The Startup Nations Summit of 2017 will be held in Tallinn, Estonia, while the country is holding the Presidency of the Council of the European Union. As such, it will be a magnet for policymakers from the region. This will provide Startup Nations members and other SNS delegates a chance to explore policy solutions currently being experimented with to unleash entrepreneurial innovation in the European and global markets.

The European Commission’s Directorate General Communications Networks, Content and Technology (DG Connect), in particular, will introduce to SNS 2017 delegates an innovative approach to policymaking: regulatory sandboxes.

A regulatory sandbox creates a "safe space" in which businesses can test innovative products, services, business models and delivery mechanisms in the context of regulation, with regulators. The sandbox framework enables firms to manage regulatory risks during the testing stage.

The sandbox is intended for testing new solutions, in real life situations, where potential consumer or user needs to be demonstrated, as well as the need to manage potential risks and to respect binding legal rules.

Not simple "de-regulation"

Regulatory sandboxes are not about "de-regulation", but rather an approach based on a two-way regulatory dialogue between an entrepreneur and an approachable regulator.

From a regulator's perspective, the largest advantage of a sandbox will be that anyone applying for a license will understand exactly what the process is before they attempt to launch. This also allows regulators to guide the innovative company through the process, enabling (and accelerating) the speed of launch.

Furthermore, another advantage is the possibility of real-time impact analysis, which ensures that the innovation is not going to undermine the safety and robustness of a sensitive sector (e.g. financial services ecosystem, connected transport, etc.), as envisaged by the regulatory bodies. This is a feature that adds value from the regulator's perspective, as the process mitigates the overall risk.

Entrepreneur-centric

Innovative firms, both start-ups and incumbents, often face disproportionate, inconsistent or over-cautious application of regulatory requirements. In the case of startups, their smaller teams may lack the experience to deal with regulatory compliance. Among established firms, current structures may be unable to efficiently respond to new developments emerging from their innovation teams.

Regulatory sandboxes are already considered to be a useful tool for areas such as fintech, blockchain, data, municipal services, automated transport and drones. It is in the financial sector – due to its intrinsic highly regulated nature – where sandboxes have primarily been tested.

Some European sandbox supervisors set up dedicated teams and departments to support fintech developments, via the so-called "innovation hubs" that aim to provide guidance to innovative firms (regardless of their size) and help them understand regulatory requirements.

Other sandbox supervisors also started a more systematic monitoring of innovation by establishing a regular forum with relevant stakeholders.

Finally, some are setting up regulatory sandboxes to work with pre-selected firms in testing innovative technologies. Sandboxes are mainly supervisory tools for firms and supervisors to explore how regulation should be interpreted and applied in light of a firm's new solution, by running live tests.

The sandbox framework enables ventures to manage regulatory risks during the testing stage, even though more solutions may be trialled later and potentially introduced to the market.

What’s next? 

The European Commission announced in November 2016 that it will explore an enabling framework for regulatory sandboxes.

The public consultation on FinTech: A More Competive and Innovative European Financial Sector, published on March 23 2017, asked stakeholders: “Are guidelines or regulation needed at the European level to harmonize regulatory sandbox approaches in the Member States? Would you see merits in developing a European regulatory sandbox targeted specifically at FinTechs wanting to operate cross-border? If so, who should run the sandbox and what should be its main objective?”

At SNS Tallinn, policymakers from outside Europe will test the approach hands-on via the SNS Policy Hack, and will be able to provide feedback and adapt the process to their own ecosystems.



Author: Pēteris Zilgalvis, J.D. is the Head of the Startups and Innovation Unit at the Directorate General Communications Networks, Content and Technology (peteris.zilgalvis@ec.europa.eu)