On February 14, the CNMV published its Operational Plan for 2018 in which it announced the creation of a new Sub-Division for Financial Technology (fintech) and Cybersecurity aimed at implementing its new strategic plan of encouraging the development of new technologies and preventing any of the potential risks associated with such growth. This plan follows on from the documents published on February 8 by the Bank of Spain and the CNMV on cryptocurrencies, blockchain and ICOs.
The CNMV has/suitably endorsed the growing recognition of the revolutionary potential of the technological advances that are being developed in the financial world. These increasingly complex advances create efficient solutions to traditional problems (blockchain, for example, is a protocol the resolves issues surrounding double payment), but they often do not have a place in the existing regulatory framework. The question being asked by many regulators is how best to regulate new technologies in the financial market in an efficient way (i.e. protecting the stability of the market) without discouraging innovation and the benefits that it often brings.
Given this conundrum, we propose the establishment of a regulatory sandbox or a new regulatory framework be considered. A sandbox aims to find a middle ground between the speed of innovation and regulatory principles (that is, protecting the consumer, maintaining financial stability and mitigating potential systemic risks). A sandbox involves allowing technologically innovative business models to be tested in a controlled environment via close collaboration between regulators and innovators throughout the pilot stage.
In the United Kingdom, for example, the authorities receive applications to be involved in sandboxes directly from startups, which often collaborate with large banks and other financial institutions. The authorities review the prima facie innovative capacity of the product or protocol and begin to work closely with the startup, supporting them in identifying the existing applicable regulation. Additionally, they (i) assess the risks of the new product; (ii) define the initial scope for its use; (iii) identify what rules could be appropriately applied to the new product; as well as (iv) ensure that the regulator carries out its role.
The sandbox phase lasts for a predetermined period of time, after which the product, protocol or innovation can be granted general access to the market, accompanied by tailor-made regulation that has been tested in practice. Moreover, the sandbox phase provides time for those involved to understand the added-value of the new fintech product and its impact on the market. Thanks to the sandbox, the regulator acquires sophisticated knowledge of emerging fintech technologies and maintains its expertise in this area. This allows the regulator to propose the most appropriate, efficient and innovative framework that prevents new technologies (which are beneficial to users, consumers and, in some cases, contribute to the economic efficiency of the market itself) from falling into legal limbo.
Common law countries, with the United Kingdom at the forefront, have been pioneers in the design and implementation of sandboxes – as part of a broader strategy – that have allowed them to attract and develop their fintech industry as well as to foster the use of their supervisory and regulatory umbrella. Recent economic history shows that the early development of a pioneering industry gives a country a competitive advantage and leadership. It is no coincidence that up to twenty countries have already announced the implementation of some form of regulatory sandbox in the fintech sector.
Those regulators most willing to learn and experiment in a controlled environment will have the best chance of earning the trust of innovators. They will then serve as a catalyst for the creation of fintech hubs to the benefit of their economy, from the creation of new jobs to the quality of technology education in universities. Ultimately, they will have established the foundation to provide the necessary legal certainty for the flourishing of economic activity.
The CNMV’s plan clearly indicates that our regulator has understood that it is crucial that we begin to walk the fintech path as soon as we can. Our country also possesses excellent technological entrepreneurs, top-level universities, and some of the most important banks in the world. With willingness and the right tools it could establish itself as one of the leading sandbox locations, offering legal certainty and motivation to innovation, protecting our consumers and, at the same time, fostering growth in the fintech sector. The CNMV’s demonstration of their interest and awareness of the advances and innovations of fintech (including, significantly, blockchain, ICOs and ITOs) is an important step forward, but the introduction of a regulatory sandbox in which to test these innovations would put us at the forefront of fintech-friendly jurisdictions.