Looking first to classic arguments that could potentially be marshalled against a centralised EU approach, a leading perspective from the economics literature is that there needs to be accommodation for when centralisation does not add up, seen most obviously in the emphasis in the post-Maastricht Treaty era on subsidiarity.Footnote 87 The subsidiarity principle recognises that sometimes Member State autonomy and regulatory competition between Member States may yield better outcomes over EU intervention aimed at a common approach. Taxation regimes, laws and regulation and economic policies influence location choice for otherwise mobile agents. In this regard governments can be seen as being actors in institutional competition with each other in relation to a market for mobile freedom of establishment. In principle competition between Member States and regulatory systems may exert incentives on governments to increase competiveness. Market failure may not occur if a small number of influential jurisdictions adopt a meaningful regulatory approach that leads others to come along.Footnote 88 However, context is everything and institutional competition among Member States does not inevitably lead to efficient outcomes, in which case supplementary EU intervention may be warranted to redress adverse outcomes associated with partitioning along national lines.
Having regard to the burgeoning spread of the regulatory sandbox in Europe and globally, a disparity of approaches to sandbox operation, and a lack of transparency are presenting as problematic to the single market concept upon which the European Union is founded. Some Member States passively await potential EU action rather than acting strategically to articulate a developed regulatory framework for either FinTech or regulatory sandboxes. In such cases the focus may instead be on wooing potential FinTech inward investment through portraying a ‘FinTech friendly’ national environment. EU scholars have rightly warned of the unpredictable outcomes associated with relying on regulatory competition as necessarily superior to harmonisation.Footnote 89 It may not be sufficient to rely on Member States to come up trumps. Leaving regulatory sandboxes to institutional competition may lead to sub-optimal regulatory consequences under the problem of ‘zero-regulation’.Footnote 90 In the present context where capital is highly mobile, the potential for a proverbial race to the bottom in the Member States in a bid to attract FinTech inward investment is unfortunately real.Footnote 91 In other instances a market may remain under-developed. Indeed, this rationale has partly underpinned the Commission’s DLT Pilot Proposal.Footnote 92
A defining issue then is whether on a cost-benefit analysis regulatory harmonisation would produce net welfare gains. The likely benefits of the EU institutions playing a leading role in broadly co-ordinating regulatory approaches is particularly apparent in the FinTech space. Regulation of new technologies represents a highly complex task for national regulators. Moreover, business models can be delivered virtually making borders opaque. Given the potential value contribution of FinTech to national economies, leaving matters to institutional Member State competition is replete with the potential for regulatory arbitrage. National regulatory fragmentation and a race to the bottom is almost inevitable. Furthermore, national responses cannot offer a viable alternative to an EU cross-border passporting solution for services provided based on home state authorisation—that can only be achieved by supra-national regulation. In short, as acknowledged in the Digital Finance Strategy,Footnote 93 where cross-border trading is the aim, fragmented Member State approaches force resource intensive compliance costs on putative market entrants.
Accordingly, within European Union policy, there is a well-leavened realisation of the need to support FinTech innovation and harness a digital single market, as enshrined in the FinTech Action Plan.Footnote 94 A competitive, ‘frictionless single market’ in the digital sphere is part of the Commission’s five year digital strategy.Footnote 95 That ambitious goal will take time and effort to deliver on. In the meantime, enhancing cooperation and dialogue among regulators on how to facilitate FinTech in a co-ordinated manner holds the prospect of easing the path for innovators in the EU even in the absence of agreed common regulatory approaches that would provide a level playing field for FinTech activities. Stakeholder dialogue is a well-established modus operandi within the European Union; before the EU institutions act, they listen and reflect. Stakeholder engagement is fundamental to this. Innovation hubs and regulatory sandboxes across the EU are providing a vital point of contact and engagement between regulators and FinTech entrepreneurs of all hues. The feedback gained in relation to regulatory hurdles and gaps can inform cross-EU inter-regulator dialogue. Informal dialogue and information gathering from EU regulators is particularly important given the opportunities and risks that new technologies and business models pose. Information-gathering at EU institutional level also takes the form of reports by the ESAs in relation to regulatory issues and national responses to innovation in the form of innovation hubs and regulatory sandboxes.Footnote 96
But is information-gathering and sharing among stakeholders enough or could more concrete steps to be taken by the EU? Based on information gathered to date at EU level, the way forward for EU policy concerning regulatory sandboxes provides the EU institutions with a classic regulatory dilemma involving policy choices with incremental stepped power effects. It must choose between between (i) continuing to simply facilitate stakeholder dialogue; (ii) issuing soft recommendations or guidelines for operation of national regulatory sandboxes, through to (iii) full harmonisation of rules on sandboxes. These policy choices are explored below and the prospects for establishment of an EU cross-border regulatory sandbox regime are evaluated. The analysis concludes with an assessment of some current evidence showing that the EU is favourably disposed towards embracing some forms of sectoral experimental governance.
Facilitating Stakeholder Dialogue
At the base of the pyramid of EU regulatory options concerning the emergence of the regulatory sandbox phenomenon within the EU lies that of stakeholder dialogue given its informal nature focusing on peer to peer interactions and relationships. Inestimable practical benefits accrue from stakeholder dialogue based on the benefits of relationships created and maintained and the learning value from the information shared. Stakeholder discussion represented a central plank of the European Commission’s FinTech Action Plan emanating from DG FISMA.Footnote 97 The joint report in 2019 from the ESAs on innovation facilitatorsFootnote 98 also emphasised the importance of increasing co-operation.
Informal infrastructure is in place to encourage regulatory dialogue and encourage FinTech innovation within the EU. Two significant initiatives allow EU regulators to upskill in relation to FinTech by enabling material enhancement of their understanding of how FinTech applications work and are impacted by regulation. First, the EU FinTech Lab has acted as a conduit since 2018 for sharing information and training between European and national regulators and supervisors. It also provides a forum for them to meet with and learn from technological innovators. Secondly, in response to Member States responsiveness to facilitating FinTech innovators bringing their product to market, 2019 saw the launch by the Commission of the European Forum for Innovation Facilitators (‘EFIF’).Footnote 99 This network facilitates dialogue among supervisors and encourages discussion on common approaches within the EU and with third countries on the regulatory treatment of technological innovation.Footnote 100 It has representation from each innovation hub and regulatory sandbox in Member States and the ESAs are also represented. The European Banking Authority (‘EBA’) also has a FinTech Knowledge Hub for regulators. To be clear, no legal effects can result. Any common positions arrived at cannot be enforced; they have no standing, and fall below soft law. Nonetheless, dialogue in these fora may usefully coalesce views on best practice approaches to the operation of regulatory sandboxes in the EU, and as to how regulation may evolve to fit FinTech.Footnote 101 This is the essence of the spirit of the new governance approach to regulation which has been well dissected in the literature on EU regulation.Footnote 102
Given the lack of real clout associated with dialogue, it is unsurprising that the ESAs envisaged that the establishment of an EU network of innovation facilitators could act as a useful knowledge-sharing forum, but only as part of a ‘multi-pronged approach’.Footnote 103 In the FinTech Action Plan, the Commission gave credence to this, and as a preliminary step the ESAs were tasked with charting authorisation and licensing approaches as applied to FinTech business models across the Member States and with exploring the vexed question of how national authorities approached questions of proportionality and the application of flexibility.Footnote 104 To conclude, while continuing stakeholder dialogue around the operation of regulatory sandboxes is valuable, more action is needed to develop a new governance approach founded upon stakeholder participation that ultimately leads to a bottom up framework.
Issuing Non-binding Guidelines for Regulatory Sandboxes in the EU
At the second level of the EU regulatory pyramid lies the option of standard-setting for regulatory sandboxes in the EU. This could take the form of a European Commission recommendation creating non-binding guidelines for Member States.Footnote 105 Indeed, the European Commission committed to providing a blueprint for national sandboxes in the form of best practice guidelines on regulatory sandboxes in its FinTech Action PlanFootnote 106 but has not yet delivered on this ambition. While hard law instruments require more precision and a lengthy legislative gestation, non-binding guidelines with EU imprimatur can have the advantage of more flexible drafting and swiftness in terms of adoption and revision. Furthermore, they fit within the post-Lisbon ‘open method of co-ordination’ involving co-ordination at an intermediate level between regulatory competition and harmonisation.Footnote 107 This has particular resonance for FinTech financial markets where market definitions and business methods are in flux. Indeed, the issuing of non-binding guidelines has become a defining modus operandi in the field of financial supervision since the establishment of the ESAs.Footnote 108
The Securities and Markets Stakeholder Group suggested that some level of co-ordination spearheaded by the European Securities and Markets Authority (‘ESMA’) would help with both quality and transparency.Footnote 109 Following on the foundations laid by the work that has been jointly done by the ESAs on mapping national approaches and in identifying issues that need to be tackled,Footnote 110 the Commission’s report on best practices for regulatory sandboxes is awaited. Furthermore, the Council has requested the Commission to study regulatory sandboxes and the use of experimentation clauses allowing regulators a measure of flexibility in relation to the application and of legal rules to the testing innovation within a regulatory sandbox.Footnote 111
Questions of competence loom large when possibilities of the ESAs adopting new guidelines or recommendations are mooted.Footnote 112 Do the ESAs possess the requisite competence to step in? The Commission’s 2014 Report on the ESAs highlighted that guidelines and recommendations would have to meet the cumulative criteria of (i) establishing ‘consistent, efficient and effective supervisory practices’ and (ii) ensuring the ‘common, uniform and consistent application of Union law’.Footnote 113 The continuing value of this function was validated by the Commission in the Digital Finance Strategy.Footnote 114 As decentralised agencies rather than EU institutions, it could be considered challenging to identify a legal basis for the ESAs to be tasked with producing guidelines on regulatory sandboxes where there is no underlying EU legal framework in the field. However, the ESAs’ role has evolved in recognition of their contribution. An expanded remit deriving from Article 9(2) which was inserted into the ESA founding Regulations with effect from 1 January 2020Footnote 115 gives the ESAs the obligation to ‘monitor new and existing financial activities’ and the power to adopt guidelines and recommendations ‘with a view to promoting the safety and soundness of markets, and convergence and effectiveness of regulatory and supervisory practices’. On its face this Article 9(2) power would permit the ESAs to issue guidelines on regulatory sandboxes that were predicated upon ensuring investor protection and financial stability.
Irrespective of which body or bodies are ultimately tasked with setting and owning any resulting guidelines, the issues of content remain the same. What should such guidance on operating regulatory sandboxes in the EU cover? Leaving to one side the rather intractable issue of available regulatory flexibility with regard to the application of substantive legal rules to sandbox participants, it is not difficult to pinpoint key matters upon which uniformity would be desirable. A broad principle of equality of access to regulatory sandboxes by start-ups and incumbents would be a desirable starting point. This principle was emphasised by the Commission’s Expert Group on Regulatory Obstacles to Financial Innovation in stating that ‘[a]ll market participants should be treated equally: irrespective of the size or degree of establishment on the market, innovators of all kinds should be able to apply without discrimination’.Footnote 116 Transparent and objective criteria regarding eligibility for admission to a regulatory sandbox would underpin this.
In some Member States the selection criteria used by sandbox regulators may not qualify as sufficiently transparent. Lack of transparency is compounded by the unique nature of the regulatory sandbox such that often the relevant criteria are not set down in legislation or formally adopted rules. However, lack of formally set out rules can lead to unfortunate uncertainty among regulatory actors on relevant sandbox criteria. It may also cast doubt on the objective nature of relevant rules and their application in decision-making on sandbox admission. This may be contributed to by the informal communication style adopted by some regulators who are keen to convey above all else that they are ‘open for FinTech business’. Thus regulators’ websites may encourage contact from FinTech entrepreneurs and provide little or no detail concerning sandbox terms and conditions online before exploratory dialogue in relation to regulatory sandbox entry takes place with a potential applicant.Footnote 117 Consequently, for the pre-application stage, EU guidelines could usefully set transparency expectations surrounding the type of minimum information to be publicly provided on the websites of EU regulators offering regulatory sandboxes.
Outside the EU, there are instances where there is a trade-off between transparency and an underlying preference of some regulators for a direct approach to be made to them by the regulatory actor so as to initiate regulatory dialogue. An example of this is seen in Hong Kong where fully transparent parameters for relevant Securities and Futures Commission SandboxFootnote 118 and the Insurtech SandboxFootnote 119 are not provided online. Instead regulatory dialogue is encouraged to determine operation and fit. An example of a more radically transparent approach is that provided by the shared Canadian Securities Administrators’ (‘CSA’) Regulatory Sandbox. Rather than providing a set of admission guidelines, the CSA provides a strong level of transparency to regulatory actors through providing online public access to previous decisions including the terms and conditions imposed on sandbox users.Footnote 120 This reflects the fact that the CSA model is individualised, based on providing tailored exemptive relief from securities laws requirements.Footnote 121
Agreement on fundamental standards of best practice for regulatory sandboxes could help to avoid FinTech regulators being drawn into a race to the bottom in terms of admission criteria and post-admission conditions attached to sandbox participation. In the quest for a common EU approach to assessment criteria for admission to regulatory sandboxes some consensus can be discerned across sandboxes and readily distilled into guidance on relevant factors in assessing the applications for sandbox testing of new business models and technological innovation. These include matters such as need and readiness for testing in a sandbox environment, innovation in the sense of novelty or novel application, benefits to consumers, for example, through providing quicker and more cost-effective options. On the flip side, risks to consumers need to be carefully weighed in the balance and may negative potential benefits. Important issues to be treated concern investor protection measures, public transparency and regular reporting on the sandbox experience in practice. It may make sense for there to also be overall reporting by national sandbox regulators of outcomes to ESMA. Such guidelines could also add some precision in relation to disclosures to consumers and the type of risk-mitigation measures that could be imposed. Recommended exit protocols could be formalised to cover both situations where controlled exit does not lead to full product roll-out as well as best case outcomes where successful testing leads to anticipation of scaling up through a full market launch.
The ESAs have highlighted a very real issue within the context of innovation hubs (and the point applies even more to regulatory sandbox participants)—that firms could mistakenly rely on general indicative guidance provided as having a final, legally binding quality.Footnote 122 Given the regulatory complexities at work, a sandbox regulator offering assistance in a test bed should take care not to appear to replace the need for specific legal advice concerning all aspects of product roll-out (including those aspects outside of financial services such as data privacy). An expectation in such guidelines that clarifying wording on this should be prominently on the relevant regulator’s regulatory sandbox webpage and in relevant documentation would be sensible. In addition, it would be prudent to require careful wording to be employed so as not to give the mistaken impression that a regulator operating a regulatory sandbox is in some way endorsing either the sandbox applicant or the proposition being tested.Footnote 123
The Commission in the Digital Finance StrategyFootnote 124 has adverted to a commitment to respect the principle ‘same activity, same risk, same rules’, so as to create a level playing field between existing financial institutions and new market entrants. In line with that the ESAs firmly state the position that regulatory sandboxes cannot allow EU regulatory requirements to be relaxed, but that available proportionality levers may be applied.Footnote 125 This stumbles upon the problem of the uneven EU financial services playing field at national level, the effects of which FinTech players and their lawyers are not equipped to assess other than through a painstaking process of individual regulatory dialogue with national regulators and supervisors. This brings us neatly to consideration of the complex question of whether the EU might be prompted to target some form of harmonised legal framework for regulatory sandboxes.
A Harmonised EU Legal Framework for Sandboxes?
A more radical approach for the EU institutions to the regulatory sandbox explosion amid unanswered regulatory challenges for FinTech would be to create a harmonised legal framework for the operation of regulatory sandboxes in the EU. The main argument for this is the classic internal market one: that removing cross-border dissonance would assist with the objectives of the single market and the realisation of the potential for scaling up of FinTech more or less on a level playing field across multiple markets. In relation to the content of any such common framework, looked at in the abstract, much of the discussion above in Sect. 4.2 concerning the potential content of non-binding guidelines on the operation of regulatory sandboxes, could equally be formalised into an EU harmonised framework for regulatory sandboxes. Policy nudges in the direction of the pursuit of a harmonised approach were cemented in the report of the European Commission’s Expert Group on Regulatory Obstacles to Financial Innovation which came out strongly in favour of harmonising standards across the EU for regulatory sandboxes, with a view to providing a level playing field.Footnote 126 The Group also stated that a common testing framework would help cross-border trade, ‘thereby enhancing confidence in, and portability of, test outcomes to other European jurisdictions, and network effects by better and more formalised coordination between regulatory sandboxes’.Footnote 127 Of course one must note that such benefits would be limited to addressing the sandbox as a stopgap solution, not the much bigger challenge of the regulatory framework within which FinTech operators must operate.
On paper a harmonised framework for regulatory sandboxes could help reduce FinTech forum shopping in relation to new FinTech models. That said, there are considerable logistical challenges to pursuing a harmonisation agenda for regulatory sandboxes, however well-intentioned. By definition sandbox regimes have to incorporate a certain amount of latitude—of necessity much has to come down to common sense exercise of discretion and judgement by regulators rather than rigid application of hard and fast rules. This makes defining a common approach a more delicate exercise than would usually be the case. A peculiarity of the regulatory sandbox is that regulatory sandboxes differ widely in legal form. Some are informally established with rules set out on a regulator’s website, while others involve a formal legislative act.Footnote 128 This in itself creates challenges to the EU moving towards a formal legal set of rules.
More fundamentally, the bigger picture context is that regulatory sandboxes do not operate in a vacuum; they are an overlay on a non-negotiable financial services regulatory framework. A playing field for FinTech that would be comfortably level needs many more components than an EU-wide understanding of regulatory sandboxes. A harmonised legal framework for regulatory sandboxes in the EU would not address the regulatory patchwork effect created by the underlying regulatory gaps and the unfinished regulatory policy work that provide the raison d’être of the regulatory sandbox. Nor would it address cross-Member State regulatory friction on treatment of FinTech. However, even an imperfect expedient solution facilitating ground-breaking FinTech innovation to get off the ground may constitute a valuable stopgap. Any EU-specific perspective must also begin to encompass a post-Brexit perspective as the United Kingdom, the country that initiated the regulatory sandbox, forges its own independent path, and provides a competitor forum of choice for many innovators.
The Challenge of Achieving an EU Cross-Border Regulatory Sandbox Regime
Within the context of discussion of the potential for a harmonised framework applicable to national regulatory sandboxes in operation, it is opportune to also weigh up the possibility of establishing cross-border, multilateral sandboxes within the EU. The availability of a co-ordinated one-stop shop approach to enabling cross-border testing could add to the attractiveness of the EU for FinTech companies.Footnote 129 At present availing of a regulatory sandbox in existence in a Member State will only aid market entry in the relevant national territory (and indeed only in relation to the particular sectoral regulator unless a multi-agency approach becomes utilised). This may leave FinTech innovators who have participated in a sandbox more or less at square one in other Member States. As the ESAs perceptively note:
firms who have successfully tested innovations in a regulatory sandbox may face practical barriers to the application of these innovations in other Member States. For instance, firms may have to enter into extensive dialogue to explain again the concept of the innovation and measures to mitigate any risks, and may even be required to test again the proposition causing delays to roll-out.Footnote 130
That being the case, an EU-wide or cross-border sandbox could be advantageous in enabling FinTech innovators to simultaneously approach market entry in more than one Member State thereby creating practical, resource and time efficiencies. For instance, this could be ideal for testing provision of cross-border payment services such as remittances. If multi-jurisdictional sandbox entry were permitted through the creation of a cross-border sandbox within the European Union, regulatory competition and the forum shopping calculations would then be diverted towards other competitive factors and regulatory differentiators in Member States such as the applicable tax regime. Although the details are scant, the Digital Finance Strategy places the onus on the EFIF to develop a procedural framework for cross-border testing in the EU with input from sandbox regulators.
The creation of a multilateral or cross-border sandbox would nonetheless be complex to achieve agreement on. Formulating how multifaceted applications to more than one national sandbox should be structured and processed would be thorny to resolve, as is evident from the Global Financial Innovation Network’s experience with an initial test-run of a multilateral sandbox.Footnote 131 As a preliminary matter, a decision would need to be made as to whether applications to an EU cross-border sandbox would be processed on a centralised or decentralised basis. Delivering a cross-border EU sandbox would require a huge amount of goodwill and co-operation between national competent authorities. Such a development could potentially support the realisation and scaling up of FinTech innovation. However, Member States would have to be willing to co-operate, bearing in mind that in a fully decentralised model where a cross-border regulatory sandbox application could be made to any designated authority at Member State level, there would be no guarantee of keeping the slice of the FinTech pie within their Member State even if the initial approach and application was made there. Consequently establishing a centralised EU authority for receiving cross-border applications may be a more sensible and streamlined approach if the plunge is taken on cross-border sandboxes.
A first logical jumping off point could lie in the ESAs developing guidance to ensure a common approach for national competent authorities entering into bilateral or multilateral co-operation agreements in relation to regulatory sandboxes.Footnote 132 This would stop short of realising a pan-EU sandbox. However, such co-operation when allied with progress towards a harmonised approach to regulatory sandbox standards may in turn lead to the establishment of a cross-border regulatory sandbox. Indeed there are some policy signals that favour this step being taken. In 2019 the potential for establishing an EU cross-border regulatory sandbox regime was floodlit by the specialist Expert Group on Regulatory Obstacles to Financial Innovation in its recommendation that the Commission and the ESAs should give further consideration to this option.Footnote 133 Commission imprimatur beckoned in 2020 in the Digital Finance StrategyFootnote 134 which contains a commitment to working with the European Forum of Innovation FacilitatorsFootnote 135 to boost the work of national innovation hubs, but also crucially to providing a procedural framework that would allow cross-border testing and would allow firms to interact with supervisors from different Member States. It remains to be seen what that would look like.
Regardless of positive sentiments being expressed towards the prospects of an EU-wide regulatory sandbox, any investigation of a cross-border sandbox solution to enable new innovative products and services to test on a limited time and scale basis would need to robustly engage with the underlying EU regulatory topography. While it is the norm for domestic sandboxes to require an intention to provide the product or service within the territory of the sandbox, some revision of this would be needed for a truly pan-European sandbox operating across borders or providing services in more than one jurisdiction. A proportionality analysis would play a central role in a cross-border-European sandbox when interpreting and applying the financial market rulebook. An agreed understanding of proportionality and available regulatory discretion would be crucial to reach a common understanding concerning the appropriate level of inherent flexibility in the application of regulatory rules to sandbox participants. This would need to be appropriately calibrated.
Currently Member States with regulatory sandboxes are autonomously fashioning their own disparate regulatory approaches within the envelope of proportional accommodation provided by relevant EU financial services rules. For instance, the Dutch DNB (Central Bank) has stated that it regards the regulatory sandbox as offering latitude in the interpretation of the rules to ‘take our cue from the purpose of a rule, while we will also review established policies with new (technological) developments in mind and adapt these where necessary […] to accommodate innovation that actually contributes to our supervision objectives as much as practicable’.Footnote 136 Meanwhile Hungary permits the creation of a tailor-made sandbox with relaxation of some domestic rules. Furthermore, its sandbox regime involves the creation of a preliminary licence for sandbox participants.
Undoubtedly the issues raised above present challenges. However, the biggest hurdle in the way of establishing a fully functioning cross-border EU sandbox regime may be principle-based objections from Member States. A known riposte from those who are anti-regulatory sandbox is that innovation hubs and FinTech helpdesks providing informal regulatory information are entirely sufficient. Although the regulatory sandbox has gained considerable traction, the majority of Member States do not have a regulatory sandbox. The concept of a regulatory sandbox is not universally liked by regulators in the Member States and remains controversial in influential Member States such as Germany and France. Fundamental objections may be voiced to the very concept of a regulatory sandbox and what it represents in terms of a regulator bending over to assist tech innovators, a stance removed from a more traditional conception of what it means to be a regulator or supervisor. Thus achieving sufficient Member State buy-in to any proposed EU-backed sandbox regime is far from certain. The FinTech Action Plan was cognisant of the fact that some competent authorities did not regard regulatory sandboxes with their competition-promotion aspect as within their mandate, while others zealously embraced the concept with a view to carving out FinTech turf.Footnote 137 Some competent authorities have also questioned the two-tier approach created by regulatory sandboxes whereby sandbox participants receive tailored advice and monitoring while non-sandbox participants are effectively an out-group and subject to less preferential treatment.Footnote 138
There may not be sufficient buy-in from Member States to feasibly achieve an EU cross-border sandbox regime allowing testing across multiple locations, particularly given that some regulators regard the sandbox as outside (or even opposed to) their mandate. A more sensible approach may therefore be to begin with a smaller scale means of dipping the EU’s toe in the water of experimental governance. Some EU trial initiatives in experimental governance that have begun to emerge in this space are discussed below.
Alternative Paths: EU-Sanctioned Pilot Regulatory Regimes and Sectoral Sandboxes
As discussed above the majority of national regulatory sandboxes in the EU (and outside) are constructed to cover a broad range of FinTech applications. In contrast to this, emerging developments show that the Commission’s current comfort level sits at the incremental point of embrace of experimental governance on a sectoral basis. First, there is the ambition to launch a pan-European regulatory sandbox for blockchain by 2022. The Digital Innovation and Blockchain Unit in DG-CONNECT is co-operating with the European Blockchain Partnership (‘EBP’) on a regulatory sandbox that would permit testing applications of certain blockchain and digital assets.Footnote 139 Secondly, within the Digital Finance Package, the Commission is championing a close cousin of the regulatory sandbox—the creation of a temporary EU legal melting pot for regulatory learning. Behind its Proposal for a Regulation on a pilot regime for market infrastructures based on DLTFootnote 140 (the ‘DLT Pilot Proposal’) lies a recognition of the significance of applications of DLT in finance.Footnote 141 The proposed Regulation is designed for certain investment firms, market operators and central securities depositories wanting to establish DLT market infrastructure and provide cross-border services throughout the EU. The objective is to provide an enabling framework to counteract the limited existing up-take of DLT in the context of backbone market infrastructures—trading venues and central securities depositories. As matters stand, regulatory obstacles and regulatory uncertainty abound amid a complex legal environment not designed with DLT-based business models in mind. Consequently, a key objective of enabling a pilot regime to allow experimentation to place is that it would assist in highlighting difficulties for secondary market trading of crypto-assets from the perspective of the existing EU framework for financial instruments. This would enable identification of what action could be taken by the EU to facilitate innovation by removing unjustifiable obstacles. At the same time, promotion of investor and consumer protection as well as market integrity and financial stability are expressed to be key objectives.Footnote 142
In this study of evolving forms of adaptive regulatory strategies for FinTech, as a form of experimental governance, the EU’s DLT Pilot Proposal is striking. The DLT Pilot Proposal acknowledges the possibility of regulatory relaxation for participants, while to date national sandbox regulators have been largely hamstrung by the obligation to apply MiFID. By contrast, the DLT Pilot Proposal is pitched to ‘allow for experimentation through derogations for the use of DLT in the trading and post-trading of crypto-assets that qualify as financial instruments, where existing legislation precludes or limits their use’.Footnote 143 This is radical in its express contemplation of the power to water down the application of regulatory requirements. Notably, in providing for sectoral derogations to be available for DLT multilateral trading facilities and DLT securities settlement systems from some aspects of financial services legislation, this would allow participants in the Pilot to benefit from a preferential regulatory regime as compared with that available to non-participants, something which sandbox regimes have generally assiduously tried to avoid.Footnote 144
The planned DLT pilot regime is not being billed as a sandbox. Nor should it be. The DLT Pilot Proposal clearly traverses well beyond the usual understanding of sandboxes as firmly rooted in the applicability of financial services law to participants at all times both during and after sandbox participation. Rather, the DLT Pilot Proposal can properly be characterised as a more formal class of experimental governance whereby it is envisaged that hard law is used to create a temporary exemption regime through empowering legislative derogations. Experimental clauses of this kind have been advocated by the Council to encourage innovation.Footnote 145 It is proposed that the special DLT trading regime be made available on an opt-in basis for up to six years and would be subject to an application process to the competent authority to ensure that there is no threat to financial stability, market integrity or investor protection. In common with sandbox regimes, the ‘test and learn’ element is present in the DLT Proposal. The objective is both to remove hurdles that exist for the issuing, trading and settlement of crypto-asset financial instruments and also to enable regulators to gain experience of handling how DLT works in such an environment.Footnote 146 The expectation is that the DLT Pilot Proposal will allow ESMA and national competent authorities to become suitably familiar with DLT trading and associated risks. Although the fulfilment of this Proposal is inchoate, its arrival shows an EU penchant for experimental governance on a sector-specific scale. In relation to interacting with the wider landscape for regulatory sandboxes in the EU, it remains to be seen how far the EU is willing to go. In the meantime, a variety of alternative paths of experimental governance offer valuable learning opportunities for both institutional and regulatory actors in the FinTech space.