Pub. 9 2019 Issue 3

12 www.azbankers.org By Mike Patterson and Caroline Lynch W HEN ARIZONA GOV. DOUG DUCEY SIGNED HOUSE BILL 2434 INTO LAW LAST YEAR, HE ESTABLISHED A FINTECH REGULATORY SANDBOX ADMINISTERED BY THE ARIZONA ATTORNEY GENERAL, 1 THE FIRST OF ITS KIND IN THE UNITED STATES. THE SANDBOX OFFERS AN OASIS, IF YOU WILL, FOR FINANCIAL TECHNOLOGIES STYMIED BY AMERICA’S ONEROUS FINANCIAL REGULATIONS. IT IS FITTING THAT THE FIRST U.S. SANDBOX WAS LAUNCHED IN ARIZONA, A STATE DEDICATED TO PROMOTING TECHNOLOGY AND INNOVATION, SPURRING ECONOMIC GROWTH AND JOB CREATION, AND REDUCING REGULATORY BARRIERS TO ENTRY FOR BUSINESSES. As Arizona Attorney General Mark Brnovich, who spearheaded cre - ation of the sandbox, noted last year, “Arizona has always been a state for big ideas and this is just one more place where we are trailblazing in entrepreneurship and innovation. I hope to see the sandbox serve as a catalyst for capital investment in Arizona and provide opportuni - ties for Arizona businesses and consumers to thrive.” 2 Under the law, which took effect Aug. 3, 2018, the Attorney Gener - al’s office has received 15 applications for entry into the sandbox. Seven participants have been admitted, offering products ranging from blockchain-enabled auto title liquidity to mobile hospitality payment solutions. Arizona followed up on its groundbreaking fintech sandbox with the enactment on March 20 of House Bill 2673, which creates a property technology sandbox. 3 This sandbox, administered by the Arizona Commerce Authority, will take effect on August 27, 2019. A sandbox is a regulatory program, typically premised on a particular trade, that provides relaxed regulatory requirements in exchange for limited access to the market and customized regula - tory requirements. 4 A sandbox gives temporary regulatory relief by allowing companies to test their products for a finite period of time before seeking a formal license, enabling innovators to perfect their technology and establish market viability. The test is approved and supervised by a regulatory agency from day one without asking the company to comply with expensive reporting obligations. 5 Sandboxes also serve as testing grounds for regulators. Antiquat - ed regulations and licensing structures simply do not adequately keep up with rapidly changing technology. From e-signatures and remote notarization to digital records and virtual businesses, technology is changing not just the products and services offered to consumers, but how companies operate. Distributed ledgers and digital tokens are being harnessed to offer digital payment and liquidity products. Unlike traditional corporations, these networks are decentralized across multiple operators, and they lack the central authority typically subject to licensing, audit and reporting requirements. State and federal regulators can use sandbox testing to study and modernize their licensing regimes to account for new ways of doing business. 21st Century Technology; 20th Century Regulations Technology is revolutionizing financial products and services. Global interconnectivity, smart phones, and accelerated computing power enable consumers to deposit, send, and borrow money, shop and apply for mortgages and other lending products, or trade digital currencies and stocks through a website or an app on their phone. These financial technologies, or fintech, offer 21st-century alter - natives to traditional financial services such as banking, payment systems, or investment advice. A wide array of fintech products are coming onto the market today, but each at its core delivers a financial service to a consumer in an innovative way. 6 These financial technologies don’t simply meet modern-day customer demands for convenience and efficiency, they bring an unprecedented level of accessibility to unbanked and underbanked consumers. As financial innovation marches forward, U.S. financial regulations remain stuck in the past. The U.S. Department of Treasury noted in its July 2018 report on “Nonbank Financials, Fintech, and Innovation”: Building Sandboxes in the Desert