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Alternative Market Briefing

Sandboxes can be part of 'real value' innovations

Tuesday, December 22, 2020

Hannah Terhune
B. G., Opalesque Geneva:

Among the great topics explored during the latest Opalesque Roundtable, which theme is "The Great Disruption", some centered around sandboxes, which are ever so necessary as the digital evolution is moving faster than much of the newly introduced legislation. Here we find that the BVIs are very proactive in this area, and that entrepreneurs would benefit from a lawyer's advice - and pre-acquired licences - before going to play.

A regulatory sandbox is a framework set up by a financial sector regulator to allow small scale, live testing of innovations by private firms in a controlled environment under the regulator's supervision. According to CGAP, the concept, which was developed in a time of rapid technological innovation in financial markets, is an attempt to address the frictions between regulators' desire to encourage and enable innovation and the emphasis on regulation following the financial crisis of 2007-2008.

Sandboxes not just for the young

The sandbox is one of the innovations the BVI is promoting at the moment to attract more fintech companies, says Rebecca Jack a lawyer with Appleby, a global law firm. "We have political neutrality, tax advantages, good corporate lawyers and an engaged regulator, so the BVI has a lot to offer for companies generally and especially emerging tech companies."

The BVI Sandbox was introduced in August 2020, and follows a wave of sandboxes introduced globally, she explains, to allow businesses experimenting with emerging technology to find the balance between regulatory oversight, and mitigating start-up costs for products under development.

But it's not only for start-ups. The UK Sandbox has been used by bigger players such as HSBC, Lloyd's, law firms and a number of larger corporates to develop, implement and try new products.

The BVI Sandbox is designed to host firms and projects for longer periods compared to many others in the market, she says. While the UK Sandbox is available for three to six months, the BVI offers 18 months, and then with the option for another six months after that.

The real value

"In Wyoming, the sandbox is offered for two years with a possible renewal option," says Hannah Terhune, a lawyer based primarily in Jackson Hole, Wyoming, USA. "In representing clients that have very innovative ideas they wish to bring to market - usually with no patience, let alone a large budget - they find that looking at the various sandbox regimes has been helpful but daunting."

But clients don't always know about the licence requirements, she adds. "By the time a client comes to me, I find that they already need a money transmitter/changer licence and an investment management licence. I prefer they clean these deficiencies up from a legal standpoint before approaching any sandbox."

Furthermore, the term "Fintech" has been in use since the late 1960s and is used to cover any idea, product or service that requires an electrical current, she says. "So let's not scare off clients with our ignorant use of the word Fintech. It really dates us. What I often see in this space are very young coders, innovators, and entrepreneurs coming up with ideas, services, products."

"The first wave of innovation focused on the unbanked or underserved people in the world. Anywhere you go, one must pay to play, as they say. So it is logical that an alternate form of property would be created to exchange value. What these young people conceptualize and create is what I call the "real value" that leads the charge in the early rounds of block chain protocol development. By block chain protocol development, I refer to the App on my phone that allows me to swap ETH for BTC and buy coffee at Starbucks with a QR code. No traditional financial institution created that for me."

Traditional financial institutions tend to try to follow on or catch up and then present a poorer version of the product or service which lacks what she calls any real value. Traditional players do not create or innovate real value - at best they copy it.

It doesn't matter what form real value is expressed in - whether it is an App, software service, cloud based service, or type of wallet, she says. The creators of real value need access to lawyers who can explain the laws that apply to what has been created. If existing laws do not go far enough, then off to the sandbox.

"In BVI and elsewhere, I have found that existing law is amazingly sufficient to date," she says.

The Great Disruption Roundtable was sponsored by BVI Finance. You can access the full roundtable report here:

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