Christopher Giancarlo, acting chairman of the U.S. Commodity Futures Trading Commission, announced an innovation lab this month designed to further the future of fintech. The initiative, which draws on the idea of giving fintech companies in the commodities and derivatives markets greater access to the commission, is intended to bring “21st century regulation for today's capital markets.” But in a speech delivered May 17, Giancarlo stopped short of referring to the initiative, LabCFTC, as a regulatory sandbox — an environment in which companies can test new products and business models without worrying about regulatory consequences — because so far there is no intention of providing any regulatory relief for participating companies.

The announcement of LabCFTC, along with the Office of the Comptroller of the Currency's proposed fintech charter, released in March, show that regulators are looking for ways to support the industry. But all of these developments combined beg the question: Will the U.S. at any point introduce a regulatory sandbox like those seen in the United Kingdom or Singapore? While many fintechs, particularly early stage startups, would likely welcome the regulatory exemptions sandboxes provide while developing their products, many lawyers in the industry are skeptical that a sandbox will happen in the U.S. because it has some unique challenges working against it.

Unlike in the U.K., which is highly regarded as a leader within the fintech industry, the greatest challenge for a sandbox in the U.S. is that there is more than one regulatory body for financial services, according to attorneys who work in fintech. In the U.K., the Financial Conduct Authority is the primary agency to oversee financial services, so it's a fairly straightforward process to operate the sandbox under one regulatory regime.

In the U.S., lawyers said, various agencies, including the CFTC, OCC, the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Federal Deposit Insurance Corporation, potentially need to be involved on some level.

“It's tough. It would be very difficult to set up a sandbox that would allow for all of those regulators to have oversight,” said Dana Syracuse, senior counsel at Perkins Coie in New York. “Each regulator looks at technology through their own jurisdictional lens.”

Michael Nonaka, a partner with Covington & Burling in Washington, D.C., said there is “great value” in a sandbox for entrepreneurs, but “in order for a sandbox to work, you have to get the buy in from all the different agencies.” Even if that were possible to do, he said that with the dual banking system, the problem would “exacerbate tenfold” if state regulators were added to the mix.

Class-action litigation could also add to the complications of implementing a regulatory sandbox in the U.S., Nonaka said. There would have to be education and disclosures notifying consumers about the sandbox and how it works. Otherwise, he explained, exemption from federal regulations would be futile because fintech companies would still be subject to potential liability in the form of class actions filed by consumers. “That's substantial and would have to be addressed in sandbox legislation,” he said, suggesting the possibility of adding a clause that protects sandbox participants from this type of litigation.

In many regards, the U.K.'s Financial Conduct Authority has been at the forefront of innovation in terms of regulators trying to accommodate fintechs, but other countries are making their mark as well.

Singapore's leaders have notably loosened regulations in an effort to encourage fintech entrepreneurs to start and build their businesses there.

The Monetary Authority of Singapore states on its website: “Depending on the experiment, MAS will provide the appropriate regulatory support by relaxing specific legal and regulatory requirements prescribed by MAS, which the sandbox entity will otherwise be subject to, for the duration of the sandbox.”

Nicolette Kost de Sevres, a partner with Mayer Brown, points out that Australia, Hong Kong, Malaysia, Thailand, United Arab Emirates, Bahrain, Russia, Switzerland and Canada are among the other “leading jurisdictions” that have or are planning to put in place a fintech regulatory sandbox. “Many of them differ on the process, [setting up a sandbox] either by granting special licenses, creating blanket exemptions or creating testing processes,” she said.

Kost de Sevres said that the LabCFTC resembles two services at the FCA in the U.K.: Innovation Hub and Advice Unit, which she noted are both fintech developments from the FCA but are distinct from the FCA Sandbox.

Even though what the CFTC has proposed is not on the level of a sandbox, many lawyers in the industry agree that this is a move in the right direction for regulators to show interest in learning more about fintech and fostering innovation.

“LabCFTC is a very positive first step,” Kost de Sevres said. “It responds to the need for regulators to get educated about innovation, and the CFTC is doing this in a very responsible manner.”

There was a bill introduced by U.S. Rep. Patrick McHenry of North Carolina last September that would require the SEC, the Federal Reserve System and the U.S. Department of the Treasury to implement a Financial Services Innovation Office aimed to help fintechs, though it would not create a sandbox. The legislation, H.R. 6118, the Financial Services Innovation Act of 2016, is currently stalled in Congress.

“The slower adjustment of the U.S. regulators to fintech, compared to other countries such as the U.K., might be due to the new political agenda in the U.S., the [Financial] CHOICE Act and many other potential regulatory reforms such as the potential Dodd-Frank repeal,” Kost de Sevres said. “However, we need to make sure that fintechs remain at the heart of the regulatory reform debate, in order to remain internationally competitive in that space.”

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