After several years of bouncing around the Kansas legislature, a bill creating regulatory sandboxes has finally appeared in the form of SB 541. This legislation creates new opportunities for Kansas businesses to thrive under a reduced regulatory burden.
What is a regulatory sandbox?
Some of the largest costs that businesses and their workers face are from regulations. It would take the average person 185 hours to read through all of Kansas’s administrative regulations. A small business opening its doors faces an average of $83,000 in first-year regulatory costs. The cost to businesses adjusting to federal regulations was estimated to be $1.9 trillion as businesses conform to the conditions. The average US firm spends between 1.3 to 3.3 percent of its wage bill on regulatory compliance alone. For a small business, that can easily add up to tens of thousands of dollars.
A regulatory sandbox is a set of rules that are timebound, typically for two to three years. These rules, or a waiver of rules, allow businesses to operate under fewer regulations. There are a number of reasons why this is beneficial. The simplest one is that regulations have a cost of compliance, so fewer regulations mean fewer costs for a business. New businesses thrive off innovation and offering a new product or service. According to MIT research, companies were less likely to expand and innovate as they approached an employee threshold that would have subjected them to new regulations. Operating under fewer regulations could allow businesses to experiment with new procedures and methods while not fearing new costs.
Sandboxes are beneficial to the government too. Fewer regulations mean a lower cost for the administration of regulations themselves. Opponents of the idea of loosened regulations are quick to accuse the process of throwing safety out the window, but it’s the opposite. The regulations that are lessened are agreed upon beforehand by both parties; the notion of safety isn’t just tossed out the window. In fact, the government continually monitors how businesses operate in a sandbox.
Here’s an example of how a sandbox works. In 2019 in Utah, the legislature passed a law called the 30/70 rule that said mergers between title companies and brokerages could occur so long as 30% of the title company’s business is from unaffiliated business. However, this number has proved hard to reach for businesses. So, they applied to participate in a financial services sandbox to show that a merger isn’t a bad deal and that they’re able to operate without the 30/70 rule. While there isn’t a direct mechanism to analyze a sandbox’s duration, the experience of companies in a sandbox is supposed to help regulators make decisions about what statutes to keep and what to change.
Here’s another. The money transfer service WorldRemit was allowed to participate in a financial technology (fintech) sandbox in Malaysia. Specifically, the company wanted to launch a new way of customer identification in which users could take a picture of themselves with their IDs and be allowed access to their accounts. At the time, this type of identification was prohibited in Malaysia. However, when WorldRemit participated in the sandbox, they demonstrated how this system could be used effectively, particularly to reach people in remote areas who normally have trouble accessing banks in person. At the end of the sandbox, Malaysia’s regulatory authorities changed their rules to allow this new type of identification.
Benefits of regulatory sandboxes
According to research examining 73 financial technology sandboxes in 57 countries, the World Bank found that sandboxes have a variety of benefits ranging from helping firms enter the market and strengthening both partnerships and competition, to creating standards for regulatory institutions to understand the current market and operate effectively.
Participants in regulatory sandboxes have seen verified economic success. Participants in the United Kingdom’s fintech sandbox got to market 40% faster than non-participants, with 80% of the sandbox’s participants staying in business. Those firms in the sandbox acquired 15% more private capital after joining than firms who did not, with the probability of raising capital increasing by 50%. On average, countries that introduced regulatory sandboxes saw their total venture capital investment amounts increase by 37.7%, with the average investment in size growing by 86.4%.
Because of their business- and user-friendly policies, sandboxes also attract businesses. For instance, in 2019, Wyoming began a fintech sandbox to promote industries such as digital banking and consumer credit. Two years later, Wyoming has become a central player in America’s digital asset market, with the first cryptocurrency bank nationwide charter filed there in September 2020.
What would a regulatory sandbox in Kansas look like?
There are two types of sandboxes. Oftentimes, states will start with an industry-targeted sandbox focused. Common industries for sandboxes include financial technology (fintech), IT, agriculture, and more. Some states have implemented an all-inclusive sandbox, in which any industry can take advantage of temporary waivers of rules and regulations.
An industry-specific sandbox related to farming could be of interest to Kansas legislators. Agriculture has a number of new technologies that can be introduced in a sandbox before they are cramped with regulations. Laser scarecrows keep birds away from crops by shining harmless green light at them. Self-driven tractors and drones to perform farm work are also possibilities. New tools to test soil quality and use GPS to predict farming yields could be seamlessly introduced via a sandbox. In Mississippi, a 2021 sandbox bill has ushered in a new wave of tools like DNA soil sampling and drone crop analysis. Though federal regulation is certainly at play, a sandbox for aviation could also work well with Wichita’s long history of flight.
