Success In The Sandbox: What Montana Can Learn From Utah And Arizona’s Regulatory Sandboxes
"If Montana leaders want to carry on their work of cutting unnecessary and burdensome red tape then the logical next step is to adopt a regulatory sandbox, a proactive mechanism used to identify and waive the red tape standing in the way of innovation."
The 2023 Legislative Session has been a milestone for red tape relief in Montana. Thanks to Governor Gianforte’s Red Tape Relief Initiative, a slate of bills to reduce the regulatory burdens are currently making their way through the legislature. While this approach has been very successful, the underlying problem of red tape remains. Red tape relief is inherently a reactive solution. We can’t know how many innovative businesses were crushed by regulations drafted when the iPhone or telehealth was considered science fiction. Proactive policy solutions are needed to ensure decades-old regulations won’t hamper innovation in nascent industries. If Montana leaders want to carry on their work of cutting unnecessary and burdensome red tape then the logical next step is to adopt a regulatory sandbox, a proactive mechanism used to identify and waive the red tape standing in the way of innovation.
As previously discussed, a regulatory sandbox promotes innovative products and services while protecting customers. Traditionally, regulations are created in partnership with government agencies and those they regulate. This process often favors legacy businesses leading to regulatory carve-outs for those businesses at the expense of the public good and entrepreneurship.
A regulatory sandbox creates a mechanism for identifying unnecessary regulations and fast-tracking innovation. The sandbox allows businesses to test their ideas while still undergoing oversight to protect consumer health and safety. Entrepreneurs get a regulatory waiver for a set period, usually two to three years. The sandbox provides essential data on whether those waived regulations should be reformed or repealed. Without this mechanism identifying unneeded regulations, the regulations would stay on the books, hampering innovation.
In 2018, Arizona created the first U.S. sandbox for financial technology (fintech). The sandbox has attracted 13 companies since its establishment. One company is BrightFi, delivering cloud-based and low-cost financial services to those that cannot afford to bank with traditional big banks. Originally from Ohio, BrightFi moved to Arizona because of the sandbox. BrightFi’s CEO stated that the sandbox gave the company a degree of latitude to test approaches that would have likely been more difficult under a traditional regulatory regime. Arizona’s sandbox provided what Ohio couldn’t, the opportunity to test an innovative service and challenge regulatory assumptions on banking.
Following in Arizona’s footsteps two years later, Utah launched a legal services sandbox. The sandbox allows nontraditional legal services entities to meet Utah’s legal needs. With almost fifty participants, the sandbox has been a fantastic success. A recent report shows that the entities provided a spectrum of services ranging from end-of-life planning, military/veterans benefits, business-related matters and immigration.
One example is LawGeex, which provides a software program that automates contract review and management using artificial intelligence. The software codifies corporate contract policies and enables much of the routine legal decision-making process via the software tool, reducing costs and man-hours.
HW Human Capital increases access by providing a “one-stop shop” for legal services involving immigration, human capital and entrepreneur start-ups. For both entities, the sandbox waived the regulatory requirements that only lawyers can own and manage legal services entities. Their success demonstrated those regulations were hampering innovation.
Regulations carry the assumptions of their authors. At its heart, sandboxes are an essential mechanism for challenging the assumptions of legislators and regulators. The sandbox creates a necessary counterweight, providing data to both legislators and regulators to reform or repeal the regulations, creating a more flexible regulatory framework.
BrightFi, LawGeex and HW Human Capital couldn’t innovate without the sandbox. Arizona and Utah facilitated entrepreneurialism, increasing access and reducing costs. Montana leaders can continue their work of proactively cutting unnecessary and burdensome red tape by adopting a regulatory sandbox to help fast-track innovative businesses with good ideas to the market.