The Central Bank of the Bahamas is consulting on the ‘feasibility’ of introducing a regulatory sandbox.
A growing number of financial authorities worldwide operate sandboxes – controlled environments for firms to test innovative propositions – with 111 regulatory sandboxes now in existence, according to the ‘Global Regulatory Innovation Dashboard’ (an interactive website maintained by the Cambridge Centre for Alternative Finance).
The Central Bank of the Bahamas (CBB) is planning on following suit, explaining in a 20-page consultation paper that the digitalisation of finance ‘raises several implications for the Central Bank in terms of defining its regulatory parameters, assessing the adequacy of existing rules and regulations and adapting effective supervisory framework and approaches’.
The authority believes that a sandbox ‘will enhance its supervisory capacity to accommodate financial technology innovators and services providers seeking to introduce innovative products and services, delivery channels and technology platforms to potential customers.’
The consultation paper outlines the proposed structure of the sandbox framework and identifies challenges and considerations in the context of current regulations. It also addresses the eligibility criteria for prospective applicants and proposed five-stage ‘sandbox lifecycle’ for approved applicants.
RELATED ARTICLE Irish central bank preps sandbox launch after ‘broadly positive’ feedback – a news article (7 June 2024) on a ‘innovation sandbox programme’ being established by the Central Bank of Ireland
Four questions asked
The paper, which has a deadline for 31 August for responses, sets out how the sandbox would be devised to support entities seeking to introduce ‘nascent fintech products and services, delivery channels and technology platforms’ to potential customers and investors.
‘By exploring the tenets of the Regulatory Sandbox as a supervisory tool, the Central Bank would be seeking to amend, establish, or develop the legislative and policy framework, authorisation requirements, and bespoke supervisory provisions under which participating entities could be introduced to the regulatory environment,’ the paper states. ‘The Sandbox would also provide the Central Bank with the flexibility to test its ability to grant conditional regulatory exceptions as part of the application process in order to assess and evaluate the viability of an applicant’s business plan and its proposed impact to the financial services sector.’
In the paper the CBB lists four main reasons how the sandbox framework ‘could potentially to deliver competition that is more effective, in the interests of customers’. They are by: reducing the time and potentially the cost of getting innovative ideas to market; enabling greater access to finance for innovators; enabling more products to be tested and thus potentially introduced to the market; and allowing the central bank to work with innovators to ensure that the appropriate consumer protection safeguards are built in to their new products and services.
The paper contains four questions, which are: whether approved applicants participating within sandbox that are not currently licensed as a regulated entity should be excluded from ‘engaging the public’; whether the sandbox’s framework should be entrenched in legislation; where an approved applicant proposes to have an outsourced arrangement with a third-party service provider, whether both entities should be required to be approved participants (by the CBB within the sandbox); and where the CBB identifies aspects of the business model of the applicant that appear to fall within the regulatory purview of another financial services regulator, whether the other regulator should be included as part of the oversight and review of the application.
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Annual cohorts proposed
A section of the paper titled ‘Regulatory Sandbox Lifecycle’ explains that each approved sandbox participant would undergo a five-stage process: pre-application; application; evaluation; testing; and exit.
The proposed structure ‘allows for’ a cohort system, which it explains as being ‘for a group of entities that share the same characteristics of being allowed to enter the sandbox at the same time and for the same duration’. The sandbox would allow one cohort per year, which would be named after the year the cohort was accepted (for example, ‘Cohort 2024’), the paper explains adding that the number of entities that may be accepted into a cohort will be determined based upon the ‘functional resource capacity’ of the central bank.
The Bahamas, which has a total population of about 400,000 people, is an archipelago nation spanning 700 islands located southeast of Florida and north of the Greater Antilles. Its central bank launched a central bank digital currency (CBDC), the Sand Dollar, almost four years ago.
Just last month (30 July), the Securities Commission of the Bahamas announced that a Digital Assets and Registered Exchanges Act 2024 (DARE 2024) has been passed into law by parliament. A Securities Industry Act 2024 was passed into law simultaneously.
The Securities Commission described DARE 2024, which builds upon the DARE Act 2020, as introducing ‘comprehensive reforms designed to address the evolving landscape of digital assets and cryptocurrency markets.’
RELATED ARTICLE Sandboxes could ‘amplify problems’: IMF analysis questions many test-spaces’ impact – a news story (11 September 2023) based on a paper mentioned in the section below
IMF analysis of sandboxes’ efficacy
An analysis published by the International Monetary Fund (IMF) last year urged authorities to think carefully about whether devoting resources to new mechanisms such as sandboxes to help with private-sector engagement is worthwhile, stating that for most authorities existing structures will likely do a better job.
‘There are several ways to strengthen surveillance and respond to the challenges of fintech,’ noted the 58-page ‘Institutional Arrangements for Fintech Regulation: Supervisory Monitoring’ analysis. ‘For most authorities, existing supervisory structures will allow them to effectively monitor new fintech developments and respond to challenges. Using existing resources and infrastructure can allow authorities to monitor new fintech developments and identify risks while saving cost and time on the design and implementation of new structures.’
‘Sandboxes may not be the most effective way for many authorities to monitor fintech developments because they are resource-intensive and costly, and engagement extends to a relatively smaller number of firms over a longer period,’ the report concluded.
It went on to add that ‘sandboxes are not a sensible fix to underlying problems with supervisory structures and could amplify existing problems as well as allow authorities to carry out risk-washing’.
The co-author of the IMF paper, Parma Bains, steered a discussion with financial authority representatives from Ireland, Latvia, Bermuda and Norway, plus the private sector, at the Global Government Fintech Lab 2024 in April.