Free Market

U.S. Congress Follows States’ Lead on Sandboxes

Sen. Mike Lee (R-UT) recently introduced the Promoting Innovation and Offering the Needed Escape from Exhaustive Regulations (PIONEER) Act. In short, the Pioneer Act would create a federal regulatory sandbox that could pave the way for much-needed regulatory relief for innovative ideas.

What is a Regulatory Sandbox?

Regulatory sandboxes create unique regulatory environments that temporarily waive specific regulations for the purpose of experimentation. Regulatory sandboxes enable innovators—both big and small, old and new—to work with regulators and legislators in trialing new products, services, and business models. 

Sandboxes are useful for many reasons, one of which being that a sandbox could create a pathway forward for new ideas caught between multiple regulated industries. The other benefit is that participants generate in-practice data. This data is useful for showing regulators and lawmakers which areas of the regulatory code are ripe for reform.

Regulatory Sandboxes Are Picking Up Steam as a Legislative Trend.

Regulatory sandboxes are far from a novel idea. Looking abroad, the United Kingdom conceptualized the first FinTech sandbox in 2014. By 2020, fifty-seven countries had implemented some form of regulatory sandbox.

Here in the states, Arizona, North Carolina, Utah, and many others have paved the way for regulatory relief with regulatory sandboxes. Some of these sandboxes are industry-specific for FinTech, insurance, legal services, as well as several others. Other states, like Utah and Arizona, have a universal sandbox to streamline the review of innovative ideas. 

Sandboxes have also gained bipartisan support among some state legislatures. In Nebraska, for example, a universal sandbox bill was introduced by Democrat Sen. Anna Wishart. In the District of Columbia, Mayor Muriel Bowser has taken an interest in regulatory sandboxes for FinTech regulation. Finally, North Carolina’s sandbox bill was shepherded through a Republican-led but diverse legislature and signed by Democrat Governor Roy Cooper. 

Late last year, U.S. Congressman Patrick McHenry introduced the Clarity for Digital Tokens Act, which would create a sandbox for cryptocurrencies and digital assets similar to Hawaii’s digital currency sandbox.

What is in the Federal Sandbox Bill?

Sen. Lee’s PIONEER Act is most similar to Utah’s universal sandbox legislation.

Creation of an Office of Federal Regulatory Relief: This office would handle applications, coordinate with agencies, and facilitate final decision-making.

Advisory Boards: Each agency would establish an advisory board made up of ten private sector representatives. These advisory boards would review applications and advise agencies on the impact of granting waivers. 

The bill would require a 50/50 split along party lines for advisory board members. The bill would also require that five members—or half of the advisory board—represent small business interests. The bill would also disqualify members who serve on an applicant’s board of directors from serving on an advisory board.

Sandbox Can Waive Rules, Not Laws: The federal sandbox would not have the authority to waive laws passed by Congress. Instead, the sandbox would review rules and regulations handed down by federal agencies.

In addition, the bill would not create a wholesale deregulation regime. The bill bakes in agency safeguards. If an agency objects to waiving one or all of the regulations, the sandbox cannot grant a waiver.

Annual Reports to Congress: The federal sandbox proposal would require the sandbox director to send annual reports to Congress. These reports would include status updates and recommendations based on data collected in the absence of waived regulations. 

Looking Ahead

In the states, sandboxes offer a unique opportunity for innovators, regulators, and legislators to work together to spur economic growth and prosperity. Through cooperation and knowledge sharing with state sandboxes, a federal sandbox could present a similar opportunity for federal regulatory relief.

To learn more about regulatory sandboxes, read our policy brief. Also, explore our dedicated webpage on regulatory sandboxes, which serves as an information center for all of our work on the topic.