbox will likely be active and ready to accept applications by late 2018.
  • Application fee amounts will be determined by the Attorney General’s Office at a later date.
  • Sandbox participants must provide detailed information regarding their service or product on a form prescribed by the Attorney General’s Office.
  • Sandbox participants will have 24 months after their approval date to test their innovative financial product or service.
  • A sandbox participant may be granted an extension of up to one year upon request to the Attorney General’s Office.
  • Consumers must be Arizona residents.
  • The Sandbox provides caps on the numbers of individuals who may participate in a particular Sandbox agreement and caps on the amount of loans that may be issued.
  • The Arizona Consumer Fraud Act guides all products and services offered in the sandbox and any product offered in the sandbox must comply with all statutory limits and caps in Arizona law related to financial transactions.
  • The program ends on July 1, 2028.

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So will other states follow the lead of Arizona? That is a good question. The US is different in the fact that each state has a financial regulatory that overlaps with Federal rules. This regulatory duplication hinders innovation and competition. By creating a Sandbox, Arizona may help entrepreneurs launch services in a highly regulated industry. But in the end, the real solution is to have a Federal Sandbox at the SEC, an entity that has been oddly hesitant to change and adapt.

459033 Arizona House Bill 2434
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