As the regulator sifts through applications for the second phase of the programme, some of the FX and blockchain-related firms from the first cohort outline here the value of the regulatory insight gained from their participation.
Few regulatory initiatives have garnered as much international admiration as the FCA’s regulatory sandbox programme, and the idea has quickly gained traction around the world since its inception in early 2016.
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| Christopher Giancarlo, CFTC |
An early proponent, Christopher Giancarlo, the commissioner of the US Commodity Futures Trading Commission (CFTC), last year urged financial regulators in other countries to follow the UK’s lead by giving fintech companies the opportunity to develop and test services without fear of enforcement action or regulatory fines. Soon after, the Hong Kong Monetary Authority, the Australian Securities and Investments Commission, the Monetary Authority of Singapore and Abu Dhabi’s Financial Services Regulatory Authority announced plans to create similar programmes.
So what have the first group of participants gained?
Epiphyte – which provides a blockchain-powered software-as-a-service for instant settlement and DVP (delivery versus payment) for financial trades including FX – used the sandbox to test its clearing and settlement platform specialFX.
“We applied to the programme because what we do with blockchain was never envisioned by regulations,” explains the company’s CEO Edan Yago. “Participation not only allowed us to launch the product, it also gave us an opportunity to tweak it and learn from real-world activity.”
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| Marc Avedissian, Tramonex |
Marc Avedissian, co-founder and COO of Tramonex, which has developed a prototype for cross-currency payments using blockchain technology, is another who refers to the value of being able to test a product for which there is no specific regulation without having to go through a lengthy and costly approval procedure.
The company created an independent entity – Tramonex Labs – to run the sandbox tests.
“Co-operating with the FCA has improved not only our understanding of regulatory issues but has also helped us understand how the FCA processes applications for licences and registrations,” says Avedissian.
“We believe it has also helped the FCA to better understand some of the issues faced by blockchain fintech start-ups.”
Fostering innovation
The greatest level of innovation in the digital currency and blockchain space will happen where digital currency companies, financial institutions and regulators work closely together. That is the view of Marcus Swanepoel, CEO and co-founder of Luno, which used the sandbox to test a service that transfers value between sterling and bitcoin.
He reckons the sandbox will bring more regulatory certainty to the market, adding: “We have worked closely with many different regulators around the world and our interaction with the FCA has certainly helped improve our understanding of regulatory issues affecting our business.”
In November, blockchain technology developer SETL successfully implemented a blockchain smartcard retail payment system in conjunction with Deloitte and Metro Bank. More than 100 users were issued with contactless smartcards and used them to make purchases from merchants equipped with contactless terminals.
The FCA sandbox case officer was extremely helpful in providing guidance on eligibility requirements, including registration, according to SETL CEO Peter Randall.
“The test was completed successfully and we submitted a final report to the FCA and our test partners,” he says. “It would have been virtually impossible to implement this test outside the sandbox since it involved a regulated activity – moving money. It was our registration with the FCA that enabled the test to take place.”
Randall says the test has generated interest from other institutions and payment providers as it demonstrated the potential for blockchain smartcard retail payment systems to significantly reduce the cost of processing retail transactions.
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| Jerry Norton, CGI |
Jerry Norton, vice-president of financial services at banking services provider CGI, suggests the fact that other countries are developing similar programmes illustrates how fruitful the sandbox exercise is.
“As these programmes evolve there will be a levelling of the playing field, but the UK has given itself a head start as a location for fintech innovation,” he says.
Norton refers to the programme as proof that regulation and innovation are not mutually exclusive.
“Whether you are a technology company or a financial institution, the process of introducing a product or service is laborious, time consuming and expensive,” he says. “The sandbox streamlines this process considerably.”
The FCA’s common-law mindset means it can apply and develop existing regulatory rules and principles to accommodate technological innovation with confidence and without the need for new legislation each time it is faced with novel technology, adds Andrew Henderson, a partner in the financial institutions group of international law firm Eversheds Sutherland.
At least one expert warned that participation in the project should not been seen as a regulatory endorsement.
However, the FCA has stated that while it might work with firms that have been issued the restricted authorization tool on submitting an application to vary their permissions to remove any requirements or limitations, it does not certify business models or sign-off products or services.
