Arizona’s financial technology (“fintech”) sandbox is the first of its kind in the United States. It is open to startups operating in areas that would otherwise require a state license, such as consumer lending, mortgage lending, and money transmission.
Rationale: Innovative financial services and products are often accompanied by high uncertainty, and often unclear compliance costs and regulatory responsibilities due to their novel approaches. Regulatory sandboxes aim to mitigate such deterrents as fintech entrepreneurs weigh these risks, while also allowing Arizona's government to ensure that the public interest is adequately protected.
Arizona’s sandbox provides fintech startups with the opportunity to apply to test the market viability of their product on a small scale for up to two years before deciding whether to incur the costs of licensing and compliance.
If approved, participants can engage in financial services activities under regulatory supervision. As explained in "Fintech Regulatory Sandboxes: Update on Arizona’s Sandbox and Other Developments", the sandbox is designed to provide a dynamic arrangement where the participant and the regulator can observe what is happening in the market and make adjustments as needed regarding monitoring and regulatory compliance at the state level.
During the two-year sandbox participation period, activity- and consumer protection-based limitations include:
- Participants may test an approved product or service for up to two years.
- The Sandbox limits the number of consumers, transactions, and amounts transacted—with specific limitations linked to the particular service or product that the participant provides. For example, a participant engaging in money transmission may provide its service to no more than 10,000 customers, with the aggregate amount of each customer’s transactions limited to $25,000.
- Participants must provide specified disclosures to its customers and keep sufficient records for purposes of consumer protection enforcement.
After two years, participants must either apply for a license to continue its service or stop providing the service in Arizona. In limited situations, participants may apply for an extension of up to one year after the first two-year period has expired.
Office of the Attorney General for Arizona.
The Attorney General’s Office receives and approves applications in consultation with other state agencies as appropriate and oversees the operation of the program.
To be approved, a participant must offer an “innovative” financial product or service, based on either an “emerging technology” or the “reimagination of uses for existing technology.” Financial services permitted within the sandbox include sales finance, consumer lending, investment management, and money transmission.
Applicants must provide details of the innovative financial product or service, the testing plan, a “Consumer Protection Plan,” and an exit plan. The Consumer Protection Plan requires that applicants identify:
- Targeted consumers;
- How the applicant plans to market to those consumers and disclose their participation in the sandbox;
- Key risks to consumers;
- Their plan to address those risks; and
- How the applicant will monitor and assess testing of the product or service so as to protect consumers in the event the test fails.
The application fee is $500.
January 18: The FinTech Sandbox bill is introduced to Arizona's House of Representatives, sponsored by state Representative Jeff Weninger.
March 22: Arizona House Bill 2343 is signed into law by Governor Doug Ducey.
August 3: The Arizona FinTech Sandbox is officially launched with an open call for applications.
September 12: Arizona announces a cooperation agreement with Taiwan's financial regulator, the Financial Supervisory Commission (“FSC”). The agreement is limited to information sharing with the hope that one day participants in either program will be able to test their products in each jurisdiction simultaneously.*
September 17: A media launch event is held in the United Kingdom where local entrepreneurs hear from UK and US fintech industry experts on how Arizona’s fintech sandbox will support UK-US financial services trade deals.
October 11: Arizona Attorney General Mark Brnovich announces the first sandbox participant.
Arizona makes additional efforts to establish formal reciprocity among regulatory sandboxes internationally, such as with the United Kingdom, which has its own fintech regulatory sandbox.*
October 24: Arizona enters into its second international cooperation agreement with the Polish Financial Supervision Authority. It also joins the Global Financial Innovation Network (“GFIN”), an international group of financial regulators spearheaded by the United Kingdom’s Financial Conduct Authority. GFIN aims to support financial innovation and facilitate cooperation among regulators on innovation-fostering policies, tests, and initiatives.
Regulatory fragmentation is a major challenge for fintech entrepreneurs in the United States. Because multiple federal and state agencies regulate financial markets, fintech innovation is complicated by multiple layers of compliance. The laws of Arizona apply exclusively to its sandbox. Consequently, participants must ensure that their activities do not implicate federal laws or those of other jurisdictions.
Close observers argue that for the benefits of sandbox-like programs to be fully realized, federal agencies will need to participate in regulatory coordination with state agencies. This will require, according to a paper by Frazier, Grant and Walter, that federal agencies exercise their exemptive authority to ensure sandbox participants are not burdened by federal regulations that are redundant of exempted state regulations. More details are available here:
- Frazier, Grant and Walter, Regulatory Sandboxes: How Federal Agencies Can Take Part in Cooperative Federalism and Catalyze Innovation and Economic Growth through Exercise of Their Exemptive Authority (March 25, 2020). Dartmouth Law Journal, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3561263.
Paul Watkins, Head of Innovation, Office of the Arizona Attorney General. Mr. Watkins was subsequently recruited by the U.S. Consumer Financial Protection Bureau to help the federal government set up a sandbox program.
Evan Daniels, Fintech Sandbox Counsel, Office of the Arizona Attorney General.
Mark Brnovich, Arizona Attorney General. He promoted the idea of an Arizona Fintech Sandbox at the end of 2017 thus pushing the concept forward. When the legislation was signed into law a year later, the Governor was quoted saying: “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. 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.”
*Arizona's sandbox legislation includes a provision that permits the Arizona Attorney General to enter into reciprocity agreements with other states, and federal and foreign regulators, that allow participants in other jurisdictions’ sandboxes to be recognized as Arizona Participants, and vice versa.