South Carolina, The New Frontier for Tech? Here’s How to Make It Happen

American entrepreneurship, once legendary, is on the decline. The United States Joint Economic Committee reports that since the 1970s entrepreneurship has diminished across multiple different measures, including business formation. One reason for the reduction in business start-ups is the increasingly complex regulatory environment that government has introduced in the past few years. Small businesses are now responsible for navigating 2,500-4,500 new federal regulations annually. The sheer number of policy burdens on the market can prevent new ventures from ever taking off. This is especially true for companies with novel and pioneering technologies.

Therefore, to inspire innovative activity and revitalize the spirit of American entrepreneurship, we must look to approaches that alleviate the regulatory burden for startups. One promising solution is the regulatory sandbox.

What is a regulatory sandbox? 

A regulatory sandbox is a legal classification that allows companies to operate exempt from certain regulations for a limited period of time. This space allows businesses within the sandbox to “play” in the pseudo market and see if innovative ideas gain traction. Generally, sandboxes last two to three years, enough time for a business to develop their idea and regulators to determine what type of approach would be appropriate for the sector.

However, sandbox businesses are not relieved from all parameters; regulations that impact public health, safety, and consumer protection remain. The framework of a sandbox allows small-scale, live testing of innovations for private firms in a controlled environment under the regulator’s supervision. The ultimate goal of regulatory sandboxes is to encourage experimentation for companies while allowing governing authorities to gain knowledge about fitting regulatory methods for innovative technologies.

Regulatory Sandboxes and Fintech 

Financial technology, or fintech, refers to the integration of technology into financial service companies. It primarily involves leveraging new technology to create, enhance, and automate financial services. Fintech includes a range of applications such as online banking, mobile payment apps such as Venmo and Zelle, peer-to-peer lending platforms, cryptocurrency, and blockchain technology.

Regulatory sandboxes are incredibly conducive, even essential, to fintech innovation. Traditional regulatory environments hinder the development of novel technologies as young companies are faced with a slew of regulatory obstacles from conception to market entry. In contrast, regulatory sandboxes allow fintech businesses to test-run their products in a safe environment with fewer barriers to entry.

Regulatory costs in traditional markets are steep. Competitive Enterprise Institute’s annual report on the federal regulatory burden estimates the total cost of federal regulations to be $1.9 trillion as of 2023. Sandboxes provide a pathway for new companies to explore the market while circumventing initial costs. This gives financially strapped startups a shot at product development and deployment. Minimal regulatory costs in the early stages are crucial to ensuring that cutting-edge ideas have a chance at market viability.

Ideally, sandboxes are mutually beneficial for both regulatory bodies and participating companies. Regulators can gain insights from emerging technologies and entities by watching fintech sandboxes. Sandboxes are a mechanism for regulators to learn about the rising class of businesses and find the appropriate number of regulations needed for the product, service, or business model, thereby avoiding premature or overbearing regulation. When working properly, after sandbox completion, regulatory authorities emerge with guidelines that support innovation while safeguarding consumers, and fintech companies are empowered to enter the market with confidence and the ability to navigate the new regulations.

Impact 

Fintech sandboxes have had a positive impact from their inception. The first sandbox created in 2015 by the Financial Conduct Authority in the United Kingdom led to a 40 percent reduction in the amount of time needed to authorize applications, and 80 percent of the firms “successfully tested” are still in operation.

Furthermore, in 2022, Oxford University scholars conducted extensive research into the impact of regulatory sandboxes on the fintech industry. The data they acquired empirically demonstrates that participation in the sandbox by one fintech startup is consistently followed by increased entry and more capital raised by other startups in the same industry. The researchers concluded that the fintech industry as a whole benefits from the sandbox structure, not just the individual companies.

For the U.S., states with fintech sandboxes are privy to a stronger technology market as the sandboxes encourage competition and strengthen tech businesses. This is one of the primary reasons that an increasing number of states are adopting regulatory sandboxes, attracting fintech startups.

Where do we see regulatory sandboxes? 

As of May 2024, fourteen states have regulatory sandboxes, including our neighbor North Carolina. Regulatory sandboxes are typically aimed at financial institutions and fintech startups. However, Utah, Arizona, and Kentucky have recently created all-inclusive sandboxes, meaning any business may apply to participate with no limitations based on industry. As South Carolina thinks about our own regulatory sandbox, we can look to these states as examples of what is possible.

North Carolina’s Insurance and Fintech Sandbox 

North Carolina is a national banking hub, second only to New York in scale, and has remained on the cutting edge of financial technology via their fintech sandbox. North Carolina developed its combined insurance and fintech sandbox in 2021, which operates under the North Carolina Innovation Council. The eligibility criteria are broad, providing an opportunity for most new financial and insurance technology entities to apply for participation as long as their corporation is a resident of North Carolina. Applicants submit a nominal fee with their application and then an additional $450 upon admittance to cover costs.

North Carolina’s original sandbox bill was introduced in 2019, three years after the first regulatory sandbox emerged in the U.K. A revised version was filed in April 2021, and subsequently received unanimous approval in both the House and the Senate. The bill was signed into law on October 15, 2021.

What South Carolina can learn from North Carolina 

If South Carolina hopes to remain economically competitive with our next-door neighbor, we must attract forward-thinking fintech innovation. A regulatory sandbox in South Carolina would enhance our attractiveness to fintech entrepreneurs and investors, creating a favorable environment for business growth and technological advancement. This, in turn, would stimulate competition, drive down consumer costs, and improve access to cutting-edge financial services.

North Carolina and other states have provided a clear roadmap for South Carolina. The ease and alacrity with which North Carolina passed their fintech sandbox legislation gives hope to the passage of a similar bill in the Palmetto State. Yet, establishing a fintech regulatory sandbox is not just a strategic move to keep pace with North Carolina; it is a necessary step to position South Carolina as a frontrunner in the dynamic world of financial technology. In December 2023, South Carolina Congressman William Timmons introduced a federal bill to reestablish the Consumer Financial Protection Bureau’s compliance assistance sandbox, indicating a growing interest in similar initiatives at the national level​. If the General Assembly seizes the opportunity and creates a fintech sandbox, it is feasible that South Carolina could see a robust sandbox established in the near future.

Read Palmetto Promise’s previous write-up on regulatory sandboxes here.