November 16, 2022

A Regulatory Sandbox in Ohio Can Promote Innovation and Regulatory Reform

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Ohio House Financial Institutions Committee

Chair Jordan, Vice Chair Ferguson, Ranking Member Crossman, and distinguished members of the committee, thank you for the opportunity to submit this testimony in relation to Senate Bill 249.

My name is Agnes Gambill West, and I am a visiting senior research fellow at the Mercatus Center at George Mason University. My expertise is in blockchain, financial technology, and decentralized finance, and I have done research on regulatory sandboxes. I have also shared my expertise to help other states in the process of enacting regulatory sandbox legislation, including North Carolina. I have attached a policy article that highlights the factors that make state regulatory sandboxes successful.

Today I would like to offer the following takeaways about regulatory sandboxes:

  1. Residency and reciprocity are important considerations in regulatory sandbox design.
  2. States should partner with nonprofits, such as innovation hubs, that support sandbox participants beyond the sandbox.

Sandbox Design: Residency and Reciprocity Are Key

At least 11 states have regulatory sandboxes; however, rates of participation in each state sandbox vary widely. One determinant of the variance is the degree of flexibility in the residency requirements of state sandboxes.

Sandbox legislation should have flexible residency requirements. It might seem that a requirement that sandbox applicants establish a physical presence in a state would lead to job growth and economic activity and be worth including in the program, but strict residency requirements may actually be a disincentive for out-of-state participants who do not want to relocate for the temporary duration of the sandbox.

For example, Wyoming’s legislation stipulates that applicants must have a physical presence in the state. By contrast, Arizona and Hawaii allow out-of-state applicants to participate in the sandbox. Hawaii and Arizona have accepted in-state and out-of-state participants into their sandboxes since the inception of those programs, whereas Wyoming’s sandbox has had no participants at all.

The present bill contains provisions that allow flexible residency. For example, the bill requires an applicant to establish a location in the United States, whether physical or virtual, that is accessible to the superintendent. At the same time, the bill provides that the applicant is still subject to the jurisdiction of Ohio through means other than residency, including incorporation or an agreement with the superintendent.

Provisions that support reciprocity with other state sandboxes could also attract sandbox participants. Statutory reciprocity allows sandbox participants to form reciprocity agreements with other states, which would allow those participants to access those states’ sandboxes and markets. In doing so, reciprocity multiplies the benefits of a sandbox by allowing participants to engage in experimental sandbox activity across multiple states, rather than in just one.

Currently, 7 out of 11 states that have regulatory sandboxes allow for reciprocity, including Arizona, Florida, North Carolina, Nevada, Utah, West Virginia, and Wyoming. Reciprocity gives startups cost-effective access to a larger market at an early stage and exposure to a variety of valuable business insights. Such reciprocal arrangements might be particularly beneficial to entrepreneurs who live in less populated or rural states and who desire access to a different geographical market and other regions with diverse economic activity.

The present bill contains a reciprocity provision, which allows the superintendent to enter into agreements with state, federal, or foreign regulators that would allow Ohio sandbox participants to operate in other jurisdictions and, likewise, permit participants of other states’ sandboxes to participate in Ohio’s program. This reciprocity provision gives in-state and out-of-state participants the opportunity to test innovative products and services in a flexible regulatory environment across a broader region.

Nonprofit Partnerships Can Support a Fintech Ecosystem Beyond the Sandbox

The duration of a regulatory sandbox is limited by design, can last on average from 12 to 24 months, and can be extended another 12 months upon request. This limited program duration is important because although sandboxes give entrepreneurs an opportunity to test innovative products and services in a modified regulatory environment, not all sandbox participants succeed by the time their regulatory waivers expire.

Upon completion of their participation in a sandbox, entrepreneurs need to plan for an exit strategy, and states can help with that transition. By partnering with nonprofits, such as innovation hubs, that support sandbox participants and innovation in general, states can build more effective fintech ecosystems.

Although regulatory resources may be constrained, nonprofits—especially innovation hubs—can fill an important gap by helping promote innovation and support sandbox participants before, during, and after participation in the sandbox. Specifically, nonprofits can shepherd applicants through the application process, give guidance on regulatory issues, provide contacts at regulatory agencies, and furnish technical and fundraising assistance.

For example, in creating a regional drone sandbox, Arkansas and Oklahoma have partnered with Tulsa Innovation Labs to establish a “launch pad” at the Helmerich Research Center at Oklahoma State University-Tulsa to fuel research and commercialization in the region. The collaboration also taps educational institutions, including community colleges, to support workforce development opportunities. In North Carolina’s regulatory sandbox bill, designated nonprofits can help sandbox participants with the design and implementation of products and services and with the sandbox’s application process.

The present bill acknowledges the importance of partnerships that support the successful implementation of the regulatory sandbox. For example, the bill states that the superintendent may work with any other state or federal agency to implement the regulatory sandbox, including InnovateOhio. Expanding these partnerships beyond agencies to nonprofits that support innovation in the state and region will amplify the growth and sustainability of innovation in Ohio.

Conclusion

Regulatory sandboxes can promote innovation and regulatory reform, but the design and execution of a sandbox matters. To attract applicants, Ohio should recognize the importance of flexible residency requirements and reciprocity provisions. Nonprofit partnerships can also create value by supporting applicants beyond the sandbox and creating a sustainable fintech ecosystem in Ohio.

Attachment

Agnes Gambill West, “States Can Attract More Entrepreneurs by Sharing Sandboxes,” Real Clear Policy, September 22, 2022.